Enrolled Agent Part 1 || QUESTIONS WITH ACTUAL
SOLUTIONS!!
Funeral expenses paid out of the estate.
would be allowed as deductions from the gross estate in computing the taxable estate
True or False correct answers True
Which of the following types of interest payments, not allowed because of one of the
limitations, may be carried over to the next year? correct answers Interest on money
borrowed to buy stocks.
Clyde, a single person, sold his principal residence for $700,000. He purchased his home 10
years ago for $150,000 and lived there until he sold it. He paid for capital improvements of
$75,000, real estate commissions of $36,000, and other settlement costs of $4,000. How
much taxable gain must Clyde report? correct answers 185,000
A taxpayer may exclude up to $250,000 ($500,000 for a joint return) of a gain on the sale of a
principal residence if (s)he primarily resided in this home for 2 years of a 5-year period
before the sale of the home. The gain is determined by subtracting from the amount realized,
$660,000, ($700,000 - $36,000 -$4,000) the adjusted basis, $225,000 ($150,000 + $75,000).
This yields a gain of $435,000. Clyde only has to claim $185,000 ($435,000 - $250,000) as a
gain (Sec. 121).
With regard to claiming a dependent, all of the following statements are true EXCEPT
A. To meet the citizenship test, a person must be a U.S. citizen or resident, or a resident of
Canada or Mexico.
B. A person does not meet the member-of-the-household test if at any time during the tax
year the relationship between the taxpayer and that person violates local law.
C. A person who died during the year, but was a member of your household until death, will
meet the member-of-the-household test.
D. In calculating a person's total support, do not include tax-exempt income used to support
that person. correct answers D - A taxpayer must furnish more than one-half of the total
support provided during the calendar year before claiming an exemption for a dependent. The
support may come from taxable income, tax-exempt receipts, or loans (Publication 501).
Ms. X, a cash-method taxpayer, received notice from her mutual fund that it has realized a
long-term capital gain on her behalf in the amount of $2,500. It also advised her that it has
paid a tax of $500 on this gain. The mutual fund indicated that it will not distribute the net
amount but will credit the amount to her account. All of the following statements are true
EXCEPT
A. X is allowed a $500 credit for the tax since it is considered paid by X.
B. X does not report a long-term capital gain because nothing was paid to her.
C. X is allowed to increase her basis in the stock by $2,000.
D. X must report a long-term capital gain of $2,500. correct answers Answer (B) is correct.
, A mutual fund is a regulated investment company, the taxation of which is determined by
Sec. 852. Shareholders are taxed on dividends paid by the mutual fund. If part or all of the
dividend is designated as a capital gain dividend, it must be treated as such by the
shareholders. Undistributed capital gains also must be included in income by shareholders,
but they are allowed a credit for their proportionate share of any tax on the capital gain paid
by the mutual fund (Publication 17).
Which of the following will NOT usually be 100% deductible as a medical expense?
A. Lowering the kitchen cabinets.
B. Modifying the hardware on doors.
C. Building entrance and exit ramps.
D. Adding an elevator to your home to allow access to a second-floor bedroom. correct
answers Answer (D) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are
deductible. An example of such an expenditure is an elevator needed for someone with a
heart condition. However, the amount of any increase in value of the existing property cannot
be deducted. Since the addition of an elevator to a home would normally increase the value of
the home, the entire cost would not be deductible as a medical expense. (Publication 502.)
Randi, a flight attendant, received wages of $30,000 in the current year. The airline provided
transportation on a stand-by basis, at no charge, from her home in Detroit to the airline's hub
in Chicago. The fair market value of the commuting flights was $5,000. Also in the current
year, Randi received reimbursements under an accountable plan of $10,000 for overnight
travel, but only spent $6,000. The excess was returned. Randi became disabled in November
of the current year and received workers' compensation of $4,000. What amount must Randi
include in gross income on her current-year tax return? correct answers
What paid for by the employer are excluded from gross income since they are no-additional-
cost fringe benefits. correct answers Commuting Flights
What to include in gross income:
wages
transportation by stand by basis
reimbursements where excess was returned
workers comp correct answers wages
Connor purchased Flora stock in 2011 and sold it in 2017. He also traded in a copy machine
that he had been using in his business since 2012 for a new model. On December 15, 2017,
he inherited 35 shares of Fauna Laboratories stock. What is the holding period for Copy
machine? correct answers is long-term because, when property is received in an exchange
without recognition of a gain or loss, the holding period of the property received in the
exchange begins on the date that the property surrendered was originally acquired (Sec.
1223).
Connor purchased Flora stock in 2011 and sold it in 2017. He also traded in a copy machine
that he had been using in his business since 2012 for a new model. On December 15, 2017,
he inherited 35 shares of Fauna Laboratories stock. What is the holding period for these
Stocks? correct answers This applies to property received in a tax-free exchange only if the
SOLUTIONS!!
