ENROLLED AGENT 2026 STUDY GUIDE QUESTIONS AND
ANSWERS GUARANTEE A+
✔✔Who is not allowed to file using a standard deduction? - ✔✔1. Persons who itemized
their deductions
2. Nonresident alien individuals
3. Individuals who file "short period" return
4. Married individual who files separate return, spouse itemized
5. Partnerships, estates, trusts, corporations
✔✔Jean is a U.S. citizen living and working in France for all of 2021. She received
wages of $150,000, dividends of $10,000, and alimony (from a pre-2019 divorce) of
$20,000 in 2021. She decides to use the foreign earned income exclusion available to
her and file Form 2555. What is the amount of Jean's foreign earned income before any
limitations are applied? - ✔✔$150,000
✔✔Reimbursements from the U.S. military of a moving expense the military
member/taxpayer properly deducted on last year's tax return. - ✔✔Generally, should be
included in gross income.
Section 82 specifically provides that, except as provided in Sec. 132(a)(6), gross
income includes amounts received as reimbursement of moving expenses that are
attributable to employment. Under Sec. 132(a)(6), the reimbursement is excluded if the
expense would be deductible under Sec. 217 if paid by the employee. It may not be
excluded, however, if the expense was actually deducted on the individual's return for
any prior tax year
✔✔Mr. Hines received a $6,200 grant from a local university for the fall of the current
year. Mr. Hines was a candidate for a degree and was required to be a research
assistant, for which services he received payment under the grant. The $6,200 grant
provided the following:
Tuition - $3,600
Books and supplies - $500
Pay for services as research assistant - $2,100
Mr. Hines spent the entire $6,200 on tuition, books, and supplies. What amount must
Mr. Hines include in his income for the current year? - ✔✔$2,100
Although Sec. 117 excludes from gross income amounts received as qualified
scholarships and tuition reduction to be used for tuition and related expenses, this
exclusion does not apply to amounts representing payments for teaching, research, or
other services performed by the student that are required as a condition for receiving
the qualified scholarship or tuition reduction (Publication 17).
,✔✔If your Social Security benefits are considered taxable, the maximum percent of net
benefits received that can be included in income is - ✔✔85%
✔✔"constructive receipt" - ✔✔A payment on a sale of real property was placed in
escrow pending settlement, at which time title would be conveyed.
Income, although not actually in a taxpayer's possession, is constructively received in
the taxable year during which it is credited to his or her account, set apart for him or her,
or otherwise made available so that (s)he may draw upon it at any time or so that (s)he
could have drawn upon it during the taxable year if notice of intention to withdraw had
been given (Reg. 1.451-2). However, income is not constructively received if the
taxpayer's control of its receipt is subject to substantial limitations or restrictions
(Publication 538). Since the taxpayer's control of the receipt of the funds in the escrow
account is substantially limited until the transaction has closed, the taxpayer has not
constructively received the income until the closing of the transaction in the following
year.
✔✔Kelley's employer gave her stock in the current year for services performed with the
condition that she would have to return the stock unless she completed 3 years of
service. At the time of the transfer, her employer's basis in the stock was $6,000, and its
fair market value was $8,000. Kelley did not make the Sec. 83(b) election. How much
should she include in her income for the current year, and what would be her basis in
the stock? - ✔✔Kelley would not report any income or have any basis in the stock until
she has completed 3 years of service.
Under the claim-of-right doctrine, a taxpayer receiving income under a claim of right and
without restrictions on its use or disposition is taxed on that income in the year received
even though the right to retain the income is not yet fixed or the taxpayer may later be
required to return it (Publication 538). In this case, however, there is a substantial
limitation on the stock's use and/or disposition because Kelley must return the stock if
she does not complete 3 years of service. Therefore, Kelley will not report any income
or have any basis in the stock until she has completed 3 years of service.
✔✔Trish Durwood works for a small retail clothing store. She earned $26,000 in wages
during the year. Because of a cash flow problem in April, Trish did not receive her $500
weekly check but instead was given a credit of $500 on the purchased clothing for her
family. How much income should be shown on her Form W-2 and reported on her Form
1040? - ✔✔$26,000
Compensation for services must be included in gross income [IRC Sec. 61(a)(1)]. Due
to the relationship between an employee and an employer, almost everything received
by the employee from the employer is included in gross income as compensation.
✔✔Ms. Miller set up a computer system for Mr. Town's business. In return, Mr. Town
gave Ms. Miller a storage facility. Ms. Miller plans to use this facility for business
,purposes and plans to depreciate it. The fair market value of Ms. Miller's services and
the storage facility was $50,000. Mr. Town's basis in the storage facility was $30,000.
How should Ms. Miller treat the transaction, and what is her depreciable basis for the
property? - ✔✔Ms. Miller should include $50,000 in income and use $50,000 as the
basis for the storage facility.
