Tax 1 - Quizzes

AMT In 2008, Karen Miller had an alternative minimum tax liability of $20,000. This was the first year that she paid an alternative minimum tax. When she recomputed her 2008 alternative minimum tax using only exclusion preferences and adjustments, her alternative minimum tax was $9,000. For 2009, Karen had a regular tax liability of $50,000 and a tentative minimum tax of $45,000. What is the amount of Karen's unused minimum tax credit from 2009 that will carry over to 2010? 1) $0 2) $4,000 3) $5,000 4) $6,000

4) $6,000 The requirement is to determine the amount of Karen's unused alternative minimum tax credit that will carry over to 2010. The amount of alternative minimum tax paid by an individual that is attributable to timing preferences and adjustments is allowed as a tax credit (i.e., mini-mum tax credit) that can be applied against regular tax liability in future years. The minimum tax credit is computed as the excess of the AMT actually paid over the AMT that would have been paid if AMTI included only exclusion preferences and adjustments (e.g., disallowed itemized deductions, excess percentage depletion, tax-exempt private activity bond interest). Since the minimum tax credit can only be used to reduce future regular tax liability, the credit can only reduce regular tax liability to the point at which it equals the taxpayer's tentative minimum tax. In this case, Karen's payment of $20,000 of alternative minimum tax in 2008 generates a minimum tax credit of $20,000 - $9,000 = $11,000 which is carried forward to 2009. Since Karen's 2009 regular tax liability of $50,000 exceeded her tentative minimum tax of $45,000, $5,000 of Karen's minimum tax credit would be used to reduce her 2009 tax liability to $45,000. Therefore, $11,000 - $5,000 = $6,000 of unused minimum tax credit would carry over to 2010.

Ray Birch, age sixty, is single with no dependents. Birch's only income is from his occupation as a self-employed plumber. Birch must file a return for 2010 if his net earnings from self-employment are at least a) $ 400 b) $ 950 c) $3,650 d) $5,700

a) $ 400 The requirement is to determine Birch's filing requirement. A self-employed individual must file an income tax return if net earnings from self-employment are $400 or more.

In July 1995, Dan Farley leased a building to Robert Shelter for a period of fifteen years at a monthly rental of $1,000 with no option to renew. At that time the building had a remaining estimated useful life of twenty years. Prior to taking possession of the building, Shelter made improvements at a cost of $18,000. These improvements had an estimated useful life of twenty years at the commencement of the lease period. The lease expired on June 30, 2010, at which point the improvements had a fair market value of $2,000. The amount that Farley, the landlord, should include in his gross income for 2010 is a) $ 6,000 b) $ 8,000 c) $10,000 d) $18,500

a) $ 6,000 The requirement is to determine a lessor's 2010 gross income. A lessor excludes from income any increase in the value of property caused by improvements made by the lessee, unless the improvements were made in lieu of rent. In this case, there is no indication that the improvements were made in lieu of rent. Therefore, for 2010, Farley should only include the six rent payments in income: 6 × $1,000 = $6,000.

David Autrey was covered by an $80,000 group-term life insurance policy of which his wife was the beneficiary. Autrey's employer paid the entire cost of the policy, for which the uniform annual premium was $8 per $1,000 of coverage. Autrey died during 2010, and his wife was paid the $80,000 proceeds of the insurance policy. What amount of group-term life insurance proceeds must be included in gross income by Autrey's widow? a) $0 b) $30,000 c) $50,000 d) $80,000

a) $0 The requirement is to determine the amount of group-term life insurance proceeds that must be included in gross income by Autrey's widow. Life insurance proceeds paid by reason of death are generally excluded from gross income. Note that although only the cost of the first $50,000 of group-term insurance coverage can be excluded from gross income during the employee's life, the entire amount of insurance proceeds paid by reason of death will be excluded from the beneficiary's income.

Al and Mary Lew are married and filed a joint 2009 income tax return in which they validly claimed the $3,650 personal exemption for their dependent seventeen-year-old daughter, Doris. Since Doris earned $5,400 in 2009 from a part-time job at the college she attended full-time, Doris was also required to file a 2009 income tax return. What amount was Doris entitled to claim as a personal exemption in her 2009 individual income tax return? a) $0 b) $950 c) $3,650 d) $5,700

a) $0 The requirement is to determine the amount of personal exemption on a dependent's tax return. No personal exemption is allowed on an individual's tax return if the individual can be claimed as a dependency exemption by another taxpayer.

Ed and Ann Ross were divorced in January 2010. In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2010. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had twenty more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining twenty-year term of the indebtedness, regardless of how long Ann lives. Ed made twelve mortgage payments in 2010. What amount is taxable as alimony in Ann's 2010 return? a) $0 b) $ 12,000 c) $100,000 d) $112,000

a) $0 The requirement is to determine the amount that is taxable as alimony in Ann's return. In order to be treated as alimony, a payment must be made in cash and be received by or on behalf of the payee spouse. Furthermore, cash payments must be required to terminate upon the death of the payee spouse to be treated as alimony. In this case, the transfer of title in the home to Ann is not a cash payment and cannot be treated as alimony. Although the mortgage payments are cash payments made on behalf of Ann, the payments are not treated as alimony because they will be made throughout the full twenty-year mortgage period and will not terminate in the event of Ann's death.

Krete, an unmarried taxpayer, had income exclusively from wages. By December 31, 2009, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, 2010, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's 2009 income tax liability was $16,500 when she timely filed her return on April 30, 2010, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes? a) $0 b) $200 c) $500 d) $16,500

a) $0 The requirement is to determine what amount would be subject to penalty for the underpayment of estimated taxes. A taxpayer will be subject to an underpayment of estimated tax penalty if the taxpayer did not pay enough tax either through withholding or by estimated tax payments. For 2009, there will be no penalty if the total tax shown on the return less the amount paid through withholding (including excess social security tax withholding) is less than $1,000. Additionally, for 2009, individuals will incur no penalty if the amount of tax withheld plus estimated payments are at least equal to the lesser of (1) 90% of the current year's tax (determined on the basis of actual income or annualized income), or (2) 100% of the prior year's tax. In this case, since the tax shown on Krete's return ($16,500) less the tax paid through withholding ($16,000) was less than $1,000, there will be no penalty for the underpayment of estimated taxes.

AMT Randy Lowe reported the following items in computing his regular federal income tax for 2009: NOTE: BE SURE TO REVIEW THE HANDOUT ON PREFERENCES AND ADJUSTMENTS BEFORE WORKING THIS QUESTION. -Personal exemption $3,650 -Itemized deduction for state taxes $1,500 -Cash charitable contributions $1,250 -Net long-term capital gain $700 -Excess of accelerated depreciation over straight-line depreciation on real property placed in service prior to 1987 $600 -Tax-exempt interest from private activity bonds issued in 2008 $400 What are the amounts of tax preference items and adjustments that must be added to or subtracted from regular taxable income in order to compute Lowe's alternative minimum taxable income for 2009? Preferences Adjustments a) $1,000 $5,150 b) $1,000 $5,850 c) $1,700 $6,150 d) $2,250 $5,400

a) $1,000 $5,150 The requirement is to determine the amount of tax preferences and adjustments that must be included in the computation of Randy's 2009 alternative minimum tax. The tax preferences include the $600 of excess depreciation on real property placed in service prior to 1987, and the $400 of tax-exempt interest on private activity bonds. These must be added to regular taxable income in arriving at alternative minimum taxable income (AMTI). The adjustments include the $3,650 personal exemption and $1,500 of state income taxes that are deductible in computing regular taxable in come but are not deductible in computing AMTI. Note that tax-exempt interest on private activity bonds issued in 2009 and 2010 is not an item of tax preference.

Rich is a cash-basis self-employed air-conditioning repairman with 2009 gross business receipts of $20,000. Rich's cash disbursements were as follows: -Air conditioning parts $2,500 -Yellow Pages listing $2,000 -Estimated federal income taxes on self-employment income $1,000 -Business long-distance telephone calls $400 -Charitable contributions $200 What amount should Rich report as net self-employment income? a) $15,100 b) $14,900 c) $14,100 d) $13,900

a) $15,100 The requirement is to determine the amount of Rich's net self-employment income. Income from self-employment generally includes all items of business income less business deductions. Excluded from the computation would be estimated income taxes on self-employment income, charitable contributions, investment income, and gains and losses on the disposition of property used in a trade or business. An individual's charitable contributions can only be deducted as an itemized deduction. Rich's net self-employment income would be Business receipts $20,000 Air conditioning parts (2,500) Yellow Pages listing (2,000) Business telephone calls (400) --------------------------------------- $15,100

During 2010 Kay received interest income as follows: -On US Treasury certificates $4,000 -On refund of 2008 federal income tax $500 The total amount of interest subject to tax in Kay's 2010 tax return is a) $4,500 b) $4,000 c) $ 500 d) $0

a) $4,500 The requirement is to determine the amount of interest subject to tax in Kay's 2010 tax return. Interest must generally be included in gross income, unless a specific statutory provision provides for its exclusion (e.g., interest on municipal bonds). Interest on US Treasury certificates and on a refund of federal income tax would be subject to tax on Kay's 2010 tax return.

