Tax Practice Exam 1
Barney and Betty got divorced this year. In the divorce decree Betty agreed to transfer 100 shares of common stock worth $50,000 and pay $24,000 per year for 5 year (or until barney's death or remarriage). What amount (if any) is included in Barney's gross income this year?
$24,000 -alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient
Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for faster wheelchair entrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prize should Ethan include in his gross income?
$25,000 -the prize must be associated with scientific, literary, or charitable achievement
Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescriptions medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal' qualifying medical expense?
$3,650 -emergency room and doctor visits $3,750 + prescription medication $500 + physical therapy $600 = $4,850 total qualifying medical expenses - less insurance reimbursement 1,200 = $3,650 Qualifying medical expenses from the accident
Joe received $60,000 compensation from his employer, the value of his stock in ABC company appreciated by $5,000 during the year (but he did not sell any of the stock), he received $30,000 of life insurance proceeds from the death of her husband. What is the amount of Joe's gross income from these items?
$60,000 -$60,000 compensation is included in gross income, the increase in the value of her stock is not realized income so it is not included in gross income, and the life insurance proceeds are excluded from gross income
Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the University when he agreed to counsel freshman on campus living. What amount must Shaun Include in his gross income?
$8,500 -college students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship
Sheri and Jake Woodhouse have 1 daughter, Emma, who is 16 years old. They also have taken in Emma's friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses provide all of the support for both girls, and both girls love at the Woodhouse residence. Which of the following statements is true regarding the dependency exemptions (and the reason for the exemptions) Sheri and Jake may claim for the current year of these girls? A. one exemption for their daughter Emma as a qualifying child but no exemption for Harriet B. one exemption for Emma as a qualifying child and one exemption for Harriet as qualifying child C. one exemption for Emma as a qualifying child and one exemption for Harriet as a qualifying relative
A. One exemption for their daughter Emma as a qualifying child but no exemption for Harriet -emma passes all tests of a qualifying child. Harriet, however, must be tested as a qualifying relative because she does not meet the relationship test of a qualifying child. in order to be considered a qualifying relative, she would have had to live a the Woodhouse residence for an entire year, and not just 11 of 12 months
Han is a self-employed carpenter and his wife, Christine, works full-time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement? A. The tools are supplies are deductible for AGI while the health insurance is an itemized deduction B. Both expenditures are deductible for AGI C. The tools are supplies are an itemized deduction but the health insurance is deductible for AGI D. Both expenditures are itemized deductions
A. The tools are supplies are deductible for AGI while the health insurance is an itemized deduction -business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are eligible to participate in an employer-provided health plan
If Lindley requests an extension to file her tax return, the latest she could pay her tax due without a penalty is:
April 15th
This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year? A. $200 is included because Mary itemized her deductions last year B. $200 is included if itemized deductions exceeded the standard deduction by $200 C. $200 is included because itemized deductions exceeded the standard deduction D. $200 is included even if Mary claimed the standard deduction
B. $200 is included it itemized deductions exceeded the standard deduction by $200 -refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deductions produced a tax benefit of $200 it itemized deductions exceeded the standard deduction by $200
Anna is a 21 year old full-time college student (she plans on returning home at the end of the school year). Her total support for the year was $34,000 (including $8,000 of tuition). Anna covered $12,000 of her support costs out of her own pocket (from savings, she did not work) and she received an $8,000 scholarship that covered all of her tuition costs. Which of the following statements regarding who is allowed to claim Anna as an exemption is true? A. even if Anna's parents provided the remaining $14,000 of support for Ann ($34,000 minus $12,000 minus $8,000), they would not be able to claim her as a dependent B. even if Anna's grandparents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000) they would not be able to claim her as a dependent C. because she provided more than half her own support, Anna may claim a personal exemption for herself
B. Even if Anna's grandparents provided the remaining $14,000 of support for Anna ($34,000 minus $12,000 minus $8,000) they would not be able to claim her as a dependent -anna does not qualify as a qualify child or relative of her grandparents because she provided more than half her own support. As it relates to the grandparents, the scholarship earned by Anna is treated as support provided by Anna (Anna provided $20,000 and the grandparents provided $14,000 of support). However, because Anna is a full-time college student under age 24, she qualifies as her parents' qualifying child (the scholarship does not count in the support test with respect to the parents). So, Anna may not claim a personal exemption for herself
In June of year 1, Jake's wife Darla died. The couple did not have any children and Jake did not remarry in year 1 or year 2. Which is the most favorable filing status for Jake in year 2? A. married filing separately B. single C. head of household D. qualifying widower
B. Single -jake is not married and he does not maintain a household for a dependent in year 2 so his most favorable filing status is single
Earmarked taxes are: A. Taxes assessed only on certain taxpayers B. Taxes assessed to fund a specific purpose C. Taxes assessed for only a specific time period
B. Taxes assessed to fund a specific purpose
Which of the following is false? A. a proportion tax rate structure imposes a constant tax rate while a progressive tax rate structure imposed an increasing marginal rate related to the tax base B. the average tax rate changes under a proportional tax rate structure, but it is static for a progressive tax rate system C. an example of proportional tax is the tax on gasoline