All compensation for personal services is gross income. The form of payment is
irrelevant. If services are paid for in property, its fair market value at the time of receipt
is gross income. The amount included in income becomes the basis in the property.
Since the building's FMV at the time of the exchange is $50,000, the amount of income
recognized and Ms. Miller's basis in the property is equal to $50,000 (Publication 17).
✔✔Gene Wingo had the following potentially taxable transactions in the current year.
How much, if any, should be included on his current-year return?
$200 credited to his savings account on December 31 of the current year. He did not
withdraw any money from the account during the entire year.
$2,000 withheld from his paycheck by his employer to satisfy a garnishment by his
doctor.
$1,000 discount given by his bank when he paid off his home mortgage 5 years early.
$500 check received December 31 of the current year from an individual for one of
Gene's original drawings. Gene did not cash or deposit the check until the next year. -
✔✔$3,700
Gross income includes compensation for services ($2,000 + $500), interest ($200), and
income from discharge of indebtedness ($1,000), among other items. Gene should
include all $3,700 in gross income on his current year return (Publication 17).
✔✔Ruby Diaz is a commissioned salesperson. She is a cash-method taxpayer. At the
end of the current year, her earnings for the year were $75,000. During the year, she
also received $10,000 in advances on future commissions and repaid $8,000. How
much income should Ruby report for the current year? - ✔✔$77,000
Both cash- and accrual-basis taxpayers must include amounts in gross income upon
actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts
under Reg. 1.61-8(b). All commissions received should be included in the current year's
gross income. The $8,000 repaid reduces gross income [Publication 17 and IRC Reg.
1.61-8(b)]. Ruby should report $77,000 ($75,000 + $10,000 - $8,000).
✔✔Gordon, age 70, is retired and works part-time as a security guard earning $8,000.
He received $5,000 interest from a savings account and $2,500 interest from tax-
exempt municipal bonds. His Social Security benefits were $12,000 and his taxable
pension was $6,000. To determine if any of his Social Security is taxable, Gordon
should compare how much of his income to the $25,000 base amount? - ✔✔$27,500
, Under Sec. 86, if the sum of the "modified" adjusted gross income plus one-half of
Social Security benefits exceeds $25,000 on a single return but does not exceed
$34,000, part of the Social Security benefits will be included in gross income. Modified
adjusted gross income equals adjusted gross income plus tax-exempt interest (modified
AGI = $8,000 + $6,000 + $5,000 + $2,500 = $21,500). The sum of the taxpayer's
modified AGI of $21,500 and one-half of their $12,000 in Social Security is equal to
$27,500, which should then be compared to the $25,000 minimum (Publication 17).
✔✔Pastor Green received an annual salary of $20,000 as a full-time minister. The
church also paid him $1,000 designated as a housing allowance to pay for his utilities.
His church owns a parsonage that has a fair rental value of $6,000 in which he lives rent
free. Neither the rental allowance nor the rental value of the parsonage is included in his
W-2. All amounts are considered provided for services he renders as a licensed pastor.
He is not exempt from self-employment tax. Compute the amount of Pastor Green's
income that is subject to income tax on his return. - ✔✔$20,000
✔✔Due to Mr. Sandburg's poor financial situation, Mr. Bond canceled the $4,000 debt
that was due Mr. Bond on June 24 of the current year, with the understanding that the
cancellation was not a gift. Mr. Sandburg was not insolvent or bankrupt at that time. As
a result, Mr. Sandburg - ✔✔Must include $4,000 in his gross income.
Under Sec. 61(a)(12), gross income includes income from the discharge of
indebtedness unless it is excluded under Sec. 108. The cancellation will be excluded if
the debt is canceled due to a bankruptcy action or if the taxpayer is insolvent outside
bankruptcy (Publication 17). Because Mr. Sandburg was not insolvent or bankrupt, he
must include the $4,000 in gross income.
✔✔On February 10 of the current year, Rose was in an automobile accident while she
was going to work. The doctor advised her to stay home for 6 months because of her
injuries. On February 25 of the current year, she filed a lawsuit. On July 20 of the
current year, Rose returned to work. On December 15 of the current year, the lawsuit
was settled and Rose received the following amounts:
Compensation for lost wages - $25,000
Personal injury damages awarded (none of which was for punitive damages) - $40,000
How much of the settlement must Rose include in ordinary income on her current-year
tax return? - ✔✔$0
In 1996, Sec. 104(a)(2) was amended to exclude from gross income damages received
on account of personal physical injury or physical sickness only. The House Committee
Report for the 1996 changes states, "If an action has its origin in a physical injury or
physical sickness, then all damages (other than punitive) that flow therefrom are treated
as payments received on account of physical injury or physical sickness . . ." Therefore,
Rose's compensation for lost wages is excluded from gross income (Publication 17).
