Enrolled Agent Practice Exam Questions Part 1

Jordan sold a building used in his business. His books and records reflect the following information for the year: Original cost of building $75,000 Improvements made to building 25,000 Broker's commissions paid on sale 5,000 Cash received on sale 50,000 Total property taxes paid by Jordan 1,500 Portion of property taxes imposed on purchaser and reimbursed to Jordan by purchaser under IRC 164(d) 500 Mortgage assumed by buyer 40,000 Accumulated depreciation 35,000 Fair market value of other property received 10,000 What is Jordan's recognized gain on the sale of the property? A) $30,000 B) $30,500 C) 35,000 D) $35,500

A) $30,000 Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage. When calculating amount realized, the seller does not include the reimbursement for real property taxes treated under Sec. 164(d) as imposed on the purchaser. The property taxes paid by Jordan are not included in either amount realized or adjusted basis because they are deductible expenses. The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. Jordan's recognized gain is calculated as follows: Cash received $50,000 FMV of other property 10,000 Mortgage assumed 40,000 Amount realized $100,000 Less: Adjusted basis (65,000) Commissions (5,000) 30,000

James is a sole proprietor. In May, he had the following expenses: - $500 for use of a yacht for a day's fishing with two clients - $50 lunch at a local restaurant with a client with whom he discusses a new product line - $200 for dues to the country club where he plays golf with a client who provides James with 40% of his commissions - $50 for a cheese package given to one of his clients on the client's birthday What is the allowed expense deduction based on these May expenses? A) $75 B) $50 C) $800 D) $600

A) $75 Entertainment expenses are not deductible. Only the business meal and gift are. The meal expense must be ordinary and necessary for the trade or business and provided by a restaurant to a current or potential business customer, client, consultant, or similar business contact. The taxpayer or the taxpayer's employee must be present at the meal. James is able to deduct $50 for the lunch with a client, during which he discussed a new product line, and $50 for a cheese package as a birthday present, for a total of $100 in expenses before any limitations. However, business gifts are limited to $25. The total deduction is $75 ($50 meal + $25 gift limit).

Rev. Janice Burton is a full-time minister at the Downtown Missionary Church. The church allows her to use the parsonage that has an annual fair rental value of $4,800. The church pays an annual salary of $13,200, of which $1,200 is designated for utility costs. Her utility costs during the year were $1,000. What is Rev. Burton's income for self-employment tax purposes? A) $18,000 B) $13,200 C) $12,200 D) $13,400

A) 18,000 In the case of a minister, net earnings from self-employment in connection with the performance of religious duties are computed without regard to the exclusion of rental value of home or parsonage (Publication 517 and Sec. 107). Therefore, the $13,200 annual salary plus the $4,800 rental value is used to determine Rev. Burton's self-employment taxes.

If an individual paid income taxes in the current year through withholding but did not file a current-year return because his or her income was insufficient to require the filing of a return, the deadline for filing a refund claim is A) 2 years from the date the tax was paid. B) 2 years from the date a return would have been due. C) 3 years from the date the tax was paid. D) 3 years from the date a return would have been due.

A) 2 years from the date the tax was paid. Section 6511(a) and (b) state that a claim for refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. Section 6511(a) further states that, if no return was filed, the claim for refund is due within 2 years from the time the tax was paid. For tax years ending after August 5, 1997, taxpayers who initially fail to file a return, but who receive a notice of deficiency and file suit to contest in Tax Court during the third year after the return due date, are permitted to obtain a refund of excessive amounts paid within the 3-year period prior to the deficiency notice (Publication 17).

John and Joanne are the sole support of the following individuals, all U.S. citizens, none of whom lives with them. None of these individuals files a joint return or has any gross income. - Jennie, John's mother - Julie, Joanne's stepmother - Jonathan, father of John's first wife How many dependents may John and Joanne claim on their joint return? A) 3 B) 2 C) 1 D) 0

A) 3 To qualify for dependency, the taxpayer must provide over 50% of the support of a U.S. citizen who meets certain relationship tests stated in Sec. 152(a). Section 152 allows dependency for fathers, mothers, stepfathers, and stepmothers. Relationships established by marriage are not ended by death or divorce (Publication 501). Thus, each of the individuals listed qualifies under the relationship test of Sec. 152.

All of the following are true EXCEPT A) A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. B) A son, age 21, was a full-time student who earned $4,400 from his part-time job. The money was used to buy a car. Even though he earned $4,400, his parents can claim him as a dependent if the other dependency tests were met. C) For each person claimed as a dependent, the Social Security number, adoption taxpayer identification number, or individual taxpayer identification number must be listed. D) If a married person files a separate return, (s)he cannot claim his or her spouse as a dependent even if the spouse had no gross income and was not the dependent of another taxpayer.

A) A brother-in-law must live with the taxpayer the entire year to be claimed as a dependent even if the other tests are met. The relationship requirement is satisfied by existence of an extended (by blood) or immediate (by blood, adoption, or marriage) relationship. The relationship need be present to only one of the two married persons who file a joint return. Any relationship established by marriage is not treated as ended by divorce or by death. An individual must satisfy either a relationship or a residence requirement but does not have to satisfy both (Publication 501).

Which of the following is an other itemized deduction reported on Schedule A? A) Amortizable premium on taxable bonds. B) Medical expenses. C) Business start-up costs. D) Business expenses of a taxpayer's sole proprietorship.

A) Amortizable premium on taxable bonds. Amortizable premium on taxable bonds is an other itemized deduction reported on Schedule A.

If a nonresident alien receives income that is effectively connected with U.S. trade or business, which itemized deductions may be taken? A) Casualty and theft losses from a federally declared disaster. B) Federal income taxes. C) A charitable contribution to a charitable organization in Germany. D) Mortgage interest on a primary residence.

A) Casualty and theft losses from a federally declared disaster. Nonresident aliens can deduct certain itemized deductions if income is received that is effectively connected with U.S. trade or business. These deductions include state and local income taxes, charitable contributions to U.S. organizations, casualty and theft losses, and miscellaneous deductions.

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was filed for the estate of John Doe. The gross estate tax was $250,000. Which of the following items cannot be credited against the gross estate tax to determine the net estate tax payable? A) Credit for marital deduction. B) Credit for gift taxes (gift made pre-1977). C) Credit for foreign death taxes. D) Credit for tax on prior transfers.

A) Credit for marital deduction. There is no credit for a marital deduction. Instead, the marital deduction is deductible in arriving at the taxable estate. The estate tax is then computed on the taxable estate.

Which of the following statements concerning the holding period of assets is true? A) In the case of stocks and bonds, the holding period begins on the day after the trading date. B) In the case of nontaxable exchanges, the holding period begins 45 days after the date you transfer the property. C) In the case of a gift, the holding period begins on the date you receive the gift. D) In the case of inherited property, there is no holding period.

A) In the case of stocks and bonds, the holding period begins on the day after the trading date. For a security that is purchased and sold on a registered security exchange, the holding period begins on the day after the taxpayer purchases the security.

Ms. Maple, a single woman age 65, retired in 2021. Prior to her retirement, she received a $6,000 bonus plus $5,250 in wages. After her retirement, she received $9,000 in Social Security benefits. Which of the following is true? A) Ms. Maple does not have to file a 2021 income tax return. B) Ms. Maple has to file a 2021 income tax return. C) Ms. Maple has to file a 2021 income tax return but may exclude the $6,000. D) Ms. Maple has to file a 2021 income tax return but may exclude the $9,000 in Social Security benefits from income.

A) Ms. Maple does not have to file a 2021 income tax return. In general, a taxpayer does not have to file a return if his or her gross income is less than his or her standard deduction [Publication 501 and Sec. 6012(a)]. For single individuals who are 65 or over, the standard deduction increases by $1,700. Therefore, the filing threshold will be $14,250($12,550 basic standard deduction + $1,700 additional standard deduction). Ms. Maple's income does not qualify her Social Security benefits for gross income inclusion in determining her filing requirement.

Which of the following payments can Demi deduct, at least in part, as interest in the current year? A) Points that the seller paid to a lender to arrange financing for Demi's purchase of her main home. B) Interest she paid on a loan used to purchase tax-exempt bonds. C) Interest on income taxes paid to the IRS. D) Property insurance premiums on a policy entered into in 2018.

A) Points that the seller paid to a lender to arrange financing for Demi's purchase of her main home. Prepaid interest paid in the form of points on a home mortgage to purchase a home is deductible in the year paid as long as points are normal business practice and are reasonable in the area. Points paid by the seller in connection with the loan to the taxpayer are treated as directly paid by the taxpayer (Publication 936). Therefore, the interest is considered as paid by Demi.

During the current year, Jack and Mary Bronson paid the following taxes: County taxes on residence (for period January 1 to September 30 of the current year) $2,700 State motor vehicle tax on value of the car 360 The Bronsons sold their house on June 30 of the current year under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for the current year? A) $1,800 B) $2,160 C) $2,700 D) $3,060

B) $2,160 Section 164(a) allows a deduction for state and local real property taxes, and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and the seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them [Sec. 164(d)]. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 ($2,700 × 6 ÷ 9). The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted (Publication 17). The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.

The following information pertains to Cole's personal residence, which sustained federally declared disaster fire damage in the current year: Adjusted basis $150,000 Fair market value immediately before the fire 200,000 Fair market value immediately after the fire 180,000 Fire damage repairs paid for by Cole in the current year 10,000 The house was uninsured. Before consideration of any "floor" or other limitation on tax deductibility, the amount of the casualty loss was A) $30,000 B) $20,000 C) $10,000 D) $0

B) $20,000 The amount of a casualty loss under Sec. 165 is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer's adjusted basis in the property. The decrease in the fair market value of Cole's residence is $20,000 ($200,000 - $180,000). This is less than the adjusted basis, so the casualty loss is $20,000. The repairs paid by Cole are not an additional loss. Instead, they are an effort by Cole to replace the loss that has already occurred and are added to the basis of the property (Publication 547).

Mr. and Mrs. Black received the following income for 2021. How much income should be reported on their 2021 joint return? I. W-2 income for Mrs. Black for wages of $30,000. II. W-2 for Mrs. Black for $2,000, the value of fringe benefits not included in the above W-2. Mrs. Black did not pay for the fringe benefits. III. Benefits of $5,000 paid to Mr. Black from a health and accident plan for which the premiums were paid by his employer but included in his income. A) $30,000 B) $32,000 C) $37,000 D) $35,000

B) $32,000 The IRC defines gross income as all income from whatever source derived except as provided otherwise. Section 61(a) enumerates types of income that constitute gross income. The list is not exhaustive. 1) Compensation for services, including fees, commissions, and fringe benefits 2) Gross income derived from business 3) Gains derived from dealings in property 4) Interest 5) Rents 6) Royalties 7) Dividends 8) Annuities 9) Income from life insurance and endowment contracts 10) Pensions 11) Income from discharge of indebtedness 12) Distributive share of partnership gross income 13) Income in respect of a decedent 14) Income from an interest in an estate or trust However, benefits received by an employee from an accident and health plan under which the employer paid the premiums or contributed to an independent fund are excluded from the employee's gross income. Accordingly, the wages and fringe benefits from Mrs. Black should be included on the joint return, and the health and accident plan benefits should be excluded from income (Publication 17). Thus, Mr. and Mrs. Black should report their income as $32,000 ($30,000 wages + $2,000 fringe benefits).

Mr. Bagley, a self-employed musician, timely filed his Year 1 income tax return, which showed an AGI of $180,000 and total tax of $45,000. He expects his Year 2 total tax to be $70,000. What is his required payment through withholding and estimated tax for Year 2? A) $63,000 B) $49,500 C) $45,000 D) $0

B) $49,500 The annual estimated payment that must be made is equal to the lesser of (1) 90% of the current year's tax or (2) 100% of the tax for the prior year. In order to avoid penalties for failure to pay estimated taxes, taxpayers with adjusted gross income for the previous tax year in excess of $150,000 must pay 110% of the prior year's tax. Mr. Bagley's adjusted gross income ($180,000) for Year 1 exceeds $150,000, so he must pay 110% of Year 1's tax, or $49,500 ($45,000 × 110%) (Publication 505).

Mr. Green must use a wheelchair. Upon advice from his doctor, in 2021, he installed an elevator and widened the front entrance of his house, incurring $10,000 and $3,000 in respective costs. Mr. Green had purchased his house for $146,000. An appraisal showed the fair market value of Mr. Green's house immediately after these modifications at $154,000. Also in 2021, Mr. Green decided to join a health club primarily to improve business contacts and for recreational purposes. He paid a $1,250 annual membership fee to make use of this facility. Compute Mr. Green's currently deductible medical expenses. A) $14,250 B) $5,000 C) $13,000 D) $6,250

B) $5,000 Expenditures for new building construction or for permanent improvements to existing structures primarily for medical care may be deductible in part as a medical expense. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense (Publication 502). Mr. Green incurred $13,000 in costs to make improvements to his house. The increase in value of his home was $8,000 ($154,000 - $146,000). Thus, Mr. Green may deduct $5,000 ($13,000 - $8,000).