Royce Rentals, Inc., an accrual-basis taxpayer, reported rent receivable of $25,000 and $35,000 in its 2010 and 2009 balance sheets, respectively. During 2010, Royce received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Royce's 2010 corporate income tax return, what amount should Royce include as rent revenue? a) $45,000 b) $50,000 c) $55,000 d) $65,000

a) $45,000 The requirement is to determine the amount to be reported as rent revenue in an accrual-basis taxpayer's tax return for 2010. An accrual-basis taxpayer's rent revenue would consist of the amount of rent earned during the taxable year plus any advance rent received. Advance rents must be included in gross income when received under both the cash and accrual methods, even though they have not yet been earned. In this case, Royce's rent revenue would be determined as follows: Rent receivable 12/31/09 $35,000 Rent receivable 12/31/10 25,000 ---------------------------------------------- Decrease in receivables (10,000) Rent collections during 2010 50,000 Rent deposits 5,000 ---------------------------------------------- Rent revenue for 2010 $45,000 The rent deposits must be included in gross income for 2010 because they are nonrefundable deposits.

James Martin received the following compensation and fringe benefits from his employer during 2009: -Salary $50,000 -Year-end bonus $10,000 -Medical insurance premiums paid by employer $1,000 -Reimbursement of qualified moving expenses $5,000 What amount of the preceding payments should be included in Martin's 2009 gross income? a) $60,000 b) $61,000 c) $65,000 d) $66,000

a) $60,000 James Martin's gross income consists of $50,000 + 10,000 = $60,000 Medical insurance premiums paid by an employer are excluded from an employee's gross income. Additionally, qualified moving expense reimbursements are an employee fringe benefit and can be excluded from gross income. This means that an employee can exclude an amount paid by an employer as payment for (or reimbursement of) expenses that would be deductible as moving expenses if directly paid or incurred by the employee.

Amy Finch had the following cash receipts during 2010: -Net rent on vacant lot used by a car dealer (lessee pays all taxes, insurance, and other expenses on the lot) $6,000 -Advance rent from lessee of above vacant lot, such advance to be applied against rent for the last two months of the five-year lease in 2014 $1,000 How much should Amy include in her 2010 taxable income for rent? a) $7,000 b) $6,800 c) $6,200 d) $6,000

a) $7,000 The requirement is to determine the amount of rent income to be reported on Amy's 2010 return. Both the $6,000 of rent received for 2010, as well as the $1,000 of advance rent received in 2010 for the last two months of the lease must be included in income for 2010. Advance rent must be included in income in the year received regardless of the period covered or the accounting method used.

Chris Baker's adjusted gross income on her 2009 tax return was $160,000. The amount covered a twelve-month period. For the 2010 tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of I. 90% of the tax on the return for the current year, paid in four equal installments. II. 100% of prior year's tax liability, paid in four equal installments. a) I only. b) II only. c) Both I and II. d) Neither I nor II.

a) I only. The requirement is to determine which statement(s) describe how Baker may avoid the penalty for the underpayment of estimated tax for the 2010 tax year. An individual whose regular and alternative minimum tax liability is not sufficiently covered by withholding from wages must pay estimated tax in quarterly installments or be subject to penalty. Individuals will incur no underpayment penalty for 2010 if the amount of tax withheld plus estimated payments are at least equal to the lesser of (1) 90% of the current year's tax; (2) 100% of the prior year's tax; or (3) 90% of the tax determined by annualizing current year taxable income through each quarter. However, note that for 2010, high-income individuals (i.e., individuals whose adjusted gross income for the preceding year exceeds $150,000) must use 110% (instead of 100%) if they wish to base their estimated tax payments on their prior year's tax liability.

Clark bought Series EE US Savings Bonds in 2010. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the a) Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). b) Bonds must be bought by a parent (or both parents) and put in the name of the dependent child. c) Bonds must be bought by the owner of the bonds before the owner reaches the age of twenty-four. d) Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

a) Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). The requirement is to determine the condition that must be met for tax exemption of accumulated interest on Series EE US Savings Bonds. An individual may be able to exclude from income all or a part of the interest received on the redemption of Series EE US Savings Bonds. To qualify, the bonds must be issued after December 31, 1989, the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse), and the owner(s) must be at least twenty-four years old before the bond's issue date. To exclude the interest the redemption proceeds must be used to pay the tuition and fees incurred by the taxpayer, spouse, or dependents to attend a college or university or certain vocational schools.

Mrs. Irma Felton, by herself, maintains her home in which she and her unmarried twenty-six-year-old son reside. Her son, however, does not qualify as her dependent. Mrs. Felton's husband died in 2009. What is Mrs. Felton's filing status for 2010? a) Single. b) Qualifying widow with dependent child. c) Head of household. d) Married filing jointly

a) Single. Mrs. Felton must file as a single taxpayer. Even though she is unmarried, Mrs. Felton does not qualify as a head of household because her son is neither a qualifying child (because of his age) nor a qualifying relative (because he is not her dependent). Answer (b) is incorrect because in order for Mrs. Felton to qualify, her son must qualify as a dependent, which he does not. Although Mrs. Felton would have qualified as married filing jointly, answer (d), in 2009 (the year of her husband's death), the problem requirement is her 2010 filing status.

John and Mary Arnold are a childless married couple who lived apart (alone in homes maintained by each) the entire year 2009. On December 31, 2009, they were legally separated under a decree of separate maintenance. Which of the following is the only filing status choice available to them when filing for 2009? a) Single. b) Head of household. c) Married filing separate return. d) Married filing joint return.

a) Single. The requirement is to determine the filing status of theArnolds. Since they were legally separated under a decree of separate maintenance on the last day of the taxable year and do not qualify for head-of-household status, they must each file as single.

If an individual paid income tax in 2009 but did not file a 2009 return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is a) Two years from the date the tax was paid. b) Two years from the date a return would have been due. c) Three years from the date the tax was paid. d) Three years from the date a return would have been due.

a) Two years from the date the tax was paid. The requirement is to determine the date by which a refund claim must be filed if an individual paid income tax during 2009 but did not file a tax return. An individual must file a claim for refund within three years from the date a return was filed, or two years from the date of payment of tax, whichever is later. If no return was filed, the claim for refund must be filed within two years from the date that the tax was paid.

Clark filed Form 1040EZ for the 2009 taxable year. In July 2010, Clark received a state income tax refund of $900, plus interest of $10, for overpayment of 2009 state income tax. What amount of the state tax refund and interest is taxable in Clark's 2010 federal income tax return? a) $0 b) $ 10 c) $900 d) $910

b) $ 10 The requirement is to determine the amount of interest for overpayment of 2009 state income tax and state income tax refund that is taxable in Clark's 2010 federal income tax return. The $10 of interest income on the tax refund is taxable and must be included in gross income. On the other hand, a state income tax refund is included in gross income under the "tax benefit rule" only if the refunded amount was deducted in a prior year and the deduction provided a benefit because it reduced the taxpayer's federal income tax. The payment of state income taxes will not result in a "benefit" if an individual does not itemize deductions, or is subject to the alternative minimum tax for the year the taxes are paid. Individuals who file Form 1040EZ are not allowed to itemize deductions and must use the standard deduction. Since state income taxes are only allowed as an itemized deduction and Clark did not itemize for 2009 (he used Form 1040EZ), his $900 state income tax refund is nontaxable and is excluded from gross income.

John Budd files a joint return with his wife. Budd's employer pays 100% of the cost of all employees' group-term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Budd by his employer is a) $100,000 b) $ 50,000 c) $ 10,000 d) $ 5,000

b) $ 50,000 The requirement is to determine the maximum amount of tax-free group-term life insurance coverage that can be provided to an employee by an employer. The cost of the first $50,000 of group-term life insurance coverage provided by an employer will be excluded from an employee's income.

Lee, an attorney, uses the cash receipts and disbursements method of reporting. In 2009, a client gave Lee 500 shares of a listed corporation's stock in full satisfaction of a $10,000 legal fee the client owed to Lee. This stock had a fair market value of $8,000 on the date it was given to Lee. The client's basis for this stock was $6,000. Lee sold the stock for cash in January 2010. In Lee's 2009 income tax return, what amount of income should be reported in connection with the receipt of the stock? a) $10,000 b) $ 8,000 c) $ 6,000 d) $0

b) $ 8,000 The requirement is to determine the amount of income to be reported by Lee in connection with the receipt of stock for services rendered. Compensation for services rendered that is received by a cash method taxpayer must be included in income at its fair market value on the date of receipt.