Funeral expenses paid out of the estate.
would be allowed as deductions from the gross estate in computing the taxable estate
True or False correct answers True
Which of the following types of interest payments, not allowed because of one of the
limitations, may be carried over to the next year? correct answers Interest on money
borrowed to buy stocks.
Clyde, a single person, sold his principal residence for $700,000. He purchased his home 10
years ago for $150,000 and lived there until he sold it. He paid for capital improvements of
$75,000, real estate commissions of $36,000, and other settlement costs of $4,000. How
much taxable gain must Clyde report? correct answers 185,000
A taxpayer may exclude up to $250,000 ($500,000 for a joint return) of a gain on the sale of a
principal residence if (s)he primarily resided in this home for 2 years of a 5-year period
before the sale of the home. The gain is determined by subtracting from the amount realized,
$660,000, ($700,000 - $36,000 -$4,000) the adjusted basis, $225,000 ($150,000 + $75,000).
This yields a gain of $435,000. Clyde only has to claim $185,000 ($435,000 - $250,000) as a
gain (Sec. 121).
With regard to claiming a dependent, all of the following statements are true EXCEPT
A. To meet the citizenship test, a person must be a U.S. citizen or resident, or a resident of
Canada or Mexico.
B. A person does not meet the member-of-the-household test if at any time during the tax
year the relationship between the taxpayer and that person violates local law.
C. A person who died during the year, but was a member of your household until death, will
meet the member-of-the-household test.
D. In calculating a person's total support, do not include tax-exempt income used to support
that person. correct answers D - A taxpayer must furnish more than one-half of the total
support provided during the calendar year before claiming an exemption for a dependent. The
support may come from taxable income, tax-exempt receipts, or loans (Publication 501).
Ms. X, a cash-method taxpayer, received notice from her mutual fund that it has realized a
long-term capital gain on her behalf in the amount of $2,500. It also advised her that it has
paid a tax of $500 on this gain. The mutual fund indicated that it will not distribute the net
amount but will credit the amount to her account. All of the following statements are true
EXCEPT
A. X is allowed a $500 credit for the tax since it is considered paid by X.
B. X does not report a long-term capital gain because nothing was paid to her.
C. X is allowed to increase her basis in the stock by $2,000.
D. X must report a long-term capital gain of $2,500. correct answers Answer (B) is correct.
, A mutual fund is a regulated investment company, the taxation of which is determined by
Sec. 852. Shareholders are taxed on dividends paid by the mutual fund. If part or all of the
dividend is designated as a capital gain dividend, it must be treated as such by the
shareholders. Undistributed capital gains also must be included in income by shareholders,
but they are allowed a credit for their proportionate share of any tax on the capital gain paid
by the mutual fund (Publication 17).
Which of the following will NOT usually be 100% deductible as a medical expense?
A. Lowering the kitchen cabinets.
B. Modifying the hardware on doors.
C. Building entrance and exit ramps.
D. Adding an elevator to your home to allow access to a second-floor bedroom. correct
answers Answer (D) is correct.
Home-related capital expenditures incurred by a physically handicapped individual are
deductible. An example of such an expenditure is an elevator needed for someone with a
heart condition. However, the amount of any increase in value of the existing property cannot
be deducted. Since the addition of an elevator to a home would normally increase the value of
the home, the entire cost would not be deductible as a medical expense. (Publication 502.)
Randi, a flight attendant, received wages of $30,000 in the current year. The airline provided
transportation on a stand-by basis, at no charge, from her home in Detroit to the airline's hub
in Chicago. The fair market value of the commuting flights was $5,000. Also in the current
year, Randi received reimbursements under an accountable plan of $10,000 for overnight
travel, but only spent $6,000. The excess was returned. Randi became disabled in November
of the current year and received workers' compensation of $4,000. What amount must Randi
include in gross income on her current-year tax return? correct answers
What paid for by the employer are excluded from gross income since they are no-additional-
cost fringe benefits. correct answers Commuting Flights
What to include in gross income:
wages
transportation by stand by basis
reimbursements where excess was returned
workers comp correct answers wages
Connor purchased Flora stock in 2011 and sold it in 2017. He also traded in a copy machine
that he had been using in his business since 2012 for a new model. On December 15, 2017,
he inherited 35 shares of Fauna Laboratories stock. What is the holding period for Copy
machine? correct answers is long-term because, when property is received in an exchange
without recognition of a gain or loss, the holding period of the property received in the
exchange begins on the date that the property surrendered was originally acquired (Sec.
1223).
Connor purchased Flora stock in 2011 and sold it in 2017. He also traded in a copy machine
that he had been using in his business since 2012 for a new model. On December 15, 2017,
he inherited 35 shares of Fauna Laboratories stock. What is the holding period for these
Stocks? correct answers This applies to property received in a tax-free exchange only if the
