Comprehensive Module 2 Final Exam Part 1 2021 complete exam solution

Comprehensive Module 2 Final Exam Part 1 2021 complete exam solution Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 1 Comprehensive Module 2: Final Exam 1. Don is a single parent. His son is 19 (not a student), and his daughter is 17 (still a student). Don claimed EIC on his tax return for both children. He later received a letter from the Internal Revenue Service which disallowed EIC for his son. The letter also stated that Don’s claim was an error due to reckless or intentional disregard of the EIC rules. For how many years will Don be denied EIC? a) 10 years b) 5 years c) 2 years d) 1 year 2. Last year Rick fraudulently claimed his cousin’s children as dependents on his return to receive earned income credit. The IRS discovered this when Rick’s cousin also claimed the children. Rick’s cousin was able to prove he had the right to claim his children, and the EIC was denied on Rick’s return. How long will EIC be prohibited if a taxpayer is denied EIC due to fraud? a) 10 years b) 5 years c) 2 years d) 1 year 3. Walt was a tax preparer who neglected to complete Form 8867 or record information needed for the return Rick fraudulently claimed the children for EIC purposes. After the IRS proved Rick had committed fraud, it was shown that Walt failed to exercise due diligence. What penalty will a tax preparer face if it is determined that he failed to exercise due diligence? a) $540 per return b) $540 per failure to comply c) $540 per year d) $540 per taxpayer and per return 4. In which of the following scenarios does the taxpayer fail to meet the residency test for EIC purposes? a) A taxpayer whose child lived with him for 5 months and 28 days b) A taxpayer whose eligible foster child lived with him all year c) A taxpayer whose child lived with him all year. He and his spouse separated on May 29. d) A taxpayer who is 64 years old and lived in the United States for more than half of the year 5. Trudy lives with her two children (ages 16 and 12), and her filing status is Head of Household. Trudy’s earned income and AGI was $31,000. Is Trudy eligible for EIC? a) Yes b) No, the taxpayer’s earned income is not within the range to receive EIC. c) No, the taxpayer’s children do not meet the age test to be a qualifying child. d) No, the taxpayer is not eligible due to her filing status. Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 2 6. Jill prepares returns for many clients who can claim the earned income credit. To be certain she is practicing due diligence about the earned income credit, which of the following forms must Jill prepare for these clients? a) Form 1040 b) Form W-5 c) Form 8862 d) Form 8867 7. Danika is a single mother with three children, ages 3, 7, and 9. They all have a valid Social Security number. Danika’s tax return shows an AGI of $32,765, which includes earned income of $32,700 and interest income of $65. She meets the requirements for filing status Head of Household and supports her family without any additional help from other sources. Which of the following statements is true? a) Danika’s EIC will be based on her earned income alone without considering her AGI. b) Danika’s EIC will be the smaller of the two EIC amounts based on her AGI or her earned income. c) Danika’s EIC will be based on her AGI without considering the earned income amount. d) Danika is not eligible to receive EIC. 8. Lucy had the following income in tax year 2020: Wages $25,900, interest income of $1,300 and strike benefits paid by the union of $1,700. For purposes of EIC, how much is considered earned income? a) $27,200 b) $25,900 c) $27,600 d) $30,200 9. Which of the following correctly identifies a condition of eligibility for purposes of earned income credit? a) The taxpayer must have wages. b) The taxpayer’s qualifying children must be under 25 years old. c) The taxpayer must have only earned income. d) The taxpayer is not required to have a qualifying child. 10. Which of the following meets the age test for purposes of EIC? a) Michael’s son turned 19 years old on March 31st of the tax year and is living with his parents. Michael’s son does not have a job and does not plan to attend college. b) Natasha’s 30-year-old daughter is permanently and totally disabled. Natasha’s daughter lived with her all year. c) Jacob is 22 years old. His 23-year brother has lived with him since Jacob started living on his own two years ago. Jacob’s brother is a full-time student and works odd jobs to help with his support. d) Stuart’s son is 23 years old and lived with him all year. His son was a full-time student and attends an online school. 