Kate's records for the year reflect the following information: - Paid a church $9,500, of which $6,000 was contributed to the church and $3,500 was paid to enroll her child in its school. - Paid $100 dues to a business organization. - Paid $1,500 cash to qualified public charitable organizations. - Donated stock having a fair market value of $1,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000. Kate's adjusted gross income (AGI) for the year was $20,000. What is the amount of her charitable contribution deduction? A) $7,500 B) $9,000 C) $10,000 D) $13,500

B) $9,000 Taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received. Accordingly, Kate may deduct the $6,000 out of $9,500 contributed to the church. The dues paid to the business organization are not deductible; the entity does not qualify as a charitable organization under Sec. 170. The $1,500 to the qualified public charitable organizations, however, is deductible in full. The stock contribution is valued at the fair market value, not the purchase price. Therefore, the donated stock is valued at $1,500. The total amount of these deductions is $9,000, and this amount is below the 50%-of-adjusted-gross-income (100% for the cash donations in 2021) limitation (Publication 526).

All investment income in excess of deductions allowable for such income and income from passive activities are subject to an additional tax, the net investment income tax. Which of the following individuals are NOT subject to this tax? A) Taxpayers over the age of 65. B) Non-resident aliens. C) U.S. citizens. D) Spouses filing separately.

B) Non-resident aliens. Non-resident aliens are not subject to the net investment income tax.

A single taxpayer has $130,000 in wages and $200,000 in net self-employment income. What is the amount of additional Medicare tax that would be due on Form 1040 for the year? A) $0 B) $720 C) $1,170 D) $1,845

C) $1,170 A single taxpayer with income in excess of $200,000 is taxed an additional 0.9% on the excess as a Medicare tax. The taxpayer had total income of $330,000 ($130,000 + $200,000). The additional Medicare tax due is $1,170 [($330,000 - $200,000) × 0.9%].

On June 30, 2021, Rita died with a taxable estate of $12,340,000 and estate taxes payable of $256,000. Victor, the executor, filed the estate tax return on December 31, 2021. He distributed all the assets of the estate without paying the estate tax liability. Dustin (one of several beneficiaries) received $35,000. What are the possible tax assessments against Victor and/or Dustin? Victor | Dustin A) $256,000 | $0 B) $128,000 | $128,000 C) $256,000 | $35,000 D) $256,000 | $256,000

C) $256,000 | $35,000 An executor is personally liable for unpaid estate taxes. An estate beneficiary is also personally liable but only to the extent of the value of assets (s)he received from the estate.

Pablo died October 10 of the current year. Prior to his death, Pablo had done the following: He sold and delivered a truckload of oranges to a co-op but did not receive the $3,000 payment prior to his death. The payment was made to his executor. He sold a truck to Roscoe for $5,000, but the payment was not received until after his death. Pablo's basis in the truck was $1,000. What is the amount of income in respect of a decedent for the above two payments? A) No amount for either transaction B) $3,000 for the oranges and $5,000 for the truck. C) $3,000 for the oranges and $4,000 for the truck D) None of the answers are correct

C) $3,000 for the oranges and $4,000 for the truck Income in respect of a decedent is that which is earned by the taxpayer but is neither received prior to his or her death, nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent's final return. Income in respect of a decedent is included in the recipient's (e.g., the estate's) income in the year received or accrued. It is calculated the same as if the decedent were still alive; therefore, Pablo's executor will include $3,000 for the oranges and $4,000 for the truck as income in respect of a decedent.

In Year 1, Ralph received 10 shares of White Corporation stock as a gift from his father. Ralph's father had originally paid $10 per share for this stock. The stock was trading for $20 per share at the time of the gift. In Year 4, Ralph purchased an additional 20 shares of White Corporation stock for a price of $30 per share. Ralph was charged a $20 transaction fee on this purchase. In October of Year 6, Ralph sold 20 shares of his White Corporation stock. Ralph cannot adequately identify the shares he disposed of. What is Ralph's basis in the White Corporation shares he still owns? A) $100 B) $200 C) $310 D) $360

C) $310 Under Sec. 1015(a), since Ralph received this stock as a gift, he retains his father's basis of $10 per share. Since Ralph cannot adequately identify the shares he disposed of, he is required to use the FIFO method of identification. Therefore, Ralph is considered to have sold the shares his father gave him and the 10 shares Ralph subsequently purchased. In addition, Ralph must add half of the transaction fee to his adjusted basis. Therefore, Ralph's basis in his shares is $310 (10 shares × $30 + $10 transaction fee).

Which of the following is a requirement that must be met in determining whether a taxpayer is considered unmarried for head of household filing-status purposes? A) The individual must be divorced or legally separated for over one year. B) An individual must pay less than one-half the cost of keeping up a home for the tax year. C) An individual's home must be, for at least 6 months, the main home of his or her child, stepchild, or qualified foster child whom (s)he or the noncustodial parent can properly claim as a dependent. D) An individual's spouse must not have lived in their home for the entire tax year.

C) An individual's home must be, for at least 6 months, the main home of his or her child, stepchild, or qualified foster child whom (s)he or the noncustodial parent can properly claim as a dependent. In determining if a taxpayer qualifies for head of household filing status, the taxpayer is considered unmarried if all the following requirements are met:

Which of the following statements concerning gift splitting is false? A) To qualify for gift splitting, a couple must be married at the time the gift is made to a third party. B) Both spouses must consent to the use of gift splitting. C) For gift tax purposes, a husband and wife must file a joint income tax return to qualify for the gift splitting benefits. D) The annual gift tax exclusion allows spouses who consent to split their gifts to transfer up to $30,000 to any one person during any calendar year without gift tax liability, if the gift qualifies as a present interest.

C) For gift tax purposes, a husband and wife must file a joint income tax return to qualify for the gift splitting benefits. Section 2513 allows a gift to be treated as made one-half by the donor and one-half by the donor's spouse. There are marriage and residency status requirements. The spouses are not required to file a joint gift tax return.

All of the following are considered adjustments for arriving at alternative minimum taxable income EXCEPT A) Local real property taxes. B) Local income taxes. C) Home mortgage interest (debt used to purchase, build, or substantially improve a residence). D) Standard deduction.

C) Home mortgage interest (debt used to purchase, build, or substantially improve a residence). Taxable income must be adjusted to arrive at alternative minimum taxable income. The adjustments are described in Secs. 56 and 58, with tax preferences in Sec. 57. The adjustments with respect to itemized deductions of an individual are contained in Sec. 56(b)(1). No adjustment is made to taxable income for home mortgage interest in order to arrive at alternative minimum taxable income [Publication 17 and Sec. 56(b)(1)(C)(i)

Which of the following is true regarding the filing of Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return? A) Filing Form 4868 provides an automatic 2-month extension of time to file and pay income tax. B) Any U.S. citizen who is out of the country on April 15, 2022, is allowed an automatic 6-month extension of time to file his or her 2021 return and pay any federal income tax due. C) Interest is charged on tax not paid by the due date of the return even if an extension is obtained. D) Electronic filing cannot be used to get an extension of time to file.

C) Interest is charged on tax not paid by the due date of the return even if an extension is obtained. An automatic extension of 6 months is provided for an individual who files Form 4868 or uses a credit card to make the required tax payment on or before the initial due date. Tax liability must be paid on the original due date of the tax return. Automatic extension for filing the return does not extend time for payment. Interest will be charged from the original due date. If the required payment is made by the regular due date for the return, the return can be filed anytime before the 6-month extension period ends.

Karen, filing as head of household, and her son James and daughter Julia are all in graduate school. James and Julia are not dependents on Karen's return, although they live with her and she pays all of their education expenses. Karen paid $6,000 in qualified tuition expenses for herself in January 2021 for the term starting in January 2021. She also paid $2,500 in qualified tuition expenses for James and another $2,500 for Julia in July 2021 for the term starting in July 2021. Her adjusted gross income is $100,000. Which of the following about the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit is true for tax year 2021? A) Karen may claim no AOTC and $2,000 Lifetime Learning Credit. B) Karen may claim $5,000 AOTC and $1,000 Lifetime Learning Credit. C) Karen may claim neither the AOTC nor the Lifetime Learning Credit. D) Karen may claim no AOTC and $1,000 Lifetime Learning Credit.

C) Karen may claim neither the AOTC nor the Lifetime Learning Credit. The AOTC and Lifetime Learning Credit may not be claimed at the same time for an individual. The AOTC is available during a student's first 4 years in college (Sec. 25A). Since Karen and each child are in graduate school, she does not qualify for the AOTC. The Lifetime Learning Credit is available in years that the AOTC is not taken (for example, fifth and later years of college). However, the Lifetime Learning Credit phases out for single filers whose AGI is between $80,000 and $90,000. Since Karen's AGI is $100,00, the Lifetime Learning Credit is completely phased out (Publication 970).

Emma's brother purchased 100 shares of Clockwork, Inc., stock for $10 per share on December 30, 2019. Emma inherited the shares of Clockwork stock from her brother on September 15, 2020, when it had a fair market value of $15 per share. On December 20, 2021, she sold the stock for $20 per share. What is the amount and character of her gain? A) The gain of $1,000 is short-term capital gain. B) The gain of $1,000 is long-term capital gain. C) The gain of $500 is long-term capital gain. D) The gain of $500 is short-term capital gain.

C) The gain of $500 is long-term capital gain. The basis for inherited property is the fair market value (FMV) on the date of the death or at some alternate date (as specified in the tax code). In addition, all inherited property has a long-term holding period. A gain is determined by subtracting the adjusted basis from the amount realized. Amount realized $2000 (100 shares × $20/share) Minus Adjusted basis (1,500) (100 shares × $15/share) Gain $500 Thus, Emma has a long-term gain of $500.

Cyril, who is 68 years of age, received Social Security benefits of $12,000, wages of $5,000, interest and dividends of $4,000, unemployment compensation of $3,000, and municipal bond interest of $1,500. Calculate Cyril's adjusted gross income. A) $22,200 B) $25,500 C) $19,200 D) $12,000

D) $12,000 Adjusted gross income (AGI) is gross income minus any AGI deductions. Cyril has no deduction for AGI, so her AGI is equal to her gross income. Of her income, only the wages, interest, dividends, and unemployment compensation are taxable income (Publication 17). Thus, her gross income is $12,000 ($5,000 + $4,000 + $3,000), which is also her AGI. Municipal bond interest is tax-exempt.

Jack, a single individual, made the following gifts in 2021: Payment directly to sister's qualifying college for tuition $20,000 Payment directly to sister's qualifying college for room and board 25,000 Cash to nephew 10,000 Cash to brother 30,000 What is the gross amount of gifts that Jack must include on his 2021 Form 709, United States Gift Tax Return? A) $85,000 B) $40,000 C) $65,000 D) $55,000

D) $55,000 Section 6019 provides that a gift tax return must be filed for almost all taxable gifts. Specifically excluded from the requirement for filing are transfers that qualify for and do not exceed the 15,000 annual exclusion of Sec. 2503(b). The payment to Jack's sister's college for tuition is not included (this is not considered a "gift"). The amount given for room and board is included, however. The cash payment made to the nephew is excluded due to the $15,000 annual exclusion. The total amount included is $55,000 ($25,000 room and board + $30,000 cash to brother).

In the alternative minimum tax, all of the following are considered adjustment items for noncorporate taxpayers EXCEPT A) The standard deduction. B) Foreign income taxes paid. C) A balance of research and experimental expenditures. D) Charitable contributions.

D) Charitable contributions. Adjustments are disallowed itemized deductions or standard deduction and balance of research and experimental expenditures. Charitable contributions, however, are not included in this computation as an adjustment item.

Which one of the following is NOT an adjustment to total income in arriving at adjusted gross income? A) Interest paid on student loans. B) Portion of health insurance of self-employed persons. C) Certain contributions to a medical savings account. D) Contributions to a Roth IRA.

D) Contributions to a Roth IRA. Section 408A(c)(1) disallows any deduction for contributions made to a Roth IRA (Publication 17).

After many years as a bachelor, Buddy, age 50, married Penny, age 63. Penny's only income was $10,800 of Social Security. They filed a joint return for year 2021 with a modified adjusted gross income of $150,000. Buddy is covered by a retirement plan at work, where he receives compensation of $125,000. He wishes to contribute to an IRA for himself and for Penny. Which of the following will provide them the greatest allowable tax benefit? A) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to his IRA. B) He may contribute $7,000 to each IRA but take no deduction for either IRA. C) He may contribute $7,000 to each IRA and take a deduction of $7,000 for each IRA. D) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny's IRA.