B. The average tax rate changes under a proportional tax rate structure, but it is static for a progressive tax rate system
For filing status purposes, the taxpayer's marital status is determined at what point during the year? A. the beginning of the year B. the end of the year C. the middle of the year
B. The end of the year -marital status is established as of the end of the year
Lay discovered the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable option with respect to an issue that she is going to litigate with the IRS. Lay should choose which of the following trial courts to hear her case: A. Tax court only B. U.S. court of federal claims only C. U.S. district court only D. tax court or U.S. district court E. tax court or the U.S. court of federal claims
B. U.S. Court of Federal Claims only -the U.S. court of federal claims will appeal to the U.S. circuit court of appeals for the federal circuit
To calculate a tax, you need to know: 1. the tax base 2. the taxing agency 3. the tax rate 4. the purpose of the tax A. only 1 is correct B. only 4 is correct C. 1 and 3 are correct D. All are correct
C. 1 and 3 are correct
Joyce's employer loaned her $50,000 this year (interest-free) to buy a new car. If the federal interest rate was 3%, which of the following is correct? A. Joyce recognizes $1,500 of taxable income B. Joyce's employer recognizes $1,500 of deductible interest expense C. Joyce recognizes $1,500 of imputed compensation income D. Joyce recognizes $1,500 of imputed dividend income
C. Joyce recognizes $1,500 of imputed compensation income -employees recognize compensation income on below market loans from employers calculated using the federal interest rate
Henry filed his 2015 tax return on May 15th, 2016. The statute of limitations for IRS assessment on Henry's 2015 tax return should end: A. may 15th, 2018 B. april 15th, 2018 C. may 15th, 2019 D. april 15th, 2019
C. May 15th, 2019 -the SOL ends 3 years from the later of (1) the date the tax return was filed or (2) the tax return's original due date
Identify the rule dictating that on a sale of an asset a taxpayer need only include the incremental gain in gross income rather than the entire proceeds from the sale: A. tax benefit rule B. constructive receipt C. return on capital principle D. wherewithal to pay
C. Return of capital principle -definition of return of capital principle
Which of the following has the highest authoritative weight? A. text book B. private letter ruling C. revenue ruling D. tax service
C. Revenue ruling
Which of the following statements regarding tax credits is true? A. tax credits reduce taxable income dollar for dollar B. tax credits provide a greater tax benefit the greater the taxpayer's marginal tax rate C. tax credits reduce taxes payable dollar for dollar
C. Tax credits reduce taxes payable dollar for dollar -credits reduce the taxes payable dollar for dollar and are therefore no sensitive to marginal tax rates
Sin taxes are: A. Taxes assessed by religious organizations B. Taxes assessed on certain illegal acts C. Taxes assessed to discourage less desirable behavior
C. Taxes assessed to discourage less desirable behavior
Which of the following is a description of how the annuity exclusion ratio is calculated for an annuity paid over a fixed period? A. the expected return is divided by the number of payments B. the original investment is divided by the prevailing interest rate C. the original investment is divided by the expected value of the annuity D. the expected return is divided by the prevailing interest rate
C. The original investment is divided by the expected value of the annuity -definition of annuity exclusion ration
Grace is a single medical student at State University, a qualified educational institution. This year Grace paid university tuition of $12,000. Grace works part-time at the University library, and this year she reports $15,000 of salary and no other items of income or expense. Which of the following is a true statement? A. Grace can deduct all of her tuition for AGI as a business expense B. Grace can deduct all of her tuition as a miscellaneous itemized deduction C. Grace can only deduct half of her tuition for AGI as a business expense D. all of these are false
D. All of these are false -educational expenses cannot be deducted as business expense if they are required for a new profession (which is always the case for medical school)
Which of the following statements regarding exclusions and/or deferrals is false? A. exclusions are favorable because taxpayers never pay tax on income that is excluded B. interest income from municipal bonds is excluded from gross income C. deferrals are income items taxpayers realize in 1 year but include in gross income in a subsequent year D. an income item need not be realized in order to qualify as an exclusion item
D. An item need not be realized in order to qualify as an exclusion item -an exclusion is realized income that is permanently excluded from taxation. If the income is not realized, it would not be included in gross income to begin with so it need not be excluded from income
Circular 230 was issued by: A. AICPA B. State Boards of Accountancy C. American Bar Association D. IRS
D. IRS
All of the following represents a type of character of income except: A. Tax exempt B. Capital C. Qualified dividend D. Normal
D. Normal -the types or characters of income include tax exempt, tax deferred, capital, ordinary, and qualified dividend. Normal income is not an income type or character
Which of the following is a true statement? A. All business expenses are deducted for AGI B. Investment expenses are typically deducted for AGI C. Tax preparation fees are deducted for AGI D. Rental and royalty expenses are deducted for AGI
D. Rental and royalty expenses are deducted for AGI -Investment expenses are typically deducted from AGI
Which of the following is not considered a primary authority? A. tax court case B. regulation C. revenue ruling D. tax service
D. Tax service
Which of the following is a true statement? A. the deduction of cash contributions to public charities is limited to 30% of AGI B. the deduction of capital property to private non operating foundations is limited to 50% of AGI C. the deduction of capital gain property to public charities is limited to 20% of AGI D. the deduction of cash contributions to private non operating foundations is limited to 30% of AGI
D. The deduction of cash contributions to private non operating foundations is limited to 30% of AGI -the deduction of cash contributions to public charities is limited to 50% of AGI, the deduction of capital gain property to private non operating foundations is limited to 20% of AGI, and the deduction of capital gain property to public charities is limited to 30% of AGI