11. Which of the following situations meets the residency test requirements? a) Alex is 16 years old and lived with his parents until May. In May he was sent to a juvenile detention facility where he stayed through the remainder of the year. b) Sterling is 18 years old, a full-time student and lived with her grandmother until June 10th, when she rented an apartment and moved out on her own. c) Orlando is 17 years old and lived with his mother until June 28th, when he went to live with his father until December 1st. Orlando then moved in with a friend. d) Melissa is 18 years old and a full-time student. Melissa lived with her grandmother until May. She then moved in with her aunt and lived there until August, when she left and moved in with her father for the remainder of the year. Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 3 12. Wilson and Zoey live together and are not married. Jason, their 4-year-old son lives with them. Also living with them the entire year is Wilson’s sister Evie (age 12), Zoey’s daughter, Belle (age 8) and Zoey’s mother (age 64). Wilson’s AGI is $30,300 and Zoey’s AGI is $29,950. Who would be a qualifying child for Wilson? a) Jason, Evie, and Belle b) Jason and Belle c) Jason d) Jason and Evie 13. Fiona and her daughter (age 2) lived with Fiona’s grandmother during the year. Fiona is 23 years old and is a full-time student. Fiona worked part-time and earned $9,450. Fiona’s grandmother received Social Security benefits of $22,600 and interest income of $800. Fiona plans to file a tax return; however, her grandmother is not required to file a return. Which of the following statements is most accurate? a) Fiona meets the relationship, age, residency, and joint return tests for the EIC. Fiona is a qualifying child of her grandmother. b) Fiona and her daughter meet all the tests for the EIC. Fiona and her daughter are qualifying children of her grandmother. c) Since Fiona’s grandmother is not required to file a return, Fiona can file a return and claim the EIC for herself; however, she cannot claim the EIC for her daughter because her daughter is a qualifying child of her grandmother. d) Since Fiona’s grandmother is not required to file a return, Fiona can file a return claiming her daughter as a qualifying child. Since all EIC test requirements have been met, Fiona is eligible to receive the EIC for her daughter. 14. Tyler is a qualifying widower and has 10-year-old twin boys. Tyler had the following income for the year: Wages $28,750 Interest income $390 Raffle winnings 1,500 Assuming all EIC requirements are met, what amount of EIC is Tyler eligible to receive? a) $3,931 b) $3,541 c) $3,615 d) $3,857 15. Which of the following statements is most accurate about nontaxable combat pay? a) A Married Filing Jointly couple who both have nontaxable combat pay may elect independent of each other to include their nontaxable combat pay in earned income. b) If a Married Filing Jointly couple both have nontaxable combat pay, they must make a joint election whether they should include their nontaxable combat pay in income. c) All taxpayers are required to include nontaxable combat pay in earned income. d) Taxpayers are not allowed to include nontaxable combat pay in earned income. Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 4 16. Mason’s client base is primarily clients who are eligible for the EIC. Recently he was audited by the IRS for due diligence. Mason was found to have 48 due diligence violations related to the EIC and 19 violations related to the incorrect use of the head of household filing status. There were 21 tax returns with due diligence violations. What is the amount of the potential due diligence fine? a) $11,340 b) $36,180 c) $25,920 d) $10,260 17. Cassandra and her husband live in a community property state. She and her husband have three children, ages 7, 9, and 11. Cassandra and her husband separated on June 29th of the current tax year. She stayed in the house and has custody of the children. Cassandra receives $1,000 per month from workers’ compensation, for which she paid the premiums. Her husband has a full-time job, of which $26,000 is considered her income subject to community property rules. What is the amount of Cassandra’s allowable EIC if she and her husband file a separate return? a) $5,294 b) $ 0 c) $6,303 d) $5,411 18. Fred prepared his tax return last year. This year, Fred decided to have his tax return prepared by a professional. During the interview process, Fred’s tax preparer realized Fred needs to repay the education credit he took for his son last year. For which of the following reasons would a taxpayer be required to repay an education credit? a) The taxpayer received a refund of personal living expenses. b) The taxpayer received tax-free educational assistance for an expense used to calculate a higher education credit on their return. c) The taxpayer received a refund of transportation expenses. d) The taxpayer received a gift from a relative to help pay lodging expenses. 