D) He may contribute $7,000 to each IRA but only take a deduction for the $7,000 to Penny's IRA. If covered for any part of the year by an employer retirement plan and no social security payments were received by the individual, the IRA contribution deduction is completely eliminated if the AGI is greater than $125,000 (married filing jointly). However, since Penny received no taxable compensation, the contribution to her IRA is completely deductible. The deduction is $6,000 plus an additional $1,000 for taxpayers age 50 or older. (Publication 590-A.)

When preparing a current-year tax return, which of the following benefits are derived from the use of the previous year's return? I. Prevents gross mathematical errors II. Identifies significant changes III. Increases efficiency A) I and II only B) I and III only C) II and III only D) I, II, and III

D) I, II, and III Use of the prior-year return helps to prevent gross mathematical errors or identify significant changes. The accuracy of the prior-year return increases efficiency in completing the current-year return. These are just a few of the benefits of obtaining a copy of the previous year's return (Publication 17).

Generally, if you own stock in a small corporation that meets the requirements of Sec. 1244 (small business) stock and you sell that stock at a loss, the loss is reported as A) Short-term loss on Schedule D limited to $3,000. B) Ordinary loss on Form 4797 limited to $25,000 for a single individual and limited to $50,000 for those filing a joint return. C) Long-term loss on Schedule D limited to $3,000. D) Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return.

D) Ordinary loss on Form 4797 limited to $50,000 for a single individual and limited to $100,000 for those filing a joint return. In the case of a loss on Sec. 1244 stock, the loss shall be treated as an ordinary loss limited to a maximum loss of $50,000 ($100,000 for a husband and wife filing jointly) for any taxable year [Sec. 1244(a-b)]. Any loss from the sale or exchange of Sec. 1244 stock should be reported on Form 4797, Sales of Business Property, up to the maximum limit for ordinary loss. Any gain from Sec. 1244 stock should not be used to offset a loss but should be reported as a capital gain on Schedule D of Form 1040 (Publication 550).

A decedent's gross estate includes the value of all property to the extent of the decedent's interest in the property at the time of death. Which one of the following items is NOT included in the gross estate? A) Medical insurance reimbursements that were due the individual at death. B) The value of the part of a deceased husband's real property allowed to his widow for her lifetime (dower interest). C) Section 2042 provides that the value of the gross estate includes proceeds of life insurance when the decedent possessed incidents of ownership in the policy. D) Outstanding dividends declared to the decedent after the date of death.

D) Outstanding dividends declared to the decedent after the date of death. Under Sec. 2033, the value of a gross estate includes the value at the time of death of all property in which the decedent had an interest at the time of death. A shareholder has a right to, or an interest in, only the dividends that have been declared by the directors. Since the dividends were declared after death, the decedent had no interest in them at the time of his or her death, so they are not included in the gross estate. Note that, if the dividends had been declared (and the record date had passed) but not paid before the decedent's death, they would be includible in the gross estate.

John bought his principal residence for $250,000 on May 3, 2020. He sold it on May 3, 2021, for $400,000. What is the amount and character of his gain? A) Long-term, ordinary gain of $650,000. B) Long-term, capital gain of $150,000. C) Short-term, ordinary gain of $650,000. D) Short-term, capital gain of $150,000.

D) Short-term, capital gain of $150,000. Real property not used in trade or business is a capital asset (e.g., principal residence). Short-term capital is any capital held for 12 months or less starting with the day after acquisition and ending on the day of the sale. Because this sale took place within the prescribed 12-month period, it is classified as a sale of short-term capital property.

John and Linda Smith are a childless married couple with no other dependents who lived apart for all of the current year. On December 31 of the current year, they were legally separated under a decree of separate maintenance. Based on the facts, which of the following is the only filing-status choice available to them for the current year? A) MFJ return B) MFS return C) HoH D) Single

D) Single The determination of whether an individual is married is made as of the close of the taxable year, so John and Linda are both single for the current year (Publication 17). Couples under a separate maintenance agreement are not considered married.

Which of the following is true regarding the Report of Foreign Bank and Financial Accounts (FBAR) requirements: A. The FinCEN Form 114 (FBAR) is filed online with the Financial Crimes Enforcement Network B. The due date for the FBAR filing is generally July 15 of the current tax year for individuals C. The FinCEN Form 114 (FBAR) is filed with the current tax year individual income tax return D. FinCEN will grant an automatic extension to October 15 if unable to meet the FBAR annual due date

Key: A References: 31 C.F.R. §§ 1010.350(b); 1010.306(c); Publication 54 (2021), page 8

The standard deduction is increased for individuals who are age 65 and older and/or: A. Blind B. Retired from the military C. A beneficiary of a trust D. Receiving unemployment compensation

Key: A References: IRC 63(f); IRS, Publication 501 (2021), page 23

Two taxpayers married on November 30. That same year, the husband enrolled in an accredited college to further his career and subsequently received a Form 1098-T, Tuition Statement. The wife was employed with an income of $45,000 and paid for the husband's education expenses. The taxpayers did not receive any other income for the year. Based on their circumstances, what is the correct method to report the education credit? A. Taxpayers must file a joint return to claim an education credit B. Based on the wife's AGI, they do not qualify to claim an education credit C. Husband is ineligible to claim an education credit because the wife paid his education expenses D. Wife should report nonqualified education expenses on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)

Key: A References: IRC § 25A(g)(6); Instructions for Form 8863 (2021), page 2

A single taxpayer filed their 2008 return and claimed $7,500 for the first-time homebuyer credit. The home was used as a primary residence until it was foreclosed on in the current tax year. Which is correct regarding the first-time homebuyer credit? A. The balance of the credit must be repaid and is reported on the tax return for the tax year which the foreclosure is completed B. The unpaid credit received is pro-rated over 15 years C. Since the home was purchased in 2008, there is no longer a requirement to repay the balance of the credit D. There is no requirement to repay the credit when the home is used as a primary residence for at least 5 years

Key: A References: IRC § 36, Instructions for Form 5405 (Nov. 2021), page 31

Tax preparation fees for individuals are generally deductible for the current year as: A. They are not deductible B. A tax credit on Schedule 1 C. An investment expense on Schedule A D. A miscellaneous itemized deduction subject to the 2% limit

Key: A References: IRC § 67 and 67(g); Pub 17 (2021), page 101

Which of the below is a correct statement regarding Form 8938, Statement of Specified Foreign Financial Assets? A. Form 8938 is attached to your annual return and filed by the due date, including extensions B. If an income tax return is not required to be filed for the tax year, you are still required to file Form 8938 when specified foreign financial assets is more than the appropriate reporting threshold C. If you are required to file Form 8938, you must report the specified foreign financial assets in which you have an interest only if the assets affect your tax liability for the year D. Filing Form 8938 relieves you of the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) if you are otherwise required to file the FBAR

Key: A References: IRS, Bank Secrecy Act, (31 U.S.C. § 5314); 31 C.F.R. §§ 1010.350(a); 1010.306(c); Pub 54, page 8 ; Pub 4261 (July 2021), page 1

Which of the following is correct regarding a personal casualty loss? A. Property due to progressive deterioration is not deductible B. It is reduced by the amount of your standard deduction C. It must be less than 10% of your adjusted gross income D. It is deducted over a three-year consecutive period

Key: A References: § 165(h)(5); Publication 547 (2021)

Which of the following is considered when calculating if any social security benefits are taxable: A. Interest that is tax-exempt B. The exclusion for foreign earned income C. Interest on education loans D. Employer-provided adoption benefits

Key: A References: § 86(b)(2); IRS, Publication 915 (2021), page 3; Publication 17 (2021), page 63

A child may be subject to kiddie tax in the current year if: A. Neither parent of the child is alive at the end of the year B. The child is under age 18 at the end of the tax year C. The child has only nontaxable income of more than $2,200 D. The child is required to file a tax return and he or she files a joint return for the year

Key: B References: I.R.C. § 1(g); Form 8615 (2021) Instructions pg. 1

For a medical expense to be deductible as an itemized deduction in the current year, the expense must exceed what percentage of adjusted gross income? A. 2.0% B. 7.5% C. 10% D. Medical expenses are no longer deductible

Key: B References: IRC § 213; Publication 502, page 2

The taxpayer has a child under the age of 24 who is a full-time student in their second year of college. The student will be claimed as a dependent on the taxpayer's return. The student's educational expenses included $8,000 for tuition and $4,000 for room and board. The student received a $5,000 scholarship for tuition use only, as well as an additional $2,500 scholarship to pay any of the student's college expenses. The taxpayer paid the remaining $4,500. Which of the following statements is correct, based on the information above? A. The student can claim the American Opportunity credit on the student's return for tuition expenses of $3,000 and should report the additional $2,500 scholarship as income B. The taxpayer can claim the American Opportunity credit on the taxpayer's return for tuition expenses of $2,250, and the student should report the additional $2,500 scholarship as income C. The taxpayer can claim the American Opportunity credit on the taxpayer's return for tuition expenses of $3,000, and neither the taxpayer nor the student should report any of the additional $2,500 scholarship as income D. The taxpayer can claim the American Opportunity credit on the taxpayer's return for tuition expenses of $3,000 and should report the additional $2,500 scholarship as income

Key: B References: IRC § 25(A)(b)(1); IRC § 25(A)(g)(3); IRC § 25A(i); IRC § 117; Instructions for Form 8863, page 2; Publication 970 (2021), pages 11-20

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

Key: C References: Form 8962 Instructions (2021), page 2; Form 1095-A (2021), page 1

Which of the following statements is correct regarding Form 8995 Qualified Business Income (QBI) Deduction Simplified Computation? A. Corporations should complete the Form 8995 in order to claim the QBI Deduction on their corporate returns B. Taxpayers will receive the Form 8995 from the IRS, if they are determined to be eligible for the QBI Deduction C. A single individual with QBI, whose taxable income doesn't exceed the threshold amount, should use the Form 8995 to claim the QBI Deduction D. A partnership is required to attach Form 8995 to their partnership tax return to claim the QBI Deduction

Key: C References: Form 8995 Instructions (2021), page 1

If you have a dependent that you cannot claim for the child tax credit, the dependent may still qualify you for which $500 credit? A. The Alternative Minimum Tax Credit B. The State and Local Income Tax Credit C. The Credit for Other Dependents D. The Credit for Foreign Dependents

Key: C References: I.R.C. § 24(h)(4); Publication 17 (2021), Chapter 14, Child Tax Credit/Credit for Other Dependents, page 109

The Net Investment Income Tax may apply to which of the following? A. Alimony B. Traditional IRA distribution C. Taxable mutual fund distribution D. Tax exempt municipal bond interest

Key: C References: IRC § 1411(c)(1) and (5); Instructions for Form 8960 Net Investment Income Tax--Individuals, Estates, and Trusts (2021), pages 1, 5 and 6

A 62-year-old, married taxpayer files Married Filing Separately, and lives apart from the spouse for the entire taxable year. What is the taxpayer's base amount for computing taxable social security benefits for the taxable year? A. Zero B. $9,000 C. $25,000 D. $32,000

Key: C References: § 86(c)(1); IRS, Publication 915 (2021); page 3; Publication 17 (2021), page 63

What is the total amount a sole proprietor is obligated to report on Forms 1099-NEC based on the following expenses claimed on schedule C? Attorneys' fees to incorporated law firm: $600 Sign painter: $800 ($600 labor and $200 materials) Web page designer: $500 Incorporated janitorial company: $800 Consultant A: $1,000 ($400 paid in cash and $600 paid by check) Consultant B: $500 paid in cash Consultant C: $400 paid by check A. $1,400 B. $1,600 C. $2,000 D. $2,400

Key: D References: 2020 Instructions for Form 1099-MISC and 1099-NEC pages 8-10. Pub 15-A (2021), pages 6-9 covers whether someone is an employee or a nonemployee independent contractor. (Key is computed as $600 to law firm + $800 to sign painter + $1,000 to Consultant A = $2,400)

Which of the following situations is reported on Form 1099 MISC: A. Payment of non-employee compensation of $600 or more B. Payments of rent of $400 C. Payments of $5 in royalty income D. Payments made to a physician or other supplier or provider of medical or healthcare services of $600 or more made in your trade of business

Key: D References: 2022 Instructions for Form 1099-MISC and 1099-NEC, pages 1-10; Treas. Reg. 1.6041-1

The interest on qualified U.S. savings bonds may not be taxable if you pay: A. A reduced rent that is government subsidized B. Mortgage interest for a rental property C. Household employee wages more than $1,000 D. Qualified higher educational expenses in the same year

Key: D References: I.R.C. § 135; Pub 17(2021) page 59

Which of the following is true regarding the premium tax credit (PTC)? A. Married individuals are required to file a joint return to qualify for the credit B. For at least 6 months during the year the individual was enrolled in a qualified health plan C. Form 1095-A, Health Insurance Marketplace Statement, is not needed to complete Form 8962, Premium Tax Credit (PTC) D. No PTC is allowed for any period during which an individual is not lawfully present in the United States

Key: D References: IRC § 36B(c)(1)(D); Pub 974 (2020); Instructions for Form 8962 (2021), pages 2-5

Larry owned 35 shares of Flower Corporation stock for which he had paid $3,500. He sold this stock to his sister, Karen, for $3,000. Karen later sold this stock to her cousin, Joe, for $10,000. What is Larry's and Karen's recognized gain or loss, if any? A) $0 loss for Larry and $6,500 gain for Karen B) $0 loss for Larry and $7,000 gain for Karen C) $500 loss for Larry and $7,000 gain for Karen D) $0 for Larry and $0 for Karen

A) $0 loss for Larry and $6,500 gain for Karen Larry and Karen are considered related parties, but Karen and her cousin are not. Larry cannot claim a loss, but Karen must claim a gain. Her gain must be reported only to the extent it exceeds Larry's loss. Her gain is $7,000 ($10,000 - $3,000) but is reduced to $6,500 by Larry's non-deductible loss. A taxpayer may not deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between the taxpayer and the following related parties: - Members of taxpayer's family, which includes only brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.) - A partnership or corporation with more than 50% directly or indirectly owned by the taxpayer - A tax-exempt charitable or educational organization controlled by taxpayer or family member

During the year, Nicholas made the following dispositions of property: - Sold publicly traded stock, which cost $2,000 and had been held for 2 years, for $3,000 - Sold land, which cost $20,000 and had been held for 9 months, to his brother for $16,000 How should Nicholas report these dispositions on his return? A) $1,000 long-term capital gain B) $3,000 long-term capital gain C) $3,000 short-term capital gain D) $3,000 ordinary loss

A) $1,000 long-term capital gain Nicholas's sale of land to his brother is a related party transaction so he cannot claim a loss on his return. He must report the stock sale as a $1,000 long term capital gain.