John and Mary were divorced in 2009. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 2010, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's 2010 income tax return? a) $ 5,600 b) $ 8,000 c) $ 8,600 d) $10,000

b) $ 8,000 The requirement is to determine the amount of payments to be included in Mary's income tax return for 2010. Alimony must be included in gross income by the payee and is deductible by the payor. In order to be treated as alimony, a payment must be made in cash and be received by or paid on behalf of the former spouse. Amounts treated as child support are not alimony; they are neither deductible by the payor, nor taxable to the payee. Payments will be treated as child support to the extent that payments will be reduced upon the happening of a contingency relating to a child (e.g., the child attaining a specified age, marrying, becoming employed). Here, since future payments will be reduced by 20% on their child's 18th birthday, the total cash payments of $10,000 ($7,000 paid directly to Mary plus the $3,000 of tuition paid on Mary's behalf) must be reduced by 20% and result in $8,000 of alimony income for Mary. The remaining $2,000 is treated as child support and is not tax able.

Amy Finch had the following cash receipts during 2010: -Dividend from a mutual insurance company on a life insurance policy $500 -Dividend on listed corporation stock; payment date by corporation was 12/30/09, but Amy received the dividend in the mail on 1/2/10 $875 Total dividends received to date on the life insurance policy do not exceed the aggregated premiums paid by Amy. How much should Amy report for dividend income for 2010? a) $1,375 b) $ 875 c) $ 500 d) $0

b) $ 875 The requirement is to determine the amount of dividend income to be reported on Amy's 2010 return. Dividends are included in income at earlier of actual or constructive receipt. When corporate dividends are paid by mail, they are included in income for the year in which received. Thus, the $875 dividend received 1/2/10 is included in income for 2010. The $500 dividend on a life insurance policy from a mutual insurance company is treated as a reduction of the cost of insurance and is excluded from gross income.

Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income? a) $0 b) $135,000 c) $160,000 d) $200,000

b) $135,000 The requirement is to determine the amount of life insurance proceeds that must be included in gross income by Decker, on the death of Fuller's parent. Life insurance proceeds paid because of the insured person's death are generally excluded from gross income. However, the exclusion generally does not apply if the insurance policy was obtained by the beneficiary in exchange for valuable consideration from a person other than the insurance company. Here, Decker purchased the policy from Fuller for $25,000 and paid an additional $40,000 in premiums, so Decker must include in gross income the excess of insurance proceeds over his investment in the policy [$200,000 - ($25,000 + $40,000) = $135,000.

Pierre, a headwaiter, received tips totaling $2,000 in December 2009. On January 5, 2010, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre's gross income? a) $2,000 in 2009. b) $2,000 in 2010. c) $1,000 in 2009, and $1,000 in 2010. d) $ 167 in 2009, and $1,833 in 2010.

b) $2,000 in 2010. The requirement is to determine the amount and the year in which the tip income should be included in Pierre's gross income. If an individual receives less than $20 in tips during one month while working for one employer, the tips do not have to be reported to the employer and the tips are included in the individual's gross income when received. However, if an individual receives $20 or more in tips during one month while working for one employer, the individual must report the total amount of tips to that employer by the tenth day of the next month. Then the tips are included in gross income for the month in which they are reported to the employer. Here, Pierre received $2,000 in tips during December 2009 that he reported to his employer in January 2010. Thus, the $2,000 of tips will be included in Pierre's gross income for 2010.

The following information pertains to Joe Diamond, a cash-method sole proprietor for 2009: -Gross receipts from business $150,000 -Interest income from personal investments $10,000 -Cost of goods sold $80,000 -Other business operating expenses $40,000 What amount of net earnings from self-employment would be multiplied by the applicable self-employment tax rate to compute Diamond's self-employment tax for 2009? a) $25,410 b) $27,705 c) $30,000 d) $40,000

b) $27,705 The requirement is to determine the amount of net earnings from self-employment that would be multiplied by the self-employment tax rate to compute Diamond's self-employment tax for 2009. Since self-employment earnings generally represent earnings derived from a trade or business carried on as a sole proprietor, the $10,000 of interest income from personal investments would be excluded from the computation. On the other hand, a self-employed taxpayer is allowed a deemed deduction equal to 7.65% of self-employment earnings in computing the amount of net earnings upon which the tax is based. The purpose of this deemed deduction is to reflect the fact that employees do not pay FICA tax on the corresponding 7.65% FICA tax paid by their employers.

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed? a) $0 b) $5,000 c) $45,000 d) $50,000

b) $5,000 The requirement is to determine the amount on which the penalties for late filing and late payment would be computed. The late filing and late payment penalties are based on the amount of net tax due. If a taxpayer's tax return indicated a tax liability of $50,000, and $45,000 of taxes were withheld, the late filing and late payment penalties would be based on the $5,000 of tax that is owed.

Alex Berger, a retired building contractor, earned the following income during 2010: -Director's fee received from Keith Realty Corp. $600 -Executor's fee received from the estate of his deceased sister $7,000 Berger's gross income from self-employment for 2010 is a) $0 b) $600 c) $7,000 d) $7,600

b) $600 The requirement is to determine Berger's gross income from self-employment for 2010. Self-employment income represents the net earnings of an individual from a trade or business carried on as a proprietor or partner, or from rendering services as an independent contractor. The director's fee is self-employment income since it is related to a trade or business, and Berger is not an employee. Fees received by a fiduciary (e.g., executor) are generally not related to a trade or business and not self-employment income. However, executor's fees may constitute self-employment income if the executor is a professional fiduciary or carries on a trade or business in the administration of an estate.

In 2010, Gail Judd received the following dividends from -Benefit Life Insurance Co., on Gail's life insurance policy (Total dividends received have not yet exceeded accumulated premiums paid) $100 -Safe National Bank, on bank's common stock $300 -Roe Mfg. Corp., a Delaware corporation, on preferred stock $500 What amount of dividend income should Gail report in her 2010 income tax return? a) $900 b) $800 c) $500 d) $300

b) $800 The requirement is to determine the amount of dividend income that should be reported by Gail Judd. The $100 dividend on Gail's life insurance policy is treated as a reduction of the cost of insurance (because total dividends have not yet exceeded accumulated premiums paid) and is excluded from gross income. Thus, Gail will report the $300 dividend on common stock and the $500 dividend on preferred stock, a total of $800 as dividend income for 2010.

Mr. and Mrs. Vonce, both age sixty-two, filed a joint return for 2009. They provided all the support for their daughter, who is nineteen, legally blind, and who has no income. Their son, age twenty-one and a full-time student at a university, had $6,200 of income and provided 70% of his own support during 2009. How many exemptions should Mr. and Mrs. Vonce have claimed on their 2009 joint income tax return? a) 2 b) 3 c) 4 d) 5

b) 3 The requirement is to determine the number of exemptions allowable in 2009. Mr. and Mrs. Vonce are entitled to one exemption each. They are also entitled to one exemption for their dependent daughter since they pro vided over one half of her support and she had less than $3,650 of gross income. An exemption is not available for their son because he provided over one-half of his own sup port.

Which of the following taxpayers may use the cash method of accounting? a) A tax shelter. b) A qualified personal service corporation. c) A C corporation with annual gross receipts of $50,000,000. d) A manufacturer with annual gross receipts of $3,000,000.

b) A qualified personal service corporation. The requirement is to determine which taxpayer may use the cash method of accounting. The cash method cannot generally be used if inventories are necessary to clearly reflect income, and cannot generally be used by C corporations, partnerships that have a C corporation as a partner, tax shelters, and certain tax-exempt trusts. Taxpayers permitted to use the cash method include a qualified personal service corporation, an entity (other than a tax shelter) if for every year it has average gross receipts of $5 million or less for any prior three-year period (and provided it does not have inventories), and a small taxpayer with average annual gross receipts of $1 million or less for any prior three-year period may use the cash method and is excepted from the requirement to account for inventories

AMT The alternative minimum tax (AMT) is computed as the a) Excess of the regular tax over the tentative AMT. b) Excess of the tentative AMT over the regular tax. c) The tentative AMT plus the regular tax. d) Lesser of the tentative AMT or the regular tax.

b) Excess of the tentative AMT over the regular tax. The requirement is to determine the correct statement regarding the computation of the alternative minimum tax (AMT). A taxpayer is subject to the AMT only if the taxpayer's tentative AMT exceeds the taxpayer's regular tax. Thus, the alternative minimum tax is computed as the excess of the tentative AMT over the regular tax.

A corporation's tax year can be reopened after all statutes of limitations have expired if I. The tax return has a 50% nonfraudulent omission from gross income. II. The corporation prevails in a determination allowing a deduction in an open tax year that was taken erroneously in a closed tax year. a) I only. b) II only c) Both I and II. d) Neither I nor II.

b) II only The requirement is to determine which statements are correct in regard to the reopening of a tax year after the statute of limitations have expired. The statute of limitations stipulate a time limit for the government's assessment of tax or a taxpayer's claim for refund. The normal period for the statute of limitations is the later of three years after a return is filed, or three years after the due date of the return. A six-year statute of limitations will apply if the gross income omitted from the return exceeds 25% of the gross income reported on the return. If a taxpayer's return was false or fraudulent with the intent to evade tax, or the taxpayer engaged in a willful attempt to evade tax, there is no statute of limitations. If a tax return has a 50% nonfraudulent omission from gross income, there would be a six-year statute of limitations. However, once the six-year period expired, the year could not be reopened. In contrast, a closed year can be reopened if a corporation prevails in a determination allowing a deduction in an open year that the taxpayer erroneously had taken in a closed tax year. This special rule for the reopening of a tax year is intended to prevent the double inclusion of an item of income, or the double allowance of a deduction or credit that would otherwise occur.