19. Amy and Hobbes are married and file a joint return. Their three children are 7, 9, and 18 years old. Their modified AGI is $58,000, and their tax liability on Form 1040, line 16 is $3,647. They have no other tax credits for the tax year. What is the amount of their child tax credit/credit for other dependents on Form 1040, line 19? a) $6,000 b) $4,000 c) $3,647 d) $4,500 20. Tony purchased a house in 2020 and received a mortgage credit certificate (MCC) issued by the local government. The original amount of the mortgage is $150,000, the certified indebtedness amount on the MCC is $100,000, and the mortgage interest paid during the year is $6,500. Determine the interest paid on the certified indebtedness amount. a) $9,750 b) $6,500 c) $4,333 d) $2,167 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 5 21. Bob had two jobs in 2020, earning a total of $139,850 in taxable wages. He paid Social Security taxes of $7,492.70 from his primary job and $1,178.00 from his second job. What is the amount, if any, of Bob’s excess SST? a) $1,178.00 b) $ 0.00 c) $ 133.30 d) $ 430.90 22. Ellen and her husband separated in June, are still legally married and will be filing separate returns. She wants to be able to claim the child and dependent care credit for her 6-year-old son, who lives with her. All of the following are conditions that Ellen must meet to be considered unmarried and eligible to claim the child and dependent care credit except: a) Ellen did not live with her husband during the last six months of the year. b) Ellen’s home was the home of the qualifying individual for more than half the year. c) Ellen’s husband must sign a release to allow her to claim the dependent care credit. d) Ellen paid more than half the cost of keeping up her home for the year. 23. Judy’s expenses for her third year at a university include the following: $3,000 for tuition, $500 for books, $2,500 for her dormitory room, and $2,200 for food. What amount of the expenses will qualify for the American Opportunity Credit? a) $6,000 b) $3,000 c) $8,200 d) $3,500 24. In 2020, Jason and Ester, a married couple, were employed all year. They each worked for only one employer for the entire year. Jason paid Social Security taxes in the amount of $4,373, and Ester paid $8,588.80. What is the amount of their excess SST which they can claim as a credit on Schedule 3 (Form 1040), line 10? a) $ 50.60 b) $4,423.60 c) $ 0.00 d) $ 349.00 25. Tom and Darla are married and have three children, ages 5, 11, and 18 years old. Their modified AGI is $68,000, and their tax liability on Form 1040, line 16 is $4,847. They claim $1,200 of education credits on Schedule 3 (Form 1040), line 3. What is the amount of their child tax credit/credit for other dependents? a) $2,800 b) $4,500 c) $3,647 d) $3,300 26. Sophia is a single mom with a 17-year-old daughter whom she claims as a dependent on her tax return. Sophia’s AGI is $35,000, and her tax liability is $1,724. She has no other nonrefundable credits. What is the amount of her child tax credit/credit for other dependents? a) $ 0 b) $1,724 c) $ 500 d) $2,000 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 6 27. Mia and Noah have four children, ages one month, 13, 15, and 19. Their AGI is $96,500, and their tax liability is $8,267. During the tax year, their 19-year-old son decided to postpone going to college and got a job instead. He earned wages of $7,400 and provided most of his support. They have no other nonrefundable tax credits. What is the amount of their child tax credit/credit for other dependents? a) $8,000 b) $6,000 c) $6,500 d) $4,000 28. John has two sons. David is a 3-year-old, and Tommy turned 13 on May 1st in 2020. John paid a local daycare provider $12,000 for David from January through December and $3,000 for Tommy from January through June. John’s earned income is 60,000. What is the maximum amount of qualified expenses John can use to figure the child and dependent care