Mr. and Mrs. Ryan Bowling have three small children. During the current tax year, they had to pay cash of $7,000 so that these children would be cared for allowing the parents to be employed. They had adjusted gross income of $56,000. What is the amount that they can claim as a child care credit on their joint tax return? A) $1,200 B) $1,400 C) $2,100 D) $2,450

A) $1,200 For two or more children, the taxpayers can utilize up to $6,000 of their payments as long as they were needed for employment. Although the taxpayers here paid $7,000, the credit is only based on $6,000. The amount of the credit depends on the taxpayers' adjusted gross income. At very low levels, $15,000 or less, the credit is 35 percent. That rate is reduced gradually to 20 percent at over $43,000 in adjusted gross income. The Bowlings have adjusted gross income above $43,000 and must use 20 percent. The credit that they can take to reduce their income tax is $1,200 ($6,000 times 20 percent).

You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every week. You expect to pay your employee $2,200 or more in 2020. If you decide to not withhold the employee's share of social security and Medicare taxes and instead pay them from your own funds, what is the weekly gross income you must report for the employee's wages? A) $107.65 B) $100.00 C) $115.30 D) $92.35

A) $107.65 If you prefer to pay your household employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your household employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages. $100 Weekly Wage + $7.65 employee share of Social Security and Medicare tax = $107.65 wages each payday for income tax purposes.

Generally, a taxpayer must report to his or her employer tips received in excess of _________? A) $20 a month B) $50 a month C) $200 per year D) $500 per year

A) $20 a month If the taxpayer received cash and charge tips of $20 or more in a calendar month, he or she must report the amount received to the employer. IRS Form 4137.

At their annual budget meeting, the Downtown Church voted to set the salary package for their pastor as follows: - Base salary $30,000 - Housing allowance (at fair rental value) $10,000 - Maximum reimbursement for travel (reports must be filed with receipts attached) $5000 How much of the salary package is includable in the pastor's taxable income? A) $30,000 B) $35,000 C) $40,000 D) $45,000

A) $30,000 Only the base salary is taxable income to the pastor. The housing allowance is specifically excludable from his income (as it is less than his salary and is a reasonable amount). The travel expenses are also non-taxable as they are reimbursed under an accountable plan (reimbursement is based on filed reports with proof of expenditures).

John is a cash basis taxpayer. During the year he incurred the following expenses for himself and his son, Michael, whom he claims as a dependent on his return. - $800 for braces - $100 for babysitting so he could visit the chiropractor - $900 for emergency room services for Michael; $875 was covered by insurance. John paid the remaining $25 in the next year. John's medical expense deduction before limitations is: A) $800 B) $825 C) $900 D) $925

A) $800 Only the $800 for braces is considered. The $100 for babysitting is not a payment for medical treatment. John cannot deduct $875 of the $900 for the ER that the insurance covers. The other $25 was paid by John but was not paid in this tax year.

Alice and Mike file a joint return for 2020 on April 15, 2021. Alice, who is a non-working spouse, is 49. Both Alice and Mike contributed $4,000 each to a traditional IRA although they qualified to contribute the maximum amount. They filed their return timely. On June 1st, 2021, Mike's mother gave each of them $1,000. What additional amount of the gift may Alice and Mike contribute to each of their IRA's for the year 2020? A) 0 B) $2,000 C) $1000 D) $500

A) 0 Contributions to a traditional IRA must be made by the due date of the return, not including extension. Their due date was April 15, 2021. A contribution for 2020 cannot be made on June 1, 2021.

The child and dependent care credit is a percentage of eligible expenses. What is the range of the percentage and how is the percentage determined? A) 20-35%, based on AGI B) 25-35%, based on earned income C) 25-35%, based on unearned income D) 20-35%, based on filing status

A) 20-35%, based on AGI To determine the amount of the Child and Dependent Care Credit, multiply work-related expenses (after applying the earned income and dollar limits) by a percentage of AGI. The applicable percentage begins at 35% for taxpayers with AGI less than $15,000 and decreases by 1% for each $2,000 increase in AGI. Taxpayers with AGI more than $43,000 receive the minimum percentage of 20%.

Which of the following amounts may be converted directly to a Roth IRA, provided all requirements are met? A) Amounts in a SIMPLE IRA, and the two-year participation period is met B) Amounts in a traditional IRA inherited from a person other than a spouse C) Hardship Distribution from a 401(k) plan D) Required minimum distributions from a traditional IRA

A) Amounts in a SIMPLE IRA, and the two-year participation period is met You cannot convert hardship distributions, inherited traditional IRA's from anyone other than a spouse, or required minimum distributions from a traditional IRA account. Rollovers are also disallowed in these circumstances.

A taxpayer who reaches age 70.5 in 2020 must begin receiving distributions from their Traditional IRA no later than the following: A) By April 1 of the year following the year in which the owner reaches age 72 B) By April 1 of the year in which the owner reaches age 70.5. C) By January 1 of the year in which the owner reaches age 70.5. D) By December 31, 2020

A) By April 1 of the year following the year in which the owner reaches age 72 Money cannot remain in a traditional IRA indefinitely. Distributions must begin by April 1 of the year following the year the taxpayer reaches age 72 (or 70.5 if age 70.5 prior to January 1, 2020).

Generally, the taxpayer may deduct the cost of medical expenses on Schedule A for which of the following: A) Doctor prescribed birth control pills. B) Controlled substances like marijuana that are in violation of federal law. C) Trips for general health improvement. D) Marriage counseling.

A) Doctor prescribed birth control pills. Controlled substances in violation of federal law and trips for general health are both specifically disallowed. Marriage counseling, even if provided by a psychologist, is not deductible because the sessions are not for treatment of a medical condition. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Do not include expenses for procedures that are purely cosmetic or those that are merely beneficial to general health, such as vitamins or a vacation.

There is a penalty for not reporting tips to an employer as required. The penalty is: A) Equal to 50% of the social security and Medicare tax due on those tips. B) Equal to 50% of the tips that were not reported. C) Equal to 20% of the social security and Medicare tax due on those tips. D) Equal to 10% of the tips that were not reported.

A) Equal to 50% of the social security and Medicare tax due on those tips. If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the social security and Medicare tax due on those tips.

Which of the following statements is correct with regard to the payment of household employment taxes? A) Household employment taxes are included on the employer's individual income tax return and are due by April 15th of the following year. B) Household employment tax payments follow the same guidelines as regular employment tax payments and tax deposits must be made throughout the year. C) Household employment tax payments must be made quarterly with Form 941. D) Household employment tax payments are not the employer's responsibility.

A) Household employment taxes are included on the employer's individual income tax return and are due by April 15th of the following year. Household employment taxes are included on the employer's individual income tax return using Schedule H (Form 1040), Household Employment Taxes, and are due by April 15. However, the employer may choose to include the wages with those of an existing sole proprietorship or farming business.

A nonresident alien taxpayer does not qualify for a social security number. What identifying number should he use on his tax return? A) Individual Taxpayer Identification Number (ITIN) B) Immigration & Naturalization Service ID (INSID) C) Identification number granted by the taxpayer's home country D) Leave the space blank

A) Individual Taxpayer Identification Number (ITIN) A nonresident or resident alien who does not have, and is not eligible to get a Social Security Number, must apply for an ITIN by using Form W-7. The ITIN is used on the taxpayer's return in place of a Social Security Number. The IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN. Examples of individuals who need ITINs include: - A nonresident alien required to file a U.S. tax return - A U.S. resident alien (based on days present in the United States) filing a U.S. tax return - A dependent or spouse of a U.S. citizen/resident alien - A dependent or spouse of a nonresident alien visa holder Note: An ITIN is for tax use only. It does not entitle the holder to social security benefits nor does it change his employment or immigration status.

Which of the following is true regarding a nonbusiness bad debt? A) It is deductible as a short-term capital loss. B) It is not deductible. C) It is deductible only if you itemize. D) It is deductible as a long-term capital loss.

A) It is deductible as a short-term capital loss. All non-business bad debts are short term capital losses and are claimed on Form 8949. The amount of time the money has been owed to you does not matter.

How do non-deductible contributions to an IRA affect the taxpayer's basis in the IRA? A) Non-deductible contributions increase basis. B) Non-deductible contributions have no effect on basis. C) Non-deductible contributions decrease basis. D) Non-deductible contributions decrease basis but not below zero.

A) Non-deductible contributions increase basis. Non-deductible contributions increase basis. Ordinarily, a taxpayer has no cost basis in his traditional IRA and all distributions are fully taxable. If a taxpayer made non-deductible contributions to his IRA, any distribution might have a component that is a return of taxpayer's capital. So, a taxpayer who made non-deductible contributions to his IRA will have a cost basis in his IRA. Further nondeductible contributions will increase his basis.

Which of the following taxes is deductible as an itemized deduction on Schedule A? A) State and income taxes B) Federal excise tax C) Federal income taxes D) Per capital taxes

A) State and income taxes State and local income taxes withheld from wages during the tax year are deductible. They appear on Form W-2. The following amounts are also deductible: - Any estimated taxes you paid to state or local governments during the year, and - Any prior year's state or local income tax you paid during the year. A nonbusiness taxpayer cannot deduct federal excise taxes, federal income taxes, and per capita taxes.

Garland, a single man, was injured in an accident in December 20X1. As a result, he was confined to a wheelchair for 3 months and unable to return to work until November 20X2. During the time he was disabled, Garland took a distribution from a qualified retirement plan he had from a previous employer in order to pay medical expenses. Garland turned 49 on October 23, 20X2 and was unable to deduct any of his medical expenses as they did not exceed the threshold. Based on this information, which of the following statements is true with regards to tax on early distributions? A) The entire distribution is subject to the 10% tax on early distributions. B) The 10% tax on early distributions does not apply since the distribution was used for medical expenses. C) The tax on early distributions does not apply since Garland was temporarily disabled at the time of the distribution. D) The tax on early distributions does not apply since Garland was no longer working for that employer.

A) The entire distribution is subject to the 10% tax on early distributions. The tax on early distributions from a qualified retirement plan does not apply to distributions that are: - Made as part of a series of substantially equal periodic payments for your life (or life expectancy). - Made because you are totally and permanently disabled. - Made on or after the death of the plan participant or contract holder. - From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees). - From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order. - From a qualified retirement plan to the extent you have deductible medical expenses (in excess of AGI limitations), whether or not you itemize your deductions for the year. - From a qualified retirement plan due to an IRS levy of the plan. - From elective deferral accounts under 401(k) or 403(b) plans, or similar arrangements, that are qualified reservist distributions. - From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election. - From an employee stock ownership plan for dividends on employer securities held by the plan.

Scott is filing for an extension to file his tax return, for which he owes additional taxes. He must pay the amount owed by which of the following to avoid interest and penalties? A) The original due date of the return B) The extended due date of the return C) One week following the acceptance of the tax return D) None of the above

A) The original due date of the return The purpose of an extension is to give someone extra time to file a return, not extra time to pay what is owed. Additional taxes owed must be paid by the original due date of the return.