In 2009, Alan Kott provided more than half the support for his following relatives, none of whom qualified as a member of Alan's household: Cousin Niece Foster parent None of these relatives had any income, nor did any of these relatives file an individual or joint return. All of these rela-tives are US citizens. Which of these relatives could be claimed as a dependent on Alan's 2009 return? a) No one. b) Niece. c) Cousin. d) Foster parent.

b) Niece. The requirement is to determine which relative could be claimed as a dependent. One of the requirements that must be satisfied to claim a dependency exemption for a person as a qualifying relative is that the person must be (1) of specified relationship to the taxpayer, or (2) a member of the taxpayer's household. Cousins and foster parents are not of specified relationship and only qualify if a member of the taxpayer's household. Since Alan's cousin and foster parent do not qualify as members of Alan's household, only Alan's niece can be claimed as a dependent.

In 2009, Sam Dunn provided more than half the support for his wife, his father's brother, and his cousin. Sam's wife was the only relative who was a member of Sam's household. None of the relatives had any income, nor did any of them file an individual or a joint return. All of these relatives are US citizens. Which of these relatives should be claimed as a dependent or dependents on Sam's 2009 return? a) Only his wife. b) Only his father's brother. c) Only his cousin. d) His wife, his father's brother, and his cousin.

b) Only his father's brother. The requirement is to determine which of the relatives can be claimed as a dependent (or dependents) on Sam's 2009 return. A taxpayer's own spouse is never a dependent of the taxpayer. Although a personal exemption is generally available for a taxpayer's spouse on the tax payer's return, it is not a "dependency exemption." Gener ally, a dependency exemption is available for a qualifying relative if (1) the taxpayer furnishes more than 50% of the dependent's support, (2) the dependent's gross income is less than $3,650, (3) the dependent is of specified relation ship to the taxpayer or lives in the taxpayer's household for the entire year, (4) the dependent is a US citizen or resident of the US, Canada, or Mexico, and (5) the dependent does not file a joint return. Here, the support, gross income, US citizen, and joint return tests are met with respect to both Sam's cousin and his father's brother (i.e., Sam's uncle). How ever, Sam's cousin is not of specified relationship to Sam as defined in the IRC, and could only be claimed as a dependent if the cousin lived in Sam's household for the entire year. Since Sam's cousin did not live in Sam's household, Sam cannot claim a dependency exemption for his cousin. On the other hand, Sam's uncle is of specified relationship to Sam as defined in the IRC and can be claimed as a de pendency exemption by Sam.

In 2009, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2010, after filing its 2009 federal income tax return, Stewart determined that the exact amount was $6,000. Which of the following statements is correct? a) No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith. b) The $1,000 difference is includible in Stewart's 2010 income tax return. c) Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item. d) Stewart is required to file an amended return to report the additional $1,000 of income.

b) The $1,000 difference is includible in Stewart's 2010 income tax return. The requirement is to select the correct statement regarding the $1,000 of additional income determined by Stewart, an accrual method corporation. Under the accrual method, income generally is reported in the year earned. If an amount is included in gross income on the basis of a reasonable estimate, and it is later determined that the exact amount is more, then the additional amount is included in income in the tax year in which the determination of the exact amount is made. Here, Stewart properly accrued $5,000 of income for 2009 on the basis of a reasonable estimate and discovered that the exact amount was $6,000 in 2010. Therefore, the additional $1,000 of income is properly includible in Stewart's 2010 income tax return.

A husband and wife can file a joint return even if a) The spouses have different tax years, provided that both spouses are alive at the end of the year. b) The spouses have different accounting methods. c) Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election. d) They were divorced before the end of the tax year.

b) The spouses have different accounting methods. The requirement is to determine the correct statement regarding the filing of a joint tax return. A husband and wife can file a joint return even if they have different accounting methods. Answer (a) is incorrect because spouses must have the same tax year to file a joint return. Answer (c) is incorrect because if either spouse was a non resident alien at any time during the tax year, both spouses must elect to be taxed as US citizens or residents for the entire tax year. Answer (d) is incorrect because taxpayers cannot file a joint return if divorced before the end of the year.

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's widowed parent, Grant. For 2009, Dale, a twenty-year-old full-time college student, earned $4,500 from a part-time job. Kim, a twenty-three-year-old bank teller, earned $18,000. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits. Grant, Dale, and Kim are US citizens and were over one-half supported by Jim and Kay. How many exemptions can Jim and Kay claim on their 2009 joint income tax return? a) Two b) Three c) Four d) Five

b) Three The requirement is to determine how many exemptions Jim and Kay can claim on their 2009 joint income tax return. Jim and Kay are entitled to one personal exemption each on their joint return. They also are entitled to one exemption for their son, Dale, since he is a qualifying child (i.e., Dale did not provide more than half of his own support, and Dale is a full-time student under age twenty-four). However, no dependency exemptions are available for Kim and Grant. Kim is not a qualifying child because she is at least age 19 and not a full-time student, and she is not a qualifying relative because her gross income was at least $3,650. Similarly, Grant is not a qualifying relative because his gross income was at least $3,650.

Majors, a candidate for a graduate degree, received the following scholarship awards from the university in 2010: • $10,000 for tuition, fees, books, and supplies required for courses. • $2,000 stipend for research services required by the scholarship. What amount of the scholarship awards should Majors include as taxable income in 2010? a) $12,000 b) $10,000 c) $ 2,000 d) $0

c) $ 2,000 The requirement is to determine the amount of scholarship awards that Majors should include as taxable income in 2010. Only a candidate for a degree can exclude amounts received as a scholarship award. The exclusion available to degree candidates is limited to amounts received for the payment of tuition and fees, books, supplies, and equipment required for courses at the educational institution. Since Majors is a candidate for a graduate degree, Majors can exclude the $10,000 received for tuition, fees, books, and supplies required for courses. However, the $2,000 stipend for research services required by the scholarship must be included in taxable income for 2010.

Richard Brown, who retired on May 31, 2009, receives a monthly pension benefit of $700 payable for life. His life expectancy at the date of retirement is ten years. The first pension check was received on June 15, 2009. During his years of employment, Brown contributed $12,000 to the cost of his company's pension plan. How much of the pension amounts received may Brown exclude from taxable income for the years 2009, 2010, and 2011? 2009 2010 2011 a) $0-$0-$0 b) $4,900-$4,900-$4,900 c) $ 700-$1,200-$1,200 d) $4,900-$8,400$8,400

c) $ 700-$1,200-$1,200 The requirement is to determine the pension (annuity) amounts excluded from income for 2009, 2010, and 2011. Brown's contribution of $12,000 will be recovered pro rata over the life of the annuity. Under this rule, $100 per month (12,000 ÷ 120 months) is excluded from income. Received Excluded Included 2009 $4,900-$ 700- $4,200 2010 8,400- 1,200- 7,200 2011 8,400- 1,200- 7,200

Charles and Marcia are married cash-basis taxpayers. In 2010, they had interest income as follows: • $500 interest on federal income tax refund. • $600 interest on state income tax refund. • $800 interest on federal government obligations. • $1,000 interest on state government obligations. What amount of interest income is taxable on Charles and Marcia's 2010 joint income tax return? a) $ 500 b) $1,100 c) $1,900 d) $2,900

c) $1,900 The requirement is to determine the amount of interest income taxable on Charles and Marcia's joint income tax return. A taxpayer's income includes interest on state and federal income tax refunds and interest on federal obligations, but excludes interest on state obligations. Here, their joint taxable income must include the $500 interest on federal income tax refund, $600 interest on state income tax refund, and $800 interest on federal government obligations, but will exclude the $1,000 tax-exempt interest on state government obligations. Although a refund of federal income tax would be excluded from gross income, any interest on a refund must be included in gross income.

Freeman, a single individual, reported the following income in the current year: -Guaranteed payment from services rendered to a partnership $50,000 -Ordinary income from an S corporation $20,000 What amount of Freeman's income is subject to self-employment tax? a) $0 b) $20,000 c) $50,000 d) $70,000

c) $50,000 The requirement is to determine the amount of Freeman's income that is subject to self-employment tax. The self-employment tax is imposed on self-employment income to provide Social Security and Medicare benefits for self-employed individuals. Self-employment income includes an individual's net earnings from a trade or business carried on as sole proprietor or as an independent contractor. The term also includes a partner's distributive share of partnership ordinary income or loss from trade or business activities, as well as guaranteed payments received by a partner for services rendered to a partnership. Self-employment income excludes gains and losses from the disposition of property used in a trade or business, as well as a shareholder's share of ordinary income from an S corporation.

