Enrolled Agent Practice Exam Questions
Part 1 UPDATED ACTUAL Questions and
CORRECT Answers
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. - CORRECT ANSWER - 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.
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. - CORRECT
ANSWER - 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.
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 - CORRECT ANSWER - 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.
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% - CORRECT ANSWER - 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%.
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. - CORRECT ANSWER - 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
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. - CORRECT
ANSWER - 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 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. - CORRECT ANSWER - 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.
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 - CORRECT
ANSWER - 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.
Form 4137 requires that:
A) All employers are represented on separate lines.
B) All tips are included.
Part 1 UPDATED ACTUAL Questions and
CORRECT Answers
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. - CORRECT ANSWER - 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.
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. - CORRECT
ANSWER - 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.
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 - CORRECT ANSWER - 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.
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% - CORRECT ANSWER - 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%.
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. - CORRECT ANSWER - 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
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. - CORRECT
ANSWER - 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 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. - CORRECT ANSWER - 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.
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 - CORRECT
ANSWER - 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.
Form 4137 requires that:
A) All employers are represented on separate lines.
B) All tips are included.