A 2020 net operating loss deduction is: A) not subject to a taxable income limitation B) limited to 90% of taxable income C) limited to 80% of taxable income D) not deductible

A) not subject to a taxable income limitation The CARES Act temporarily suspends the TCJA's 80% of taxable income limitation allowing NOL carryforward to fully offset taxable income in tax years beginning before Jan. 1, 2021. For tax years beginning after December 31, 2020, the TCJA limits the NOL deduction to 80% of taxable income (determined without regard to the deduction) NOLs arising in taxable years beginning before 2018 remain subject to prior law. Accordingly, such NOLs are not subject to the 80-percent limitation and remain subject to the prior-law 2-year carryback rules and the 20-year carryover limitation.

Elaine and Hugh divorced on September 1, 2020. As part of the divorce decree, beginning in September, Hugh agreed to pay Elaine's last tuition payment of $8,000, child support payments of $500 per month, and $1,500 a month for the mortgage payment on a home titled in his name. Elaine and the children will continue to live in the home. What is the amount that Hugh can deduct as alimony for 2020? A) $13,000 B) $0 C) $8,000 D) $11,000

B) $0 Hugh cannot deduct any amount for alimony because the divorce decree was signed after December 31, 2018. If the divorce had been finalized prior to 2019, the $8,000 tuition would have counted as alimony. The mortgage payments wouldn't be alimony because the home is titled in his name only. Always remember child support is never considered alimony.

The 2020 AMT exemption for taxpayers filing a joint return (MFJ) is: A) $150,000 B) $113,400 C) $72,900 D) $56,700

B) $113,400 The AMT exemption is based on filing status and income level, for 2020: A) $113,400 if filing status is MFJ or QW B) $72,900 if filing status is single or HH C) $56,700 if filing status is MFS

John purchased a new gasoline-electric hybrid automobile on July 2, 20X1, for $18,000. He also claimed a $2,000 clean-fuel vehicle deduction on his 20X1 tax return for that vehicle. In 20X1, John used this automobile only for personal purposes. On January 1, 20X3, he began using the hybrid automobile exclusively for business purposes. The fair market value of the automobile on that day was $17,000. What is the automobile's depreciable basis as of January 1, 20X3? A) $15,000 B) $16,000 C) $17,000 D) $18,000

B) $16,000 If you held property for personal use and later use it in your business or income-producing activity, your depreciable basis is the lesser of the following. 1. The fair market value (FMV) of the property on the date of the change in use. 2. Your original cost or other basis adjusted as follows. - Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. - Decreased by any deductions you claimed for casualty and theft losses and other items that reduced your basis. The vehicle had a basis of $18,000 when purchased. He must deduct the $2,000 already claimed when figuring the basis of the vehicle for business depreciation purposes. Thus, John's adjusted basis of the vehicle is $16,000 (18,000 - 2,000 = 16,000). The adjusted basis is less than the FMV of the vehicle on the date the vehicle was placed in service so the depreciable basis is the vehicle's adjusted basis.

Abigal Van Jones owned a large building with a tax basis of $700,000 but had an estimated fair value of $820,000. The property was condemned by the state government so that the building could be torn down to make way for a new highway. She was paid the fair value for the property. In a short period of time, she used $800,000 of this money to buy property that qualified as replacement property. The other $20,000 was invested in State of Idaho bonds. What gain, if any, should she recognize on this condemnation of this building? A) Zero B) $20,000 C) $100,000 D) $120,000

B) $20,000 When property is condemned, destroyed, or stolen, it is viewed as an involuntary conversion. If the owner receives an amount below the tax basis, a loss must be recognized for the difference. However, in this case, the owner received $120,000 more than the tax basis. Because the sale was not intended but was created by an involuntary conversion, the gain that is reported for tax purposes is this $120,000 gain or the amount of the proceeds left over after similar replacement property is acquired. Although $820,000 was received, only $800,000 was used for the replacement property. The $20,000 that is left is less than the $120,000 gain and must be reported for tax purposes. The investment in state bonds is irrelevant here.

What is the total amount of savings bonds that a taxpayer may purchase with a single tax refund? A) $1,000 B) $5,000 C) $10,000 D) $15,000

B) $5,000 A taxpayer may request up to three different savings bond registrations. Each registration must be a multiple of $50, and the total of all registrations cannot be more than $5,000 (or the taxpayer's refund amount, whichever is smaller). The taxpayer does not need a TreasuryDirect account to purchase the bonds. IRS Form 8888.

Richard collected baseball cards as a hobby. Richard had shared his interest in this hobby with his niece Susan, who was now also an avid card collector. At the time of his death, Richard's collection had a fair market value of $10,000 and an adjusted basis of $2,000, while Susan's collection had a fair market value of $5,000 and an adjusted basis of $1,000. Upon his death Richard's entire card collection went to Susan. With the death of her uncle, Susan lost interest in the hobby and sold all of the cards for $20,000. What is Susan's gain on the sale of these baseball cards? A) $5,000 B) $9,000 C) $13,000 D) $17,000

B) $9,000 Her basis in the inherited cards is $10,000 (the FMV of Richard's cards at the time of his death). Her cards only had a basis of $1,000. Total basis is $11,000, so there is a gain of $9,000 as a result of selling them all for $20,000.

Qualified dividends are subject to one of three maximum tax rates. Which three tax rates are used for qualified dividends? A) 15% / 25% / 37% B) 0% / 15% / 20% C) 15% / 28% / 37% D) 18% / 20% / 25%

B) 0% / 15% / 20% Qualified dividends are subject to the same 0%, 15% or 20% maximum tax rate that applies to net capital gain. Qualified dividends are subject to the 20% tax rate if the regular tax rate that would apply is 37%.

Failure to take a required minimum distribution (RMD) can result in an excise tax equal to? A) 25% of the RMD amount B) 50% of the RMD amount C) 10% of the RMD amount D) 25% of the RMD amount, plus an additional 10% penalty

B) 50% of the RMD amount Owners of tax-deferred retirement plans must generally begin required minimum distributions (RMD) after reaching age 72 (or 70.5 if taxpayer turned age 70.5 prior to January 1, 2020). If the taxpayer does not take any distributions, or if the distributions are not large enough, the taxpayer may have to pay a 50% excise tax on the amount not distributed as required.

In 20X1, Sam bought 200 shares of stock at $9 per share for a total cost of $1,800. In 20X2, he bought 300 shares at $12 per share for a total of $3,600. In 20X3, the stock split 3 for 1. What is the basis per share in the stock after the split? A) 200 shares at $9 and 300 shares at $12 B) 600 shares at $3 and 900 shares at $4 C) 200 shares at $3 and 300 shares at $4 D) 600 shares at $9 and 900 shares at $12

B) 600 shares at $3 and 900 shares at $4 When a stock splits, the amount of money invested in the shares does not change. Allocate the basis equally to all shares received. Sam received 400 shares based on the 200 shares bought for $9 each, making each of those 600 now worth $3 each. He received 600 shares for 300 shares of the stock bought at $12 each, making the 900 now worth $4 apiece.

Joseph Argentino died early with an estate that had a considerable value. The executor of his estate is currently determining the value of his estate for taxation purposes. Which of the following cannot be deducted in arriving at the estate value? A) Debts owed at death B) A bequest made to his only son C) Funeral expenses D) Charitable bequests

B) A bequest made to his only son To determine the amount of a taxable estate, certain deductions are allowed for costs such as funeral expenses, debts, administrative expenses, debts at death, and charitable bequests. Bequests to a spouse are deductible but no other personal bequests (even to a son or daughter) can be used as a deduction.

Which of the following recipients of money must include the funds received in his total income? A) A car pool driver who is given moneterm-0y by his passengers for highway tolls. B) An elected official who is given money by a real estate developer to influence his vote. C) A homeowner who is given a subsidy by a public utility for the purchase of a new hot water heater. D) A taxpayer who inherits one hundred silver dollars in a bequest.

B) An elected official who is given money by a real estate developer to influence his vote. A bribe is income. In fact, all income from illegal activities, such as money from dealing illegal drugs, must be included on a taxpayer's 1040, either on Line 8 (from Schedule 1) or on Schedule C. Monies received from car pool passengers are reimbursements. A subsidy paid by a public utility for energy conservation is excluded from income. A bequest is also excluded from income even if the bequest is cash.

Which of the following is NOT eligible as an investment within an IRA? A) Bank CD B) Artwork C) Mutual Fund D) Annuity

B) Artwork IRA transactions involving collectibles are prohibited. If a traditional IRA invests in collectibles, the amount invested is considered a distribution in the year invested. The taxpayer may have to pay the 10% additional tax on early distributions. Collectibles include: - Artworks - Rugs - Antiques - Metals - Gems - Stamps - Coins - Alcoholic beverages - Certain other tangible personal property Exception. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.

Sally had to pay Alternative Minimum Tax (AMT) this tax year. She can recapture that amount in future years in the form of a credit if the AMT tax paid was due to: A) Excess income B) Deferral items C) Exclusion items D) Standard Deduction

B) Deferral items AMT is caused by two types of adjustments and preferences—deferral items and exclusion items. A taxpayer with AMT liability in the current year may recapture that amount in future years in the form of a credit. This non-refundable credit can offset future tax liability only to the extent prior AMT tax paid was due to deferral items.

Which of the following is allowed as a miscellaneous deduction on Schedule A? A) Home office expense B) Federal estate taxes on income in respect of a decedent C) Trade association dues D) Job hunting expenses

B) Federal estate taxes on income in respect of a decedent The deduction for estate taxes paid on IRD falls under "Other Miscellaneous Deductions." The remaining choices are no longer deductible (prior to 2018 these items were allowed subject to 2% AGI limit).

Lenny, age 52, and Norma, age 49, file a joint return for tax year 2020. Lenny and Norma are not covered by retirement plans. Their modified AGI is $150,000 all of which came from Lenny's wages. They wish to make the maximum allowed deductible IRA contributions for tax year 2020, which of the following is correct: A) Both may make a deductible contribution of $6,000. B) Norma may make a deductible contribution of $6,000 and Lenny may make a deductible contribution of $7,000. C) Norma may not make any contribution. D) Both may make a deductible contribution of $7,000.

B) Norma may make a deductible contribution of $6,000 and Lenny may make a deductible contribution of $7,000. For 2020, an individual that is not covered by a retirement plan at work may make an IRA contribution up to $6,000 ($7,000 if over age 50) or 100% of taxable compensation (of both spouses), whichever is less. There is no income limit as neither spouse is covered by a retirement plan at work. This means Lenny can make $7,000 ($6,000 + $1,000 catch-up contribution) deductible contribution because he is over age 50 and Norma can make a $6,000 deductible contribution.

Scholarships and fellowships awarded to degree candidates are not taxable unless they are used for: A) Tuition B) Room and board C) Books D) Supplies required for the course of study

B) Room and board For degree candidates; scholarships and fellowships are considered taxable income to the extent the proceeds are used for room, board or travel.

Which of the following is income in respect of a decedent? A) Cash received from a grandmother's estate. B) Royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate. C) Certificate of deposit received as a gift. D) Both cash received from a grandmother's estate and royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate.

B) Royalties received on the deceased father's published book; the right to receive these royalties was distributed from the father's estate. Income in respect of a decedent is the amount that is earned by the taxpayer but not received prior to his or her death nor accrued prior to his or her death if on the accrual method, so it is not included in the decedent's final return. Income in respect of a decedent is included in the recipient's (e.g., the estate's) income in the year received or accrued.

Merry got a $10 tip from a customer at the bakery. That was the only tip she received all month. Which of the following statements is true? A) Unless her employer asks, she does not have to report the $10 tip as income. B) She does not have to report the tip to her employer if her tips total less than $20 for the month. C) She can wait until the end of the year to report the tip to her employer. D) She never has to report tips earned while working in a bakery.

B) She does not have to report the tip to her employer if her tips total less than $20 for the month. All tips received are income and are subject to federal income tax. Employees must give their employers a written report of cash and charge tips if they received $20 or more in tips during the month. Employees should use Form 4137 to figure social security and Medicare taxes on tips not reported to the employer.

Which of the following statements regarding gift splitting is correct? A) The couple must have been married at the time the gift was given, but either or both spouses may be remarried during the year. B) The couple must have been married at the time the gift was given and the spouse who gave the gift may not be remarried during the year. C) The couple need not be married at the time of the gift, but must be married by the end of the year. D) The couple must be married at all times during the year.

B) The couple must have been married at the time the gift was given and the spouse who gave the gift may not be remarried during the year. If divorced or widowed during the year, gift splitting can occur only if the taxpayers were married when making the gift. The donor spouse (the one who actually made the gift) cannot have remarried before the end of the year.