Bristol, a cash-basis taxpayer, owns an apartment building. The following information was available for 2009: • An analysis of the 2009 bank deposit slips showed recurring monthly rents received totaling $50,000. • On March 1, 2009, the tenant in apartment 2B paid Bristol $2,000 to cancel the lease expiring on December 31, 2009. • The lease of the tenant in apartment 3A expired on December 31, 2009, and the tenant left improvements valued at $1,000. The improvements were not in lieu of any rent required to have been paid. In computing net income from that apartment building for 2009, Bristol should report gross income of a) $50,000 b) $51,000 c) $52,000 d) $53,000

c) $52,000 The requirement is to determine the amount to be reported as gross income. Gross income includes the $50,000 of recurring rents plus the $2,000 lease cancellation payment. The $1,000 of lease improvements are excluded from income since they were not required in lieu of rent.

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction? a) $0 b) $200 c) $550 d) $600

c) $550 The requirement is to determine the amount that Perle should include in taxable income as a result of performing dental services for Wood. An exchange of services for property or services is sometimes called bartering. A taxpayer must include in income the amount of cash and the fair market value of property or services received in exchange for the performance of services. Here, Perle's taxable income should include the $200 cash and the bookcase with a comparable value of $350, a total of $550.

Jack and Joan Mitchell, married taxpayers and residents of a separate property state, elect to file a joint return for 2010 during which they received the following dividends: Received by Jack and Joan: -Alert Corporation (a qualified, domestic corporation): Jack $400 - Joan $ 50 -Canadian Mines, Inc. (a Canadian company): Joan $300 -Eternal Life Mutual Insurance Company (dividends on life insurance policy): Jack $200 Total dividends received to date on the life insurance policy do not exceed cumulative premiums paid. For 2010, what amount should the Mitchells report on their joint return as dividend income? a) $550 b) $600 c) $750 d) $800

c) $750 The requirement is to determine the amount of dividends to be reported by the Mitchells on a joint return. The amount of dividends would be ($400 + $50 + $300) = $750. The $200 dividend on the life insurance policy is not gross income, but is considered a reduction of the cost of the policy.

AMT In 2009, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows: -State and local income taxes $5,000 -Home mortgage interest on loan to acquire residence $6,000 -Miscellaneous deductions that exceed 2% of adjusted gross income $2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? a) $72,000 b) $75,000 c) $77,000 d) $83,000

c) $77,000 The requirement is to determine the amount that Mills should report as alternative minimum taxable income (AMTI) before the AMT exemption. Certain itemized deductions, although allowed for regular tax purposes, are not deductible in computing an individual's AMTI. As a result, no AMT deduction is allowed for state, local, and foreign income taxes, real and personal property taxes, and miscellaneous itemized deductions subject to the 2% of AGI floor. Also, the deduction for medical expenses is computed using a 10% floor (instead of the 7.5% floor used for regular tax), and no deduction is allowed for qualified residence interest if the mortgage proceeds were not used to buy, build, or substantially improve the taxpayer's principal residence or a second home. Additionally, no AMT deduction is allowed for personal exemptions and the standard deduction. Here, Mills' $5,000 of state and local income taxes and $2,000 of miscellaneous itemized deductions that were de ducted for regular tax purposes must be added back to his $70,000 of regular taxable income before personal exemption to arrive at Mills' AMTI before AMT exemption of ($70,000 + $5,000 + $2,000)= $77,000. Note that no adjustment was necessary for the mortgage interest because the mortgage loan was used to acquire his residence.

A claim for refund of erroneously paid income taxes, filed by an individual before the statute of limitations expires, must be submitted on Form a) 1139 b) 1045 c) 1040X d) 843

c) 1040X The requirement is to determine the form that must be filed by an individual to claim a refund of erroneously paid income taxes. Form 1040X, Amended US Individual Income Tax Return, should be used to claim a refund of erroneously paid income taxes. Form 843 should be used to file a refund claim for taxes other than income taxes. Form 1139 may be used by a corporation to file for a tentative adjustment or refund of taxes when an overpayment of taxes for a prior year results from the carryback of a current year's net operating loss or net capital loss. Form 1045 may be used by taxpayers other than corporations to apply for similar adjustments.

In 2009, Smith, a divorced person, provided over one-half the support for his widowed mother, Ruth, and his son, Clay, both of whom are US citizens. During 2009, Ruth did not live with Smith. She received $9,000 in social security benefits. Clay, a full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for 2009, owing an additional $500 in taxes on his wife's income. How many exemptions was Smith entitled to claim on his 2009 tax return? a) 4 b) 3 c) 2 d) 1

c) 2 The requirement is to determine the number of exemptions that Smith was entitled to claim on his 2009 tax return. Smith will be allowed one exemption for himself and one exemption for his dependent mother. Smith is enti tled to an exemption for his mother because he provided over half of her support, and her gross income ($0) was less than $3,650. Note that her $9,000 of social security benefits is excluded from her gross income, and that she did not have to live with Smith because she is related to him. No exemp tion is available to Smith for his son, Clay, because his son filed a joint return on which there was a tax liability.

Jim Planter, who reached age sixty-five on January 1, 2009, filed a joint return for 2009 with his wife Rita, age fifty. Mary, their twenty-one-year-old daughter, was a full-time student at a college until her graduation on June 2, 2009. The daughter had $6,500 of income and provided 25% of her own support during 2009. In addition, during 2009 the Planters were the sole support for Rita's niece, age 27, who had no income. How many exemptions should the Planters claim on their 2009 tax return? a) 2 b) 3 c) 4 d) 5

c) 4 The requirement is to determine the number of exemptions the Planters may claim on their joint tax return. There is one exemption for Mr. Planter, and one exemption for his spouse. In addition there is one dependency exemption for their daughter who is a qualifying child (i.e., she did not provide more than half of her own support, and she is a full-time student under age twenty-four). There is also one dependency exemption for their niece who is a qualifying relative (i.e., they provided more than half of her support, and her gross income was less than $3,650). However, there is no additional exemption for being age sixty-five or older.

With regard to the alimony deduction in connection with a 2010 divorce, which one of the following statements is correct? a) Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple's children. b) The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife. c) Alimony payments must terminate on the death of the payee spouse. d) Alimony may be paid either in cash or in property.

c) Alimony payments must terminate on the death of the payee spouse. The requirement is to determine the correct statement regarding the alimony deduction in connection with a 2010 divorce. To be considered alimony, cash payments must terminate on the death of the payee spouse. Answer (a) is incorrect because alimony payments cannot be contingent on the status of the divorced couple's children. Answer (b) is incorrect because the divorced couple cannot be members of the same household at the time the alimony is paid. Answer (d) is incorrect because only cash payments can be considered alimony.

Which of the following taxpayers may use the cash method of accounting for tax purposes? a) Partnership that is designated as a tax shelter. b) Retail store with $2 million inventory, and $9 million average annual gross receipts. c) An international accounting firm. d) C corporation manufacturing exercise equipment with average annual gross receipts of $8 million.

c) An international accounting firm. The requirement is to determine which taxpayer may use the cash method of accounting for tax purposes. The cash method generally cannot be used (and the accrual method must be used to measure sales and cost of goods sold) if inventories are necessary to clearly determine income. Additionally, the cash method generally cannot generally be used by (1) a corporation (other than an S corporation), (2) a partnership with a corporation as a partner, and (3) a tax shelter. However, this prohibition against the use of the cash method in the preceding sentence does not apply to a farming business, a qualified personal service corporation (e.g., a corporation performing services in health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting), and a corporation or partnership (that is not a tax shelter) that does not have inventories and whose average annual gross receipts for the most recent three-year period do not exceed $5 million.

A married couple filed their joint 2008 calendar-year return on March 15, 2009, and attached a check for the balance of tax due as shown on the return. On June 15, 2010, the couple discovered that they had failed to include $2,000 of home mortgage interest in their itemized deductions. In order for the couple to recover the tax that they would have saved by using the $2,000 deduction, they must file an amended return no later than a) December 31, 2011. b) March 15, 2012. c) April 15, 2012. d) June 15, 2012.

c) April 15, 2012. The requirement is to determine the date by which a taxpayer must file an amended return to claim a refund of tax paid on a calendar-year 2008 return. A taxpayer must file an amended return to claim a refund within three years from the date a return was filed, or two years from the date of payment of tax, whichever is later. If a return is filed before its due date, it is treated as filed on its due date. Thus, the taxpayer's 2008 calendar-year return that was filed on March 15, 2009, is treated as filed on April 15, 2009. Therefore, an amended return to claim a refund must be filed not later than April 15, 2012.

A calendar-year taxpayer files an individual tax return for 2009 on March 20, 2010. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency? a) March 20, 2013. b) March 20, 2012. c) April 15, 2013. d) April 15, 2012.

c) April 15, 2013. The requirement is to determine the latest date that the IRS can assert a notice of deficiency for a 2009 calendar-year return if the taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income. The normal period for assessment is the later of three years after a return is filed, or three years after the due date of the return. Since the 2009 calendar-year return was filed on March 20, 2010, and was due on April 15, 2010, the IRS must assert a deficiency no later than April 15, 2013.

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons: Amount of support Percent of total -Alma (an unrelated friend) $2,400 - 48% -Ben (Sara's brother) $2,150 - 43% -Carl (Sara's son) $450 - 9% Under a multiple support agreement, Sara's dependency exemption can be claimed by a) No one. b) Alma. c) Ben. d) Carl.

c) Ben. The requirement is to determine who can claim Sara's dependency exemption under a multiple support agreement. A multiple support agreement can be used if (1) no single taxpayer furnishes more than 50% of a dependent's support, and (2) two or more persons, each of whom would be able to take the exemption but for the support test, together provide more than 50% of the dependent's support. Then, any taxpayer who provides more than 10% of the dependent's support can claim the dependent if (1) the other persons furnishing more than 10% agree not to claim the dependent as an exemption, and (2) the other requirements for a dependency exemption are met. One of the other requirements that must be met is that the dependent be related to the taxpayer or live in the taxpayer's household. Alma is not eligible for the exemption because Sara is unrelated to Alma and did not live in Alma's household. Carl is not eligible for the exemption because he provided only 9% of Sara's support. Ben is eligible to claim the exemption for Sara under a multiple support agreement because Ben is related to Sara and has provided more than 10% of her support.

AMT An individual's alternative minimum tax adjustments include -Net long-term capital gain in excess of net short-term capital loss -Home equity interest expense where loan proceeds not used to buy, build, or improve home a) Yes Yes b) Yes No c) No Yes d) No No

c) No Yes The requirement is to determine whether a net capital gain and home equity interest expense are adjustments for purposes of computing the alternative minimum tax. Although an excess of net long-term capital gain over net short-term capital loss may be subject to a reduced maximum tax rate, the excess is neither a tax preference nor an adjustment in computing the alternative minimum tax. On the other hand, home equity interest expense where the home equity loan proceeds were not used to buy, build, or improve the home is an adjustment because the interest expense, although deductible for regular tax purposes, is not deductible for purposes of computing an individual's alternative minimum tax.

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified US Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is(are) true? I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. II. "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income. a) I only. b) II only. c) Both I and II. d) Neither I nor II.

c) Both I and II. The requirement is to determine whether two statements are true concerning the exclusion of interest income on US Series EE Bonds that are redeemed to pay for higher education. The accrued interest on US Series EE savings bonds that are redeemed by a taxpayer is excluded from gross income to the extent that the aggregate redemption proceeds (principal plus interest) are used to finance the higher education of the taxpayer, taxpayer's spouse, or dependents. Qualified higher educational expenses include tuition and fees, but not room and board or the cost of courses involving sports, games, or hobbies that are not part of a degree program. In determining the amount of available exclusion, qualified educational expenses must be reduced by qualified scholarships that are exempt from tax, and any other nontaxable payments such as veteran's educational assistance and employer-provided educational assistance.

Which of the following conditions must be present in a post-1984 divorce agreement for a payment to qualify as deductible alimony? I. Payments must be in cash. II. The payment must end at the recipient's death a) I only. b) II only. c) Both I and II. d) Neither I nor II.

c) Both I and II. The requirement is to determine which conditions must be present in a post-1984 divorce agreement for a payment to qualify as deductible alimony. In order for a payment to be deductible by the payor as alimony, the payment must be made in cash or its equivalent, the payment must be received by or on behalf of a spouse under a divorce or separation instrument, the payments must terminate at the recipient's death, and must not be designated as other than alimony (e.g., child support).

Which payment(s) is(are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university. a) I only. b) II only. c) Both I and II. d) Neither I nor II.

c) Both I and II. The requirement is to determine which pay ment(s) must be included in a recipient's gross income. A candidate for a degree can exclude amounts received as a scholarship or fellowship if, according to the conditions of the grant, the amounts are used for the payment of tuition and fees, books, supplies, and equipment required for courses at an educational institution. All payments received for services must be included in income, even if the services are a condition of receiving the grant or are required of all candidates for the degree. Here, the payment to a graduate assistant for a part-time teaching assignment and the grant to a Ph.D. candidate for participation in research are payments for services and must be included in income.

With regard to the inclusion of social security benefits in gross income for the 2010 tax year, which of the following statements is correct? a) The social security benefits in excess of modified adjusted gross income are included in gross income. b) The social security benefits in excess of one half the modified adjusted gross income are included in gross income. c) Eighty-five percent of the social security benefits is the maximum amount of benefits to be included in gross income. d) The social security benefits in excess of the modified adjusted gross income over $32,000 are included in gross income.

c) Eighty-five percent of the social security benefits is the maximum amount of benefits to be included in gross income. The requirement is to determine the correct statement regarding the inclusion of social security benefits in gross income for 2010. A maximum of 85% of social security benefits may be included in gross income for high-income taxpayers. Thus, no matter how high a taxpayer's income, 85% of the social security benefits is the maximum amount of benefits to be included in gross income.

Nell Brown's husband died in 2006. Nell did not remarry, and continued to maintain a home for herself and her dependent infant child during 2007, 2008, and 2009, providing full support for herself and her child during these three years. For 2006, Nell properly filed a joint return. For 2009, Nell's filing status is a) Single. b) Married filing joint return. c) Head of household. d) Qualifying widow with dependent child.

c) Head of household. The requirement is to determine Nell's filing status for 2009. Nell qualifies as a head of household because she is unmarried and maintains a household for her infant child. Answer (a) is incorrect because although Nell is single, head of household filing status provides for lower tax rates. Answer (b) is incorrect because Nell is unmarried at the end of 2009. Since Nell's spouse died in 2006, answer (d) is incorrect because the filing status of a "qualifying widow" is only available for the two years following the year of the spouse's death.

Jackson Corp., a calendar-year corporation, mailed its 2009 tax return to the Internal Revenue Service by certified mail on Thursday, March 11, 2010. The return, postmarked March 11, 2010, was delivered to the Internal Revenue Service on March 17, 2010. The statute of limitations on Jackson's corporate tax return begins on a) December 31, 2009. b) March 12, 2010. c) March 16, 2010. d) March 17, 2010.

c) March 16, 2010. The requirement is to determine the date on which the statute of limitations begins for Jackson Corp.'s 2009 tax return. Generally, any tax that is imposed must be assessed within three years of the filing of the return, or if later, the due date of the return. Since Jackson Corp.'s 2009 return was filed on March 11, 2010, and the return was due on March 15, 2010, the statute of limitations expires on March 15, 2013. This means that the statute of limitations begins on March 16, 2010.

The self-employment tax is a) Fully deductible as an itemized deduction. b) Fully deductible in determining net income from self-employment. c) One-half deductible from gross income in arriving at adjusted gross income. d) Not deductible.

c) One-half deductible from gross income in arriving at adjusted gross income. The requirement is to determine the correct statement regarding the self-employment tax. The self-employment tax is imposed at a rate of 15.3% on individuals who work for themselves (e.g., sole proprietor, independent contractor, partner). One-half of an individual's self-employment tax is deductible from gross income in arriving at adjusted gross income.

Under a "cafeteria plan" maintained by an employer, a) Participation must be restricted to employees, and their spouses and minor children b) At least three years of service are required before an employee can participate in the plan. c) Participants may select their own menu of benefits. d) Provision may be made for deferred compensation other than 401(k) plans.

c) Participants may select their own menu of benefits. The requirement is to determine the correct statement regarding a "cafeteria plan" maintained by an employer. Cafeteria plans are employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits (e.g., accident and health insurance, group-term life insurance, coverage under a dependent care or group legal services program). Thus, employees "may select their own menu of benefits." If an employee chooses qualified benefits, they are excluded from the employee's gross income to the extent allowed by law. If an employee chooses cash, it is includible in the employee's gross income as compensation. Answer (a) is incorrect because participation is restricted to employees only. Answer (b) is incorrect because there is no minimum service requirement that must be met before an employee can participate in a plan. Answer (d) is incorrect because deferred compensation plans other than 401(k) plans are not included in the definition of a cafeteria plan.

Emil Gow's wife died in 2007. Emil did not remarry, and he continued to maintain a home for himself and his dependent infant child during 2008 and 2009, providing full support for himself and his child during these years. For 2007, Emil properly filed a joint return. For 2009, Emil's filing status is a) Single. b) Head of household. c) Qualifying widower with dependent child. d) Married filing joint return.

c) Qualifying widower with dependent child. The requirement is to determine Emil Gow's filing status for 2009. Emil should file as a "Qualifying widower with dependent child" (i.e., surviving spouse) which will entitle him to use the joint return tax rates. This filing status is available for the two taxable years following the year of a spouse's death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse's death, (2) does not remarry before the end of the current tax year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse's dependent child.