ANSWERS GUARANTEE A+
✔✔Who is not allowed to file using a standard deduction? - ✔✔1. Persons who itemized
their deductions
2. Nonresident alien individuals
3. Individuals who file "short period" return
4. Married individual who files separate return, spouse itemized
5. Partnerships, estates, trusts, corporations
✔✔Jean is a U.S. citizen living and working in France for all of 2021. She received
wages of $150,000, dividends of $10,000, and alimony (from a pre-2019 divorce) of
$20,000 in 2021. She decides to use the foreign earned income exclusion available to
her and file Form 2555. What is the amount of Jean's foreign earned income before any
limitations are applied? - ✔✔$150,000
✔✔Reimbursements from the U.S. military of a moving expense the military
member/taxpayer properly deducted on last year's tax return. - ✔✔Generally, should be
included in gross income.
Section 82 specifically provides that, except as provided in Sec. 132(a)(6), gross
income includes amounts received as reimbursement of moving expenses that are
attributable to employment. Under Sec. 132(a)(6), the reimbursement is excluded if the
expense would be deductible under Sec. 217 if paid by the employee. It may not be
excluded, however, if the expense was actually deducted on the individual's return for
any prior tax year
✔✔Mr. Hines received a $6,200 grant from a local university for the fall of the current
year. Mr. Hines was a candidate for a degree and was required to be a research
assistant, for which services he received payment under the grant. The $6,200 grant
provided the following:
Tuition - $3,600
Books and supplies - $500
Pay for services as research assistant - $2,100
Mr. Hines spent the entire $6,200 on tuition, books, and supplies. What amount must
Mr. Hines include in his income for the current year? - ✔✔$2,100
Although Sec. 117 excludes from gross income amounts received as qualified
scholarships and tuition reduction to be used for tuition and related expenses, this
exclusion does not apply to amounts representing payments for teaching, research, or
other services performed by the student that are required as a condition for receiving
the qualified scholarship or tuition reduction (Publication 17).
,✔✔If your Social Security benefits are considered taxable, the maximum percent of net
benefits received that can be included in income is - ✔✔85%
✔✔"constructive receipt" - ✔✔A payment on a sale of real property was placed in
escrow pending settlement, at which time title would be conveyed.
Income, although not actually in a taxpayer's possession, is constructively received in
the taxable year during which it is credited to his or her account, set apart for him or her,
or otherwise made available so that (s)he may draw upon it at any time or so that (s)he
could have drawn upon it during the taxable year if notice of intention to withdraw had
been given (Reg. 1.451-2). However, income is not constructively received if the
taxpayer's control of its receipt is subject to substantial limitations or restrictions
(Publication 538). Since the taxpayer's control of the receipt of the funds in the escrow
account is substantially limited until the transaction has closed, the taxpayer has not
constructively received the income until the closing of the transaction in the following
year.
✔✔Kelley's employer gave her stock in the current year for services performed with the
condition that she would have to return the stock unless she completed 3 years of
service. At the time of the transfer, her employer's basis in the stock was $6,000, and its
fair market value was $8,000. Kelley did not make the Sec. 83(b) election. How much
should she include in her income for the current year, and what would be her basis in
the stock? - ✔✔Kelley would not report any income or have any basis in the stock until
she has completed 3 years of service.
Under the claim-of-right doctrine, a taxpayer receiving income under a claim of right and
without restrictions on its use or disposition is taxed on that income in the year received
even though the right to retain the income is not yet fixed or the taxpayer may later be
required to return it (Publication 538). In this case, however, there is a substantial
limitation on the stock's use and/or disposition because Kelley must return the stock if
she does not complete 3 years of service. Therefore, Kelley will not report any income
or have any basis in the stock until she has completed 3 years of service.
✔✔Trish Durwood works for a small retail clothing store. She earned $26,000 in wages
during the year. Because of a cash flow problem in April, Trish did not receive her $500
weekly check but instead was given a credit of $500 on the purchased clothing for her
family. How much income should be shown on her Form W-2 and reported on her Form
1040? - ✔✔$26,000
Compensation for services must be included in gross income [IRC Sec. 61(a)(1)]. Due
to the relationship between an employee and an employer, almost everything received
by the employee from the employer is included in gross income as compensation.
✔✔Ms. Miller set up a computer system for Mr. Town's business. In return, Mr. Town
gave Ms. Miller a storage facility. Ms. Miller plans to use this facility for business
,purposes and plans to depreciate it. The fair market value of Ms. Miller's services and
the storage facility was $50,000. Mr. Town's basis in the storage facility was $30,000.
How should Ms. Miller treat the transaction, and what is her depreciable basis for the
property? - ✔✔Ms. Miller should include $50,000 in income and use $50,000 as the
basis for the storage facility.