Mr. and Mrs. Pigg live in a brick house for 24 months. Then, for the next 24 months, they live in a traditional wood house. Then, for the next 12 months, they live in a contemporary house made of stone. At that time, they sell the brick house with a tax basis of $300,000 and receive $420,000. After another 12 months, they sell the traditional wood house. It had a tax basis of $400,000 and is sold for $490,000. What of the following statements is true? A) The gain on both the brick house and the traditional wood house are taxable because they were not serving as their principal residence at the time of sale. B) The gain on one of the two houses can be tax free but not the gain on both. C) The gain on both of these houses is tax free because the total is less than $500,000. D) The gain on the traditional wood house can be tax free but the gain on the brick house cannot be tax free.

B) The gain on one of the two houses can be tax free but not the gain on both. A gain on a house can be tax-free up to $500,000 on a joint return and $250,000 on a single return but certain rules must be met. First, the house must have served as the principal residence for the taxpayers in at least two of the previous five years. Both the brick house and the traditional wood house meet this requirement. Second, this exclusion can only be taken once every two years. Since the brick house and the traditional wooden house were sold 12 months apart, it is not possible to exclude both gains. They can exclude one gain but not both. Note that gains allocated to periods of nonqualified use after Dec. 31, 2008 cannot be excluded.

Under what circumstances would the standard deduction generally be appropriate? A) The taxpayer is claiming more than 3 dependents B) The standard deduction exceeds the taxpayer's itemized deductions C) The filing status is head of household D) The filing status is MFJ

B) The standard deduction exceeds the taxpayer's itemized deductions In most cases, the federal income tax will be less if the taxpayer takes the larger of the standard deduction or itemized deductions. If a taxpayer itemizes deductions, Schedule A must be completed and attached to the Form 1040. Schedule A is generally used if the taxpayer's total itemized deductions are more than the standard deduction amount. Form 1040 Instructions.

Which of the following statements is true with respect to capital assets for individual taxpayers? A) Gains and losses for both investment and personal property are reported on Schedule D of the Form 1040. B) The taxpayer must report gains and losses on investment property, but only reports gains on personal property. C) Losses on personal property are deductible only to the extent of gains on personal property D) Losses on investment property are deductible only to the extent of gains on investment property

B) The taxpayer must report gains and losses on investment property, but only reports gains on personal property. Taxpayers must report gains and losses on investment property (such as their investment stocks and bonds) but only gains on personal property are reported. For example, if a taxpayer sells personal furniture at a gain, that capital gain must be reported. However, if the same personal property is sold at a loss, no deduction is allowed.

Which of the following is taxable income? A) A crockpot, valued at $15, received as a gift for depositing $10,000 in a bank account B) OID interest of $20 on a bond whose face value is $10,000 C) $10 received for mowing your neighbor's lawn D) A turkey, valued at $30, received from your employer at Thanksgiving

C) $10 received for mowing your neighbor's lawn The $10 received for mowing the neighbor's lawn is compensation for services performed and is therefore taxable. A gift received for a bank deposit of $5,000 or more is not taxable if the gift is valued at $20 or less. OID interest of less than one-fourth of 1% (.0025) of the redemption value is considered

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

C) $10,000 If you receive property for services, include the property's FMV in income. The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.

A couple of years ago Mason paid $100,000 to have his home built on a lot that cost him $10,000. Before changing the property to rental use last year, he paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. On the date of change in use, his property has an FMV of $150,000, of which $30,000 is for the land and $120,000 is for the house. His depreciable basis for the house is: A) $120,000 B) $140,000 C) $118,000 D) $138,000

C) $118,000 If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home. The basis for depreciation is the lesser of the following amounts. -The FMV of the property (home) on the date of the change -Your adjusted basis on the date of the change. In this case the FMV is $120,000 and the basis is $118,000 (original construction cost of $100,000 plus improvements of $20,000 less casualty loss $2,000). Therefore the basis for depreciation is $118,000. You cannot depreciate land.

Roberto Manzela made the following contributions to his church, a qualified charity: Land with a tax basis of $4,000 and a fair value of $16,000 and shares of stock with a tax basis of $6,000 and fair value of $9,000. Both assets had been held for several years. The taxpayer's adjusted gross income (without including any gain on the stock) is $60,000. What is the limit on the amount that can be claimed as an itemized deduction? A) $10,000 B) $12,000 C) $18,000 D) $25,000

C) $18,000 Individual taxpayers can deduct the fair value of contributions made to qualified charities. For long-term capital gain property, the amount of the deduction is limited to 30% of adjusted gross income (AGI). Here, that would be 30% of $60,000 AGI or $18,000. The FMV of the property contributed is $25,000 ($16,000 land + $9,000 stock), but ONLY up to the 30% of AGI limit of $18,000 can be deducted. TIP: The special 30% limit does not apply when using cost in place of FMV as the amount of the gift. Instead, only the 50% limit applies. Here, that would be 50% of $60,000 AGI or $30,000. While 50% of AGI is $30,000, the cost basis of the property contributed is only $10,000 ($4,000 land + $6,000 stock). Although fully deductible ($10,000), the fair value method still produces the highest deduction ($18,000).

Several years ago, you paid $150,000 to build your home on a lot that cost you $50,000. Before converting the property to rental use last year, you paid $30,000 for permanent improvements to the house. You received a $5,000 easement payment from the State of California for use of the land for a power line. The county indicates the FMV of the house is $250,000 and the land is $100,000. What is your basis for depreciation? A) $150,000 B) $175,000 C) $180,000 D) $250,000

C) $180,000 Generally, the IRS considers compensation for granting an easement proceeds from the sale of an interest in real property. Reduce basis of the property by the amount received. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. Since the easement is for the use of land it will reduce the basis of the land, not the structure. Your basis for depreciation of the rental property is $180,000 ($150,000 building cost + $30,000 improvements)

Richard Milhaus owns securities with a tax basis of $7,000. He gives them to Shania Mitchell when they are worth $6,700. She holds them but they continue to fall in value and are finally sold for $6,200. What is the impact on taxable income that she must report on this sale? A) Zero B) $300 loss C) $500 loss D) $800 loss

C) $500 loss When property that has been received as a gift is sold below the previous owner's tax basis, a loss must be computed by comparing the amount received with the lower of the previous owner's basis or the fair value at the date of gift. In this problem, the previous basis was $7,000 but the fair value at the time of the conveyance was only $6,700. Consequently, the $6,200 sales price is compared to the $6,700 (because it is lower than $7,000) and a loss of $500 is recognized for income tax purposes.

Dave and Dyan are married and had interest income on a bank savings account of $4,000, interest on federal treasury bonds of $3,400, interest on their state income tax refund of $400, and interest of $1,500 on New York City bonds. What is the amount of the above items that are includible in the couple's federal taxable income? A) $4,400 B) $7,400 C) $7,800 D) $9,300

C) $7,800 The interest from the savings account ($4,000), federal bonds ($3,400), and their state income tax refund ($400) are all taxable interest. Thus, $7,800 is included in the couple's federal taxable income. Municipal bond interest ($1,500 on New York City bonds) is not taxable on a federal return. TIP: The state income tax refund may also be taxable if the taxpayers itemized their deductions in the previous tax year.

Joe and Jean purchased their primary residence in 1985 for $100,000. While they lived there, they made renovations at a cost of $125,000. They lived there until July 1, 2017. On June 15, 2020, the residence was sold for $800,000. From July 1, 2017, until June 15, 2020, the home was unoccupied. Joe and Jean file a joint return, and they have never excluded a gain from the sale of another home. What is their maximum taxable gain? A) $575,000 B) $0 C) $75,000 D) $200,000

C) $75,000 The couple meets the tests (owned over 2 years and lived in at least 24 of prior 60 months) to exclude up to $500,000 of gain. The total gain on the sale was $575,000 ($800,000 proceeds minus $225,000 basis), less the $500,000 exclusion leaves a taxable gain of $75,000. If you had a gain and can exclude part or all of it, enter "H" in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. If you had a gain and can exclude part or all of it, enter "H" in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949.

Minnie's tax return shows the following income: -$800 wages -$6,490 unemployment compensation -$1,000 alimony received under the terms of a divorce decree finalized before 2019 -$8,000 rental income from apartment buildings she owns What is Minnie's earned income for the purpose of determining how much she can contribute to an IRA? A) $800 B) $7,290 C) $1,800 D) $16,290

C) $800 Generally, compensation is the amount earned from working. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts individuals receive for providing personal services. For IRA purposes, compensation includes amounts considered taxable alimony and nontaxable combat pay. Minnie's earned income for the purpose of determining how much she can contribute to an IRA is $1,800. Only wages of $800 and taxable alimony of $1,000 count as compensation for IRA purposes, so they set the limit for the allowable contribution amount.

How should an individual report the following transactions on a return? - Total short-term capital losses $6,000 - Total short-term capital gains $15,000 - Total long-term capital losses $10,000 - Total long-term capital gains $10,000 A) $0 net capital gain B) $6,000 net capital gain C) $9,000 net capital gain D) $21,000 net capital gain

C) $9,000 net capital gain A taxpayer may calculate total net gain (loss) by comparing the net short-term capital gain (loss) to the net long-term capital gain (loss). The long-term gains and losses cancel out, and the short-term gain exceeds the short-term loss by $9,000. This leaves a net capital gain of $9,000, the character of which is short-term.

Who is eligible to take the Section 199A qualified business income deduction? 1. Individuals, Form 1040 2. Trusts and Estates, Form 1041 3. C corporations, Form 1120 A) 1 B) 2 C) 1, 2 D) 1, 2, 3

C) 1, 2 Individuals, trusts and estates with qualified business income (QBI), qualified REIT dividends or qualified PTP income may qualify for the Section 199A deduction.

Which of the following is included in a taxpayer's gross income? A) A loan from a bank for $10,000. B) A line of credit from a bank of $10,000. C) A forgiven bank loan of $10,000. D) A $10,000 bank loan that was discharged in bankruptcy.

C) A forgiven bank loan of $10,000. If a debt is canceled or forgiven other than as a gift or bequest, the taxpayer must include the canceled debt in his income. If an outstanding loan is discharged in bankruptcy or canceled due to a taxpayer's insolvency, then it is not included in the taxpayer's income.

Without considering exceptions, when can a taxpayer first take a distribution from his IRA without penalty? A) After April 1 of the year after which he turns 72 B) After April 1 of the year after which he turns 59.5 C) After he reaches age 59.5 D) After he turns 59

C) After he reaches age 59.5 Early distributions generally are amounts distributed from a taxpayer's traditional IRA account or annuity before he reaches age 59.5. Unless an exception applies, a taxpayer who takes an early distribution must pay a 10% additional tax on the distribution of any assets (money or other property) from his traditional IRA. The 10% additional tax applies to the part of the distribution that he has to include in gross income. It is in addition to any regular income tax on that amount.

What banking information must be submitted on Form 8888? A) Account number B) Routing number C) Both of the above D) None of the above

C) Both of the above The bank routing number and account number must be included on Form 8888. The routing number must be nine digits. The account number can be up to 17 characters (both numbers and letters), and may include hyphens but omit spaces and special symbols. IRS Form 8888.

Leah is estimating her adjusted gross income for the year. Of the following items, which one is not considered an adjustment to her total income? A) Interest paid on Leah's student loans B) A portion of Leah's health insurance, as she is self-employed C) Contributions to Leah's Roth IRA D) One-half of self employment taxes

C) Contributions to Leah's Roth IRA Contributions to a Roth IRA are non-deductible and cannot be used as an adjustment to income.

On which form is mortgage interest paid reported to a taxpayer by the mortgage holder? A) Form W-2 B) Form W-4 C) Form 1098 D) Form 1099

C) Form 1098 If the taxpayer paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, the mortgage holder will send a Form 1098 or similar statement to the taxpayer. The statement for each year should be sent by January 31 of the following year. A copy of this form is also sent to the IRS.

Mr. Purple bought 1,500 shares of ABC stock for $15,000 or $10 a share. A year prior, Mr. Purple bought 1,000 shares of ABC stock for $16,000 or $16 a share. If ABC declares a 2-for-1 stock split, which of the following statements is A) Mr. Purple now has 3,000 shares with a basis of $5 per share. B) Mr. Purple now has 2,000 shares with a basis of $8 per share. C) Mr. Purple now has 5,000 shares with a basis of $6.20 per share. D) In the event of a sale, and in the absence of adequate identification, Mr. Purple must report the sale under the first in first out method.

C) Mr. Purple now has 5,000 shares with a basis of $6.20 per share. Without adequate identification of the trade lot sold, report the sale according to FIFO. A 2-for-1 split doubles the share amount for each purchase, while the amount invested does not change. Allocate basis from the original purchase evenly across the new shares. The 1,500 shares bought at 10 are now 3,000 shares with a basis of $5 per share. The 1,000 shares bought at $16 each becomes 2,000 shares with a basis of $8 per share. Unlike mutual fund transactions, a taxpayer cannot use an average basis for separate stock purchases.