AMT In 2005, Ross was granted an incentive stock option (ISO) by her employer as part of an executive compensation package. Ross exercised the ISO in 2008 and sold the stock in 2010 at a gain. Ross was subject to regular tax for the year in which the a) ISO was granted. b) ISO was exercised. c) Stock was sold. d) Employer claimed a compensation deduction for the ISO.

c) Stock was sold. The requirement is to determine when Ross was subject to "regular tax" with regard to stock that was acquired through the exercise of an incentive stock option. There are no tax consequences when an incentive stock option is granted to an employee. When the option is exercised, any excess of the stock's FMV over the option price is a tax preference item for purposes of the employee's alternative minimum tax. However, an employee is not subject to regular tax until the stock acquired through exercise of the option is sold. If the employee holds the stock acquired through exercise of the option at least two years from the date the option was granted (and holds the stock itself at least one year), the employee's realized gain is treated as long-term capital gain in the year of sale, and the employer receives no compensation deduction. If the preceding holding period rules are not met at the time the stock is sold, the employee must report ordinary income to the extent that the stock's FMV at date of exercise exceeded the option price, with any remaining gain reported as long-term or short-term capital gain. As a result, the employer receives a compensation deduction equal to the amount of ordinary income reported by the employee.

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim a) Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers. b) Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers. c) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. d) The excess as a credit against income tax, if that excess was withheld by one employer.

c) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. The requirement is to determine the correct statement with regard to social security tax (FICA) withheld in an amount greater than the maximum for a particular year. If an individual works for more than one employer, and combined wages exceed the maximum used for FICA purposes, too much FICA tax will be withheld. In such case, since the excess results from correct withholding by two or more employers, the excess should be claimed as a credit against income tax. Answer (a) is incorrect because the excess cannot be used as an itemized deduction. Answer (b) is incorrect because if employers withhold correctly, no reimbursement can be obtained from the employers. Answer (d) is incorrect because if the excess FICA tax withheld results from incorrect withholding by any one employer, the employer must reimburse the excess and it cannot be claimed as a credit against tax.

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household? -Insurance on the home -Rental value of home a) Yes - Yes b) No - No c) Yes - No d) No - Yes

c) Yes - No The requirement is to determine which items are considered in determining whether an individual has contributed more than one half the cost of maintaining the household for purposes of head of household filing status. The cost of maintaining a household includes such costs as rent, mortgage interest, taxes, insurance on the home, repairs, utilities, and food eaten in the home. The cost of maintaining a household does not include the cost of clothing, education, medical treatment, vacations, life insurance, transportation, the rental value of a home an individual owns, or the value of an individual's services or those of any member of the household.

Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction? -Must be age 65 or older or blind -Must support dependent child or aged parent a) Yes Yes b) No No c) Yes No d) No Yes

c) Yes No The item asks you to determine the requirements that must be met in order for a single individual to qualify for the additional standard deduction. A single individual who is age sixty-five or older or blind is eligible for an ad ditional standard deduction ($1,400 for 2009 and 2010). Two addi tional standard deductions are allowed for an indi vidual who is age sixty-five or older and blind. It is not required that an individual support a dependent child or aged parent in order to qualify for an additional standard deduc tion.

During the current year Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following payments during the year: -Workers' compensation $2,400 -Reimbursement from his employer's accident and health plan for medical expenses paid by Hal and not deducted by him $1,800 -Damages for physical injuries $8,000 The amount to be included in Hal's gross income for the current year should be a) $12,200 b) $ 8,000 c) $ 1,800 d) $0

d) $0 The requirement is to determine the amount to be included in Hal's gross income for the current year. All three amounts that Hal received as a result of his injury are excluded from gross income. Benefits received as workers' compensation and compensation for damages for physical injuries are always excluded from gross income. Amounts received from an employer's accident and health plan as reimbursement for medical expenses are excluded so long as the medical expenses are not deducted as itemized deductions.

Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2009 return: The divorce agreement, executed in 2006, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches age eighteen, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 2009, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2009 in a suit to collect the alimony owed. What amount should be reported in Hall's 2009 return as alimony income? a) $28,800 b) $ 5,000 c) $ 3,000 d) $0

d) $0 The requirement is to determine the amount to be reported in Hall's 2009 return as alimony income. If a divorce agreement specifies both alimony and child support, but less is paid than required, then payments are first allocated to child support, with only the remainder in excess of required child support to be treated as alimony. Pursuant to Hall's divorce agreement, $3,000 was to be paid each month, of which $600 was designated as child support, leaving a balance of $2,400 per month to be treated as alimony. However, during 2009, only $5,000 was paid to Hall by her former husband which was less than the $36,000 required by the divorce agreement. Since required child support payments totaled $600 × 12 = $7,200 for 2009, all $5,000 of the payments actually received by Hall during 2009 is treated as child support, with nothing remaining to be reported as alimony.

Smith, a retired corporate executive, earned consulting fees of $8,000 and director's fees of $2,000 in 2010. Smith's gross income from self-employment for 2010 is a) $0 b) $ 2,000 c) $ 8,000 d) $10,000

d) $10,000 The requirement is to determine Smith's gross income from self-employment. Self-employment income represents the net earnings of an individual from a trade or business carried on as a sole proprietor or partner, or from rendering services as an independent contractor (i.e., not an employee). The $8,000 consulting fee and the $2,000 of director's fees are self-employment income because they are related to a trade or business and Smith is not an employee.

In 2010, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2010 adjusted gross income in connection with this award? a) $0 b) $ 4,000 c) $ 5,000 d) $10,000

d) $10,000 The requirement is to determine the amount of a $10,000 award for outstanding civic achievement that Joan should include in her 2010 adjusted gross income. An award for civic achievement can be excluded from gross income only if the recipient was selected without any action on his/her part, is not required to render substantial future services as a condition of receiving the award, and designates that the award is to be directly transferred by the payor to a governmental unit or a tax-exempt charitable, educational, or religious organization. Here, since Joan accepted and actually received the award, the $10,000 must be included in her adjusted gross income.

Howard O'Brien, an employee of Ogden Corporation, died on June 30, 2010. During July, Ogden made employee death payments (which do not represent the proceeds of life insurance) of $10,000 to his widow, and $10,000 to his fifteen-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2010? Widow-Son a) $ 5,000-$ 5,000 b) $ 5,000-$10,000 c) $ 7,500-$ 7,500 d) $10,000-$10,000

d) $10,000-$10,000 The requirement is to determine the amount of employee death payments to be included in gross income by the widow and the son. The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.

Harold Thompson, a self-employed individual, had income transactions for 2009 (duly reported on his return filed in April 2010) as follows: Gross receipts $400,000 Cost of goods sold and deduction (320,000) -------------------------------------------------------- Net business income $ 80,000 Capital gains $36,000 --------------------------------------------------------- Gross income $116,000 In November 2010, Thompson discovers that he had inadvertently omitted some income on his 2009 return and retains Mann, CPA, to determine his position under the statute of limitations. Mann should advise Thompson that the six-year statute of limitations would apply to his 2009 return only if he omitted from gross income an amount in excess of a) $ 20,000 b) $ 29,000 c) $100,000 d) $109,000

d) $109,000 A six-year statute of limitations applies if gross income omitted from the return exceeds 25% of the gross income reported on the return. For this purpose, gross income of a business includes total gross receipts before subtracting cost of goods sold and deductions. Thus, a six-year statute of limitations will apply to Thompson if he omitted from gross income an amount in excess of ($400,000 + $36,000) × 25% = $109,000.

Lake Corp., an accrual-basis calendar-year corporation, had the following 2010 receipts: -Advanced rental payments where the lease ends in 2012 - $125,000 -Lease cancellation payment from a five-year lease tenant - $50,000 Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2010 tax return? a) $0 b) $ 50,000 c) $125,000 d) $175,000

d) $175,000 The requirement is to determine the amount of advance rents and lease cancellation payments that should be reported on Lake Corp.'s 2010 tax return. Advance rental payments must be included in gross income when received, regardless of the period covered or whether the taxpayer uses the cash or accrual method. Similarly, lease cancellation payments are treated as rent and must be included in income when received, regardless of the taxpayer's method of accounting.

Daniel Kelly received interest income from the following sources in 2010: -New York Port Authority bonds $1,000 -Puerto Rico Commonwealth bonds $1,800 What portion of such interest is tax exempt? a) $0 b) $1,000 c) $1,800 d) $2,800

d) $2,800 The requirement is to determine the amount of tax-exempt interest. Interest on obligations of a state or one of its political subdivisions (e.g., New York Port Authority bonds), or a possession of the US (e.g., Puerto Rico Commonwealth bonds) is tax-exempt.

AMT The following information is available for Ann Drury for 2010: -Salary $36,000 -Premiums paid by employer on group-term life insurance in excess of $50,000 $500 -Proceeds from state lottery $5,000 How much should Drury report as gross income on her 2010 tax return? a) $36,000 b) $36,500 c) $41,000 d) $41,500

d) $41,500 The requirement is to determine the amount of gross income. Drury's gross income includes the $36,000 salary, the $500 of premiums paid by her employer for group-term life insurance coverage in excess of $50,000, and the $5,000 proceeds received from a state lottery.