credit? a) $15,000 b) $ 5,000 c) $ 6,000 d) $ 3,000 29. Aria and Logan Johnson have two children, Sara, age 2, and Mia, age 4. Logan is an engineer and Aria is a homemaker. The Johnsons paid $8,800 for Sara and Mia to attend daycare during the year. Logan received dependent care benefits from his employer of $2,000. Their AGI is $65,000, and their tax liability is $4,487. How much of the childcare expenses can be used to claim the child and dependent care credit? a) $6,800 b) $4,000 c) $6,000 d) $ 0 30. Amy is single and works part-time at a local company. During the year, she paid $3,800 in tuition and fees to enroll in classes at the local community college. This was her second year attending college to work toward her bachelor’s degree. She purchased her course materials from a friend for $300. She has not been convicted of a felony for possessing or distributing a controlled substance as of the end of 2020. Her modified adjusted gross income (MAGI) is $38,000. Assuming she otherwise qualifies, which education credit best benefits Amy and what amount of credit is she entitled to claim? a) Lifetime Learning Credit: $820 b) Lifetime Learning Credit: $760 c) American Opportunity Credit: $2,450 d) American Opportunity Credit: $2,500 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 7 31. Alicia’s 18-year-old son is a freshman at a local college. She paid the required tuition and fees for her son and received a Form 1098-T. She is wondering whether she is eligible to claim an education credit on her 2020 tax return. Which of the following statements is correct? a) The Lifetime Learning Credit offers a higher maximum credit amount than the American Opportunity Credit. b) The phase-out amount based on the taxpayer’s AGI for the Lifetime Learning Credit is greater than for the American Opportunity Credit. c) Both the American Opportunity Credit and the Lifetime Learning Credit are nonrefundable tax credits. d) If the student has been convicted of a felony for possessing or distributing a controlled substance as of the end of 2020, he or she is not eligible for the American Opportunity Credit. 32. Shelly, single, is a full-time elementary school teacher. She is interested in learning the basics of information technology to improve her current job skills and enrolled in a couple of IT courses at the local college. Shelly paid $3,500 for tuition and fees and $300 for textbooks from a local bookstore (not required by the institution). She received a Form 1098-T. Her AGI is $56,000 and her tax liability on Form 1040, line 16 is $5,500. Shelly has never been convicted of a felony for possessing or distributing a controlled substance. Which education credit is Shelly eligible to claim and for what amount? a) American Opportunity Credit; $2,375 b) American Opportunity Credit; $2,450 c) Lifetime Learning Credit; $700 d) Lifetime Learning Credit; $760 33. Joshua is a 25-year-old graduate school student who paid $15,000 in tuition and fees to an eligible educational institution in 2020. He received a Form 1098-T. Joshua works part-time at a local firm and had wages of $22,500. He has no other income or nonrefundable tax credits. His tax liability on Form 1040, line 16 is $1,045. What is the amount of his education credit for 2020? a) $3,000 b) $2,000 c) $1,045 d) $2,500 34. The Browns are both managers and file jointly with a modified AGI of $166,000. Their dependent son, Gary, is a full-time college student. During tax year 2020, they paid $10,500 in qualifying education expenses for Gary’s second year of college. On their tax return, how will the Browns claim the tax benefit for Gary’s education expenses? a) They are not eligible to claim a tax benefit for the education expenses. b) They can claim the Lifetime Learning Credit. c) They can claim the American Opportunity Credit. d) They can claim an adjustment to income. 35. Danny works as a web designer at a local company. In 2020, to improve his job skills, Danny enrolled in a course at a local college to learn how to upgrade computer hardware. He paid $3,000 in tuition and fees. His AGI is $45,000, and he has no other nonrefundable credits. Is he allowed any tax benefit for his education expenses and, if so, on which Form 1040 schedule(s)? a) No; these expenses are not eligible for any tax benefits. b) Yes; on Schedule 3 (Form 1040) and Form 1040, as an American Opportunity Credit and on Schedule 3 (Form 1040) as a Lifetime Learning Credit c) Yes; on Schedule 3 (Form 1040) and Form 1040, as an American Opportunity Credit d) Yes; on Schedule 