Marcia Green bought a home and moved in September 2010. She paid $250,000 for the house. She lived in the house until she sold it on September 15, 2020. Due to the economy, she sold the house for $225,000, which was a loss. Can she deduct the loss from her income? A) No, because the problem does not provide information about her adjusted basis. B) Yes, because the loss is realized. C) No, because a loss on a primary residence cannot be deducted. D) Yes, she meets the ownership and use tests.

C) No, because a loss on a primary residence cannot be deducted. If the amount realized from the sale of a home is less than the adjusted basis, the difference is a loss. But a loss on the sale of a taxpayer's main home cannot be deducted from his income.

A self-employed taxpayer may take a deduction on his/her personal return for ___ of the employment tax paid. A) One-quarter B) One-third C) One-half(Employer-equivalent portion) D) Two-thirds

C) One-half(Employer-equivalent portion) A self-employed taxpayer may take a deduction on his personal return for the employer-equivalent portion of the employment tax paid.

If you are self-employed you may be able to deduct 100% of the premiums paid for health insurance established under your business for yourself and your family. The following are considered self-employed for purposes of the deduction, EXCEPT: A) General Partner of a Partnership B) Greater than 2% Shareholder of an S Corporation C) Shareholder owning 100% of stock in a C Corporation D) Limited Partner receiving guaranteed payments

C) Shareholder owning 100% of stock in a C Corporation A taxpayer is considered self-employed if he is a general partner (or a limited partner receiving guaranteed payments) or if he receives wages from an S corporation in which he is more than a 2% shareholder. The deduction cannot be more than the earned income from the business. A shareholder in a C corporation is not self-employed.

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

C) Short-term capital loss on Schedule D All non-business bad debts are short term capital losses and are claimed on Schedule D. The amount of time the money has been owed to you does not matter.

A taxpayer has both short-term capital loss and nontaxable distribution from an investment. Which of the following statements is A) The basis of the investment is reduced by the non-taxable distribution. B) Non-taxable distribution is a return of capital invested. C) Short-term capital loss reduces the basis of the investment. D) Short-term capital losses have no effect on basis.

C) Short-term capital loss reduces the basis of the investment. A capital gain (loss) does not impact the basis of an investment.

All of the following are true EXCEPT: A) Original Issue Discount must be included in income as it accrues over the term of the debt instrument, whether or not any payments are received from the issuer. B) The Original Issue Discount rules do not apply to U.S. Saving Bonds. C) The amount of Original Issue Discount is the difference between the stated redemption price at maturity and the par value. D) Original issue discount can be treated as zero if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of years from the date of issue to maturity.

C) The amount of Original Issue Discount is the difference between the stated redemption price at maturity and the par value. OID is the difference between the stated redemption price at maturity and the issue (purchase) price. Report OID in the year accrued. U.S. savings bonds are issued at a discount; however, only an accrual basis taxpayer must report interest when accrued. Unlike other instruments issued at a discount, a cash basis taxpayer can choose to defer recognition of income until redemption (or sale) of the bonds. The OID in item D is de minimis and not necessary to report.

Charlie owns a factory that specializes in making candy. Charlie just received a gift of rental property from his uncle. Which of the following is the depreciable basis in the rental property that is placed in service after Charlie received it as a gift, if the donor's basis was less than the fair market value of the property? The fair market value on the date of the gift plus or minus any required adjustments to basis. A) The fair market value on the date of the gift plus or minus any required adjustments to basis. B) The fair market value of the property on the date you converted it to rental property. C) The donor's basis of the property plus or minus any required adjustments to basis. D) All of the above.

C) The donor's basis of the property plus or minus any required adjustments to basis. If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property.

Diane, single and age 49, made a $5,000 contribution to her traditional IRA during the tax year. Her compensation that year was $4,000. The following year she files an extension until October 15 to report her taxes. What is Diane required to do in order to avoid the 6% additional tax on excess contributions? A) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by December 31 of the year she made the contribution. B) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by April 15, the original due date of the return. C) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by Oct 15, the extended due date of the return. D) File an election to deduct the $1,000 on her return for the following year by attaching a statement to her tax return

C) Withdraw the $1,000 excess contribution and all interest earned on the $1,000 by Oct 15, the extended due date of the return. The way to avoid the penalty for excess contributions is to withdraw the excess contribution and any gains on the excess contribution by the due date of the return (including extensions). Diane must withdraw the excess contribution of $1,000 by October 15, the extended due date of her tax return.

For 2020, in which of the following situations would you be required to report and pay social security and Medicare taxes? A) You pay $2,500 cash to your 19-year-old daughter for babysitting your 3 year old son. B) You pay $5,500 cash to a 17-year-old who lives down the street for cleaning your house. C) You pay $2,300 cash to a 19-year-old who lives down the street for lawn care. D) You pay $7,500 cash to your mother for providing child care services at mother's home.

C) You pay $2,300 cash to a 19-year-old who lives down the street for lawn care. You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If you pay cash wages of $2,200 or more (for 2020) to any one household employee, then you need to report and pay social security and Medicare taxes. Do not count wages you pay to your spouse, your child under the age of 21, your parent (certain exceptions apply), or any employee under the age of 18 at any time during the year. If childcare services are provided outside of the taxpayer's home, the childcare provider is not considered a household employee. Cash wages include wages you pay by cash, check, money order, etc.

You do not have to pay estimated taxes if: A) Your tax liability for the previous year was less than $1,000. B) Your withholding covers 90% of the tax liability for the previous year. C) Your earned income credit will exceed your tax liability for the current year. D) All of the above.

C) Your earned income credit will exceed your tax liability for the current year. US citizens with no tax liability in the previous full year are not required to pay estimated tax. Estimated tax liability exists if a taxpayer will owe at least $1,000 in tax for the current year, after subtracting withholding and credits, and withholding and credits will be less than the smaller of 90% of current year tax liability, or 100% of the tax liability on prior year's return (110% if AGI over $150,000).

Doug is 67 and single at the end of 2020. He is required to file a tax return if his gross income is: A) at least $5 B) at least $12,400 C) at least $14,050 D) more than his amount of itemized deductions

C) at least $14,050 Single taxpayers who are age 65 or older must file a tax return if their 2020 gross income is at least $14,050.

Marc and Mandy's dependent children, ages 3 and 4, attend daycare where the total expense for the year was $6,200, $3,100 per child. Marc earned $20,000 and Mandy earned $15,000. How much child and dependent care credit can they claim? AGI | Credit $15,000 | 35% $20,000 | 32% $35,000 | 25% A) $1,296 B) $1,040 C) $1,404 D) $1,500

D) $1,500 To determine the credit amount, multiply work-related expenses (after applying the earned income and dollar limits) by a percentage (based on AGI). The applicable percentage begins at 35% for taxpayers with AGI below $15,000 and declines by 1% for each $2,000 increase in AGI. Taxpayers with AGI above $43,000 receive the minimum percentage of 20%. The maximum amount of this credit is $1,050 (one qualifying person), $2,100 (more than one qualifying person). Applicable percentage equals 25% (35% reduced by 1% for each $2,000 of AGI over $15,000). Total allowable expenses are $6,000 ($6,000 is the limit if more than one qualifying person). $6,000 × 25% is $1,500 credit for child and dependent care expenses. The expenses to figure the child and dependent care credit on Form 2441 cannot be more than any one of the following: - $3,000 if one qualifying person or $6,000 if more than one qualifying person - Taxpayer's earned income for the year if single at the end of the year - If married at end of year, the smaller of taxpayer or a spouse's earned income for the year

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

D) $10,000 The FinCEN Form 114 reporting threshold (total value of assets) is $10,000 at any time during the calendar year. IRS, Bank Secrecy Act, (31 U.S.C. § 5314); 31 C.F.R. §§ 1010.350; 1010.306(c); Publication 4261.

George and Marie sold their primary residence in 2020 for $300,000. They purchased the home about 10 years ago for $100,000 and lived in the home until the sale. George was a salesman and used 1/6th of the home as a business office. He deducted 1/6th of all costs including depreciation since buying the property. The original cost of $100,000 was assessed at $40,000 land and $60,000 building. George used the straight-line method to claim $6,667 in depreciation. What is George and Marie's realized gain on the sale? A) None B) $200,000 C) $6,667 D) $206,667

D) $206,667 Basis starts at $100,000. He claims depreciation of $6,667. This depreciation reduces his basis to $93,333. He realizes a gain on the sale of $206,667 (sales price - basis). Unrecaptured Section 1250 Gain is due to depreciation, which is recaptured in the year the property is disposed and taxed at a maximum rate of 25%. Taxpayers may be able to exclude gain from the sale of a home that they have used for business or to produce rental income. However, a taxpayer must meet the ownership and use tests. If a taxpayer is entitled to take depreciation deductions because the main home was used for business purposes or as rental property (even if not actually claimed), the part of the gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997, may not be excluded. If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. In addition, you do not need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation.

A married taxpayer filing jointly may owe Net Investment Income Tax if modified adjusted gross income exceeds which of the following thresholds: A) $100,000 B) $125,000 C) $200,000 D) $250,000

D) $250,000 The Net Investment Income Tax (NIIT) is imposed by Section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax. A taxpayer with Net Investment Income will owe the NIIT if modified adjusted gross income exceeds one of the following thresholds: Filing Status | Threshold Amount MFJ | $250,000 MFS | $125,000 Single | $200,000 HoH | $200,000 Qualifying Widower | $250,000

Patti inherited 100 shares of Superbubble Inc stock when her mother died on August 8, 20X1; the fair market value of the stock was $10 per share. Her mother paid $290 per share when she purchased the stock ten years prior. If Patti sells all 100 shares for $60 per share on July 3, 20X4, how should she report the sale on her return for 20X4? A) $23,000 short-term capital loss B) $5,000 short-term capital gain C) $23,000 long-term capital loss D) $5,000 long-term capital gain

D) $5,000 long-term capital gain In general, capital gains or losses from the sale of inherited property are treated as long-term. Patti's basis in the stock is the FMV of the stock on her mother's date of death (100 shares at $10 per share is $1,000). She sold the stock for $6,000 which means the gain was $5,000 and is a long-term capital gain. In this case, the opportunity to deduct a substantial loss on the stock was lost when her mother passed away.

Parker has $90,000 income from self-employment. What is his self-employment tax rate? A) 2.9% B) 7.65% C) 11.7% D) 15.3%

D) 15.3% In 2020, a tax rate of 15.3% applies to the first $137,700 of income from self-employment. A tax rate of 2.9% applies to the excess. Before applying the tax rates, a self-employed taxpayer reduces income from self-employment by the percentage of tax that employers normally pay for their employees.

Who is eligible to take the Section 199A qualified business income deduction? 1. C corporation on Form 1120 2. S corporation on Form 1120S 3. Partnership on Form 1065 4. Sole proprietorship on Schedule C 5. Individual taxpayer on Form 1040 A) 1 B) 1, 2, 3 C) 2, 3, 4 D) 5

D) 5 An individual taxpayer on Form 1040, is eligible to take the Section 199A deduction, qualified business income deduction. A temporary deduction—called the Section 199A deduction or qualified business income deduction —is available for taxable years beginning after December 31, 2017, and before January 1, 2026. Under this temporary provision, an individual taxpayer generally may deduct 20% of qualified business income (QBI) with respect to a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust dividends, qualified publicly traded partnership income, and qualified cooperative dividends (special rules apply to specified agricultural or horticultural cooperatives). Eligible taxpayers also generally include fiduciaries and beneficiaries of trusts and estates with QBI. Individual taxpayers and certain trusts and estates may be entitled to a deduction of up to 20% of their QBI from a trade or business, including income from a pass-through entity, but not from a C corporation. S corporations and partnerships are not eligible for the deduction. Instead, S corporations and partnerships report each shareholder's or partner's share of QBI, W-2 wages, unadjusted basis of qualified property held for use in the trade or business, whether the trade or business is a specified service trade or business, and other information on Schedule K-1 so the shareholders or partners may determine their deduction on their Form 1040. A sole proprietorship would not take the deduction on Schedule C, instead, they would take the deduction on Form 1040.

A refund may be directly deposited into which individual retirement account? A) Traditional IRA B) Roth IRA C) SEP-IRA D) All of the above

D) All of the above A refund (or part of it) may be directly deposited to a traditional IRA, Roth IRA, or SEP-IRA, but not a SIMPLE IRA account. The trustee or custodian of the account must be notified of the year to which the deposit is to be applied. IRS Form 8888.

Mary has an early withdrawal from her 401(k). If she changes her mind within 60 days, which of the following plans can she use to make a qualified rollover contribution? A) Traditional IRA B) Qualified annuity C) SEP IRA D) All of the above

D) All of the above An eligible retirement plan , under section 402(c)(8)(B), means a qualified plan or an individual retirement plan. The following eligible retirement plans can accept a qualified rollover contribution: - a qualified plan described in section 401(a) which is exempt from tax under section 501(a) - an annuity plan described in section 403(a) - an individual retirement account described in section 408(a) - an individual retirement annuity (other than an endowment contract) described in section 408(b)

In which of the following situations may the IRS impose penalties on a taxpayer? A) Late filing B) Late payment of taxes C) Frivolous return D) All of the above

D) All of the above Generally, there are three circumstances in which the IRS will impose a penalty and interest. First, if the return is filed late, the IRS will impose a penalty of 5% of the amount due, compounded every month. Second, if taxes are paid late, the penalty is usually 1/2 of 1% of the unpaid amount for each month or part of a month the tax is not paid. Third, if the taxpayer files a frivolous return, the law imposes a penalty of $5,000. A frivolous return is one that does not contain information needed to figure the correct tax or shows a substantially incorrect tax due to a frivolous position or desire to delay or interfere with the tax laws. This includes altering or striking out the preprinted language above the taxpayer's signature. Form 1040 Instructions.

Which of the following constitutes qualified official extended duty? A) Serving at a duty station at least 50 miles from the main home B) Living in government quarters under government order C) Serving for an indefinite period D) All of the above

D) All of the above The taxpayer is on qualified official extended duty while: serving at a duty station that is at least 50 miles from his or her main home, or living in government quarters under government orders. The taxpayer is on extended duty when he or she is called or ordered to active duty for a period of more than 90 days or for an indefinite period.

Which of the following are examples of prohibited transactions with a traditional IRA? A) Selling property to it B) Using it as security for a loan C) Buying property for personal use with your IRA funds D) All of the above

D) All of the above These are ALL specifically listed prohibited transactions. Generally, if there is a prohibited transaction in connection with a traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. At that time the entire account balance is considered a distribution. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. There is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if not corrected.

Form 4137 requires that: A) All employers are represented on separate lines. B) All tips are included. C) The current social security and Medicare tax rate is used. D) All of the above.

D) All of the above. Use Form 4137 only to figure the social security and Medicare tax owed on tips you did not report to your employer. Including any allocated tips shown on your Form(s) W-2 that you must report as income. Complete a separate line for each employer. Indicate all tips on the form, including tips already reported.

Which of the following conditions must be present for the IRS to be required to accept an installment agreement request? A) The taxpayer has filed timely returns for the last five years. B) The IRS determines the taxpayer cannot pay the tax in full. C) The taxpayer agrees to pay the tax in full within three years if the amount is $10,000 or less. D) All of these are requirements.

D) All of these are requirements. The IRS cannot turn down a request for an installment agreement if all three conditions are met. This is known as a guaranteed installment agreement. This requires that (i) the tax owed is not more than $10,000; (ii) the taxpayer has timely filed returns and paid any income tax due in the last five years, and has not entered into an installment agreement for payment of income tax; (iii) the IRS determines that the taxpayer cannot pay the tax owed in full, and (iv) the taxpayer agrees to pay the full amount owed within 3 years and to comply with the tax laws while the agreement is in effect. STREAMLINED INSTALLMENT AGREEMENTS — For taxpayers with tax deficiencies of $50,000 or less (including tax, penalties, and interest), that can be paid within 72 months. GUARANTEED INSTALLMENT AGREEMENTS — For taxpayers with income tax deficiencies of $10,000 or less (excluding penalties & interest), that can be paid within 36 months.

Which contribution does NOT qualify for the retirement contribution credit? A) Elective deferral to SIMPLE plan B) Elective deferral to a 401(k) C) Voluntary employee contributions D) Employer contributions

D) Employer contributions A taxpayer is eligible for this credit if he or she made contributions to a traditional or Roth IRA; elective deferrals to a 401(k), 403(b), governmental 457, SEP, or SIMPLE plan; or voluntary employee contributions to a qualified retirement plan. Employer contributions under 414(h)(2) are not voluntary employee contributions and do not qualify for the credit.

Who is eligible for the Section 199A deduction on qualified business income? A) C corporation B) Fiduciaries and beneficiaries of trusts and estates C) Individual Taxpayers D) Fiduciaries, beneficiaries of trusts and estates, and Individual taxpayers

D) Fiduciaries, beneficiaries of trusts and estates, and Individual taxpayers A new deduction—called the Section 199A deduction or qualified business income deduction —is available for taxable years beginning after December 31, 2017, and before January 1, 2026. Under this new provision, individual taxpayers generally may deduct 20 percent of qualified business income (QBI) with respect to a partnership, S corporation, or sole proprietorship, as well as 20 percent of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. Eligible taxpayers also generally include fiduciaries and beneficiaries of trusts and estates with QBI.

What income is a resident alien required to report on his U.S. income tax return? A) Wages from his job working for an Italian company while living in Europe for the summer. B) Interest income received in a foreign bank account. C) Gain from the sale of inventory he purchased in Germany and sold in the United States. D) Income from all sources both within and outside the United States.

D) Income from all sources both within and outside the United States. A Resident Alien must report income from sources both within and outside the United States on a U.S tax return.

Lucille bought a house in 2000 and lived in it until she sold it in 2020. She had a gain of $300,000 from the sale of her house. Shortly after the sale, she married Michael, who coincidentally also sold his primary residence in 2020 after ten years of ownership. He had a gain of $100,000 from the sale of his home. Can Lucille and Michael exclude their entire gains from their income? A) Yes, because they are married. B) Yes, because they each met the use and ownership tests independently. C) No, because they were not married when they sold their houses. D) No, because they cannot exclude more than $250,000 for Lucille's home.

D) No, because they cannot exclude more than $250,000 for Lucille's home. The $500,000 maximum exclusion for certain joint returns does not apply because Lucille and Michael do not jointly meet the use test for the same home. The ownership and use tests are met independently (for their own homes). The maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. They cannot exclude the entire gain of $300,000 on Lucille's home as a result, as the exclusion for that home is limited to $250,000. Taxpayers who are married and file a joint return for the year can exclude up to $500,000 of the gain on the sale of a main home if all of the following are true: -Either spouse meets the ownership test. -Both meet the use test. -During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

Which of the following is subject to withholding for a U.S resident? A) Interest B) Rent C) Royalties D) None of the above

D) None of the above Income from dividends, interest, capital gains, rent, royalties, and self-employment is NOT subject to withholding. A taxpayer with income from these sources must make estimated quarterly payments.

Which of the following statements is NOT true regarding tax benefits for education? A) The American Opportunity credit may be claimed for tuition expenses incurred in the first 4 years of post-secondary education. B) The dollar limitations for the American Opportunity credit are calculated on a per student basis. C) The Lifetime Learning Credit is allowed for tuition paid for graduate program studies. D) Room and board are qualifying expenses for the American Opportunity Credit.

D) Room and board are qualifying expenses for the American Opportunity Credit. The American Opportunity credit is calculated per student (and not per return like the Lifetime Learning credit). The Lifetime Learning credit covers ALL post-secondary education as well as courses to acquire or improve job skills. Room and board do not qualify as educational expenses for either the American Opportunity or Lifetime Learning credits.

Kristin picked up some odd jobs over the holiday break and made $385. This is her income for the entire year. Which of the following statements is true? A) She has to report the income as self-employment income. B) She should file a 1040 SE because it is considered self-employment income. C) She should file a 1040 because it is considered regular income. D) She does not need to report the income.

D) She does not need to report the income. You do not have to file an income tax return if your net earnings from self-employment were less than $400.

Which of the following applies to the allowable credit for prior year minimum tax? A) Any unused portion may not be carried forward. B) It is allowed in full against the current year's tax. C) It may only be carried forward for five years. D) The allowable credit cannot reduce the current year's tax below the current year's tentative minimum tax.

D) The allowable credit cannot reduce the current year's tax below the current year's tentative minimum tax. A taxpayer with AMT liability in the current year may recapture that amount in future years in the form of a credit. This non-refundable credit can offset future AMT liability only to the extent prior AMT tax paid was due to deferral items.

The following are true regarding the credit for prior-year minimum tax, EXCEPT: A) Individuals who pay AMT, Alternative Minimum Tax, may take a credit against regular income tax in future years for only the portion of the AMT that is attributable to deferral items, such as depreciation. B) The credit cannot reduce tax below the tentative minimum tax for the year. C) The credit is not refundable. D) The credit may be carried forward for a period of 20 years.

D) The credit may be carried forward for a period of 20 years. A taxpayer with AMT liability in the current year may recapture that amount in future years in the form of a credit. This non-refundable credit can offset future tax liability only to the extent prior AMT tax paid was due to deferral items. The credit cannot reduce tax below the tentative minimum tax for the year. You can carry over any unused portion of the credit to future years (there is no 20-year limit).

Early distributions from a traditional IRA may incur an additional tax, unless an exception exists which exempts the taxpayer from the additional tax. Which of the following is NOT an exception? A) The distribution is made to buy, build or rebuild a first home. B) The distribution is made for higher education expenses. C) The distribution is due to total and permanent disability. D) The distribution is due to casualty or theft.

D) The distribution is due to casualty or theft. Distributions from a traditional IRA before a taxpayer is age 59.5 are early distributions. Early distributions from a traditional IRA are subject to an additional 10% tax. Exceptions to this rule include the following: - The taxpayer has unreimbursed medical expenses that are more than 7.5% of AGI - The taxpayer is disabled - The taxpayer is the beneficiary of a deceased IRA owner - The taxpayer receives distributions as an annuity - The distributions are not more than the taxpayer's qualified educational expenses - The distribution is to buy, build, or rebuild a first home (subject to certain limits) -The distribution is to pay qualified expenses for the birth or adoption of a child (up to $5,000) Casualty and theft losses are not one of the exceptions to this rule.

All of the following are true with regards to education credits, EXCEPT: A) Only one of the credits can be claimed per student, per year B) If filing status is Married Filing Separate, the credits cannot be claimed C) The student must be the taxpayer, a spouse, or claimed as a dependent on the tax return D) The fees must be paid directly to the educational institute to qualify for the credit

D) The fees must be paid directly to the educational institute to qualify for the credit There is no requirement for the fees to be paid directly to the educational institution; rather, the taxpayer must be able to prove amounts paid are for qualified expenses.

Form 4137 is used _________? A) To report tips to an employer. B) To report tips in excess of $1,000 per month. C) When tips were received for work covered by the Railroad Retirement Tax Act. D) To calculate the social security and Medicare tax owed on tips not reported to employer.

D) To calculate the social security and Medicare tax owed on tips not reported to employer. A taxpayer must file Form 4137 if receiving cash and charge tips of $20 or more in a calendar month and he or she did not report all of those tips to the employer. Form 4137 is also used when box 8 of Form W-2 shows allocated tips that the taxpayer must report as income. However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer. IRS Form 4137.

All of the following are true EXCEPT: A) You may be able to exclude your gain from the sale of a home that you have used for the use of a business if you meet the ownership and use tests. B) You may be entitled to take depreciation deductions because you used your home for business purposes. C) You cannot exclude the part of your gain equal to any depreciation allowed as a deduction for periods after May 6, 1997. D) You cannot exclude any gain if your main home is a mobile home.

D) You cannot exclude any gain if your main home is a mobile home. A taxpayer who meets certain qualifications may exclude gains on the sale of a principal residence. This is known as section 121 exclusion. The taxpayer must own and live in the property as his main home for at least 2 years during the 5-year period ending on the date of sale. Usually, the home that is lived in most of the time is the main home. In addition to a house, a main home may also be a condominium, cooperative apartment, houseboat, or mobile home. If a taxpayer uses only part of the property as a main home, these rules apply only to the gain or loss on the sale of that part. If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. The word except is a critical element you must recognize. It changes everything. In this case, the correct answer is the only incorrect statement.

The Net Investment Income Tax applies to certain net investment income, which includes: A) interest only B) interest, dividends, and capital gains, increased by expenses properly allocable to the income C) 401(k) distributions D) interest, dividends, capital gains, rental and royalty income, reduced by expenses properly allocable to the income

D) interest, dividends, capital gains, rental and royalty income, reduced by expenses properly allocable to the income In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of Section 469). The taxpayer may reduce investment income by certain expenses properly allocable to the income. Net investment income does not include distributions from a qualified retirement plan.

Qualified business income (QBI) is: A) the amount of qualified items of income and gain from a qualified trade or business. B) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. C) the amount of qualified items of income and gain from a qualified trade or business, only to the extent included in taxable income. D) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, only to the extent included or allowed in the determination of taxable income for the year.

D) the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, only to the extent included or allowed in the determination of taxable income for the year. Qualified business income (QBI) is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. Qualified items of gain or loss are taken into account to determine QBI or qualified business loss only to the extent included or allowed in the determination of taxable income for the year. Exception: Disallowed losses or deductions allowed in the taxable year are generally taken into account for purposes of computing QBI except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from taxable years ending before January 1, 2018