AMT In 2009, Emil Gow won $5,000 in a state lottery. Also in 2009, Emil spent $400 for the purchase of lottery tickets. Emil elected the standard deduction on his 2009 income tax return. The amount of lottery winnings that should be included in Emil's 2009 taxable income is a) $0 b) $2,000 c) $4,600 d) $5,000

d) $5,000 The requirement is to determine the amount of lottery winnings that should be included in Gow's taxable income. Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) not subject to the 2% of AGI floor if a taxpayer itemizes deductions. Since Gow elected the standard deduction for 2009, the $400 spent on lottery tickets is not deductible. Thus, all $5,000 of Gow's lottery winnings are included in his taxable income.

Alex Burg, a cash-basis taxpayer, earned an annual salary of $80,000 at Ace Corp. in 2009, but elected to take only $50,000. Ace, which was financially able to pay Burg's full salary, credited the unpaid balance of $30,000 to Burg's account on the corporate books in 2009, and actually paid this $30,000 to Burg on January 30, 2010. How much of the salary is taxable to Burg in 2009? a) $50,000 b) $60,000 c) $65,000 d) $80,000

d) $80,000 The requirement is to determine the amount of salary taxable to Burg in 2009. Since Burg is a cash-basis taxpayer, salary is taxable to Burg when actually or constructively received, whichever is earlier. Since the $30,000 of unpaid salary was unqualifiedly available to Burg during 2009, Burg is considered to have constructively received it. Thus, Burg must report a total of $80,000 of salary for 2009; the $50,000 actually received plus $30,000 constructively received.

Richard Baker filed his 2008 individual income tax return on April 15, 2009. On December 31, 2009, he learned that 100 shares of stock that he owned had become worthless in 2008. Since he did not deduct this loss on his 2008 return, Baker intends to file a claim for refund. This refund claim must be filed not later than April 15, a) 2009 b) 2011 c) 2014 d) 2016

d) 2016 The requirement is to determine the date by which a refund claim due to worthless security must be filed. The normal three-year statute of limitations is extended to seven years for refund claims resulting from bad debts or worthless securities. Since the securities became worthless during 2008, and Baker's 2008 return was filed on April 15, 2009, Baker's refund claim must be filed no later than April 15, 2016.

Joe and Barb are married, but Barb refuses to sign a 2009 joint return. On Joe's separate 2009 return, an exemption may be claimed for Barb if a) Barb was a full-time student for the entire 2009 school year. b) Barb attaches a written statement to Joe's income tax return, agreeing to be claimed as an exemption by Joe for 2009. c) Barb was under the age of nineteen. d) Barb had no gross income and was not claimed as another person's dependent in 2009.

d) Barb had no gross income and was not claimed as another person's dependent in 2009. The requirement is to determine the requirements which must be satisfied in order for Joe to claim an exemption for his spouse on Joe's separate return for 2009. An exemption can be claimed for Joe's spouse on Joe's separate 2009 return only if the spouse had no gross income and was not claimed as another person's dependent in 2009.

A cash-basis taxpayer should report gross income a) Only for the year in which income is actually received in cash. b) Only for the year in which income is actually received whether in cash or in property. c) For the year in which income is either actually or constructively received in cash only. d) For the year in which income is either actually or constructively received, whether in cash or in property.

d) For the year in which income is either actually or constructively received, whether in cash or in property. The requirement is to determine the correct statement regarding the reporting of income by a cash-basis taxpayer. A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property. Constructive receipt means that an item of income is unqualifiedly avail-able to the taxpayer without restriction (e.g., interest on bank deposit is income when credited to account).

AMT The credit for prior year alternative minimum tax liability may be carried a) Forward for a maximum of five years. b) Back to the three preceding years or carried forward for a maximum of five years. c) Back to the three preceding years. d) Forward indefinitely.

d) Forward indefinitely. The requirement is to determine the proper treatment for the credit for prior year alternative minimum tax (AMT). The amount of AMT paid by an individual taxpayer that is attributable to timing differences can be carried forward indefinitely as a minimum tax credit to offset the individual's future regular tax liability (not future AMT liability). The amount of AMT credit to be carried forward is the excess of the AMT actually paid over the AMT that would have been paid if AMTI included only exclusion preferences (e.g., disallowed itemized deductions, preferences for excess percentage depletion, and tax-exempt private activity bond interest).

AMT Which of the following itemized deductions are deductible when computing the alternative minimum tax for individuals? a) State income taxes. b) Home equity mortgage interest when the loan proceeds were used to purchase an auto. c) Unreimbursed employee expenses in excess of 2% of adjusted gross income. d) Gambling losses.

d) Gambling losses. The requirement is to determine the itemized deduction that is deductible when computing an individual's alternative minimum tax (AMT). For purposes of computing an individual's AMT, no deduction is allowed for personal, state, and local income taxes, and miscellaneous itemized deductions subject to the 2% of adjusted gross income threshold. Similarly, no deduction is allowed for home mortgage interest if the loan proceeds were not used to buy, build, or substantially improve the home.

Which of the following is (are) among the requirements to enable a taxpayer to be classified as a "qualifying widow(er)"? I. A dependent has lived with the taxpayer for six months. II. The taxpayer has maintained the cost of the principal residence for six months. a) I only. b) II only. c) Both I and II. d) Neither I nor II.

d) Neither I nor II. The requirement is to determine which statements (if any) are among the requirements to enable a taxpayer to be classified as a "qualifying widow(er)." Qualifying widow(er) filing status is available for the two years following the year of a spouse's death if (1) the surviving spouse was eligible to file a joint return in the year of the spouse's death, (2) does not remarry before the end of the current year, and (3) the surviving spouse pays over 50% of the cost of maintaining a household that is the principal home for the entire year of the surviving spouse's dependent child.

Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is generally mandatory for a sole proprietor when there are -Accounts receivable for services rendered -Year-end merchandise inventories a) Yes - Yes b) Yes - No c) No - No d) No - Yes

d) No - Yes The requirement is to determine whether the accrual method of tax reporting is mandatory for a sole proprietor when there are accounts receivable for services rendered, or year-end merchandise inventories. A taxpayer's taxable income should be computed using the method of accounting by which the taxpayer regularly computes income in keeping the taxpayer's books. Either the cash or the accrual method generally can be used so long as the method is consistently applied and clearly reflects income. However, when the production, purchase, or sale of merchandise is an income producing factor, inventories must be maintained to clearly reflect income. If merchandise inventories are necessary to clearly determine income, only the accrual method of tax reporting can be used for purchases and sales.

Which one of the following is not included in determining the total support of a dependent? a) Fair rental value of dependent's lodging. b) Medical insurance premiums paid on behalf of the dependent. c) Birthday presents given to the dependent. d) Nontaxable scholarship received by the dependent.

d) Nontaxable scholarship received by the dependent. The requirement is to determine which item is not included in determining the total support of a dependent. Support includes food, clothing, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support is life insurance premiums, funeral expenses, nontaxable scholarships, and income and social security taxes paid from a dependent's own income.

During 2009 Robert Moore, who is fifty years old and unmarried, maintained his home in which he and his widower father, age seventy-five, resided. His father had $4,700 interest income from a savings account and also received $2,400 from social security during 2009. Robert provided 60% of his father's total support for 2009. What is Robert's filing status for 2009, and how many exemptions should he claim on his tax return? a) Head of household and two exemptions. b) Single and two exemptions. c) Head of household and one exemption. d) Single and one exemption.

d) Single and one exemption. The requirement is to determine Robert's filing status and the number of exemptions that he should claim. Robert's father does not qualify as Robert's dependent because his father's gross income (interest income of $4,700) was not less than $3,650. Social security is not included in the gross income test. Since his father does not qualify as his dependent, Robert does not qualify for head-of-household filing status. Thus, Robert will file as single with one exemption.

If a taxpayer omits from his or her income tax return an amount that exceeds 25% of the gross income reported on the return, the Internal Revenue Service can issue a notice of deficiency within a maximum period of a) Three years from the date the return was filed, if filed before the due date. b) Three years from the date the return was due, if filed by the due date. c) Six years from the date the return was filed, if filed before the due date. d) Six years from the date the return was due, if filed by the due date.

d) Six years from the date the return was due, if filed by the due date. The requirement is to determine the maximum period during which the IRS can issue a notice of deficiency if the gross income omitted from a taxpayer's return exceeds 25% of the gross income reported on the return. A six-year statute of limitations applies if gross income omitted from the return exceeds 25% of the gross income reported on the return. Additionally, a tax return filed before its due date is treated as filed on its due date. Thus, if a return is filed be fore its due date, and the gross income omitted from the return exceeds 25% of the gross income reported on the return, the IRS has six years from the due date of the return to issue a notice of deficiency.

Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income? a) Employer-provided medical insurance coverage under a health plan. b) A $10,000 gift from the taxpayer's grandparents. c) The fair market value of land that the taxpayer inherited from an uncle. d) The dividend income on shares of stock that the taxpayer received for services rendered.

d) The dividend income on shares of stock that the taxpayer received for services rendered. The requirement is to determine which of the following would be included in gross income by Darr who is an employee of Sorce C corporation. The definition of gross income includes income from whatever source derived and would include the dividend income on shares of stock that Darr received for services rendered. However, items specifically excluded from gross income include amounts received as a gift or inheritance, as well as employer-provided medical insurance coverage under a health plan.