All compensation for personal services is gross income. The form of payment is
irrelevant. If services are paid for in property, its fair market value at the time of receipt
is gross income. The amount included in income becomes the basis in the property.
Since the building's FMV at the time of the exchange is $50,000, the amount of income
recognized and Ms. Miller's basis in the property is equal to $50,000 (Publication 17).
✔✔Gene Wingo had the following potentially taxable transactions in the current year.
How much, if any, should be included on his current-year return?
$200 credited to his savings account on December 31 of the current year. He did not
withdraw any money from the account during the entire year.
$2,000 withheld from his paycheck by his employer to satisfy a garnishment by his
doctor.
$1,000 discount given by his bank when he paid off his home mortgage 5 years early.
$500 check received December 31 of the current year from an individual for one of
Gene's original drawings. Gene did not cash or deposit the check until the next year. -
✔✔$3,700
Gross income includes compensation for services ($2,000 + $500), interest ($200), and
income from discharge of indebtedness ($1,000), among other items. Gene should
include all $3,700 in gross income on his current year return (Publication 17).
✔✔Ruby Diaz is a commissioned salesperson. She is a cash-method taxpayer. At the
end of the current year, her earnings for the year were $75,000. During the year, she
also received $10,000 in advances on future commissions and repaid $8,000. How
much income should Ruby report for the current year? - ✔✔$77,000
Both cash- and accrual-basis taxpayers must include amounts in gross income upon
actual or constructive receipt if the taxpayer has an unrestricted claim to such amounts
under Reg. 1.61-8(b). All commissions received should be included in the current year's
gross income. The $8,000 repaid reduces gross income [Publication 17 and IRC Reg.
1.61-8(b)]. Ruby should report $77,000 ($75,000 + $10,000 - $8,000).
✔✔Gordon, age 70, is retired and works part-time as a security guard earning $8,000.
He received $5,000 interest from a savings account and $2,500 interest from tax-
exempt municipal bonds. His Social Security benefits were $12,000 and his taxable
pension was $6,000. To determine if any of his Social Security is taxable, Gordon
should compare how much of his income to the $25,000 base amount? - ✔✔$27,500
, Under Sec. 86, if the sum of the "modified" adjusted gross income plus one-half of
Social Security benefits exceeds $25,000 on a single return but does not exceed
$34,000, part of the Social Security benefits will be included in gross income. Modified
adjusted gross income equals adjusted gross income plus tax-exempt interest (modified
AGI = $8,000 + $6,000 + $5,000 + $2,500 = $21,500). The sum of the taxpayer's
modified AGI of $21,500 and one-half of their $12,000 in Social Security is equal to
$27,500, which should then be compared to the $25,000 minimum (Publication 17).
✔✔Pastor Green received an annual salary of $20,000 as a full-time minister. The
church also paid him $1,000 designated as a housing allowance to pay for his utilities.
His church owns a parsonage that has a fair rental value of $6,000 in which he lives rent
free. Neither the rental allowance nor the rental value of the parsonage is included in his
W-2. All amounts are considered provided for services he renders as a licensed pastor.
He is not exempt from self-employment tax. Compute the amount of Pastor Green's
income that is subject to income tax on his return. - ✔✔$20,000
✔✔Due to Mr. Sandburg's poor financial situation, Mr. Bond canceled the $4,000 debt
that was due Mr. Bond on June 24 of the current year, with the understanding that the
cancellation was not a gift. Mr. Sandburg was not insolvent or bankrupt at that time. As
a result, Mr. Sandburg - ✔✔Must include $4,000 in his gross income.
Under Sec. 61(a)(12), gross income includes income from the discharge of
indebtedness unless it is excluded under Sec. 108. The cancellation will be excluded if
the debt is canceled due to a bankruptcy action or if the taxpayer is insolvent outside
bankruptcy (Publication 17). Because Mr. Sandburg was not insolvent or bankrupt, he
must include the $4,000 in gross income.
✔✔On February 10 of the current year, Rose was in an automobile accident while she
was going to work. The doctor advised her to stay home for 6 months because of her
injuries. On February 25 of the current year, she filed a lawsuit. On July 20 of the
current year, Rose returned to work. On December 15 of the current year, the lawsuit
was settled and Rose received the following amounts:
Compensation for lost wages - $25,000
Personal injury damages awarded (none of which was for punitive damages) - $40,000
How much of the settlement must Rose include in ordinary income on her current-year
tax return? - ✔✔$0
In 1996, Sec. 104(a)(2) was amended to exclude from gross income damages received
on account of personal physical injury or physical sickness only. The House Committee
Report for the 1996 changes states, "If an action has its origin in a physical injury or
physical sickness, then all damages (other than punitive) that flow therefrom are treated
as payments received on account of physical injury or physical sickness . . ." Therefore,
Rose's compensation for lost wages is excluded from gross income (Publication 17).