3 (Form 1040) as a Lifetime Learning Credit Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 8 36. Geoffrey was age 23 on 12/31/2020. He was a full-time student and completed his 4th year of college in May of 2020. His Spring semester was paid for in December of the prior year and credit on those expenses has been claimed on the prior year’s return. After graduation, he was unable to find employment, so he moved back in with his parents and entered graduate school in the fall of 2020. Geoffrey’s parents are claiming him as a dependent on their tax return, and they had an AGI of $57,000. Geoffrey received a 1098-T from the college with Box 9 checked (graduate student). Which of the following statements is correct? a) Geoffrey’s parents will claim him as a dependent and are eligible to take a Lifetime Learning Credit. b) Geoffrey’s parents will claim him as a dependent and are eligible to take an American Opportunity Credit. c) Geoffrey’s parents will claim him as a dependent and may take an American Opportunity Credit for the expenses for Geoffrey’s 4th year in college and take a Lifetime Learning Credit for Geoffrey’s graduate school expenses in 2020. d) Geoffrey’s parents will claim him as a dependent but are ineligible to claim either an American Opportunity Credit or Lifetime Learning Credit for 2020. 37. The Greens are filing jointly with modified AGI of $86,000. During the tax year, they paid $9,500 in qualified education expense for their son, Eric’s, first year of college. They have no education expenses for themselves. What would be the Green’s maximum allowable education credit? a) $ 0 b) $1,500 c) $1,900 d) $2,500 38. The Grays’ son, Joel, graduated and received his bachelor’s degree in June 2020. In 2020, Joel turned age 24 and provided more than half of his support. The Grays file jointly with modified AGI of $116,000. Joel has modified AGI of $26,000. Who can claim a tax credit for education expenses paid by Joel during 2020? a) Only the Grays can claim the Lifetime Learning Credit or the American Opportunity Credit (if Joel qualifies), whichever is more beneficial. b) Only Joel can claim the Lifetime Learning Credit or the American Opportunity Credit (if he qualifies), whichever is more beneficial. c) Either the Grays or Joel (but not both) can claim an education tax credit. d) Neither the Grays nor Joel can claim an education tax credit. 39. Linda paid her tuition and later received a Pell grant (tax-free educational assistance) covering part of the tuition. All of the following are true except: a) The Pell grant should reduce the amount of qualified expenses for the education credit. b) If the Pell grant was received after Linda claimed the education credit on her return, she may have to repay all or part of the credit. c) If Linda claimed an education credit and received a reimbursement for that same year; Linda must refigure the credit for a previous year and report the difference as an additional tax on line 16 (Form 1040). d) Linda does not need to adjust her education credit by the Pell grant since it was received after she filed her return. Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 9 40. Madison, 18, is in her first year of college. She lives with her parents and attends a local college. Madison’s parents continue to claim her as a dependent since she is a full-time student and under age 24. Madison paid the following amount for qualified tuition in 2020:  $2,100 in March for the summer semester (2020) Her parents paid the following amounts for qualified tuition in 2020:  $3,500 in June for the fall semester (2020)  $3,300 in December for the spring semester (2021) What amount of qualified tuition will Madison be allowed to use in calculating her 2020 American Opportunity Credit on her tax return? a) $ 0 b) $2,100 c) $5,600 d) $8,900 41. If used to pay tuition at an eligible educational institution, which of the following would reduce the amount of qualified education expenses a taxpayer could use to claim education credit on his tax return? a) A Pell grant b) A student loan c) A gift from a friend d) A family inheritance 42. Judi and May adopted a child in 2020. Their adoption expenses include $3,500 of court fees, $6,880 of traveling fees, and $3,250 of attorney fees. The child is not a special needs child. They also received a $2,250 reimbursement from their employer for adopting the child. Their modified AGI is $200,500. What is the amount of their adoption credit in 2020? a) $13,630 b) $11,380 c) $14,300 d) $12,050 43. Junie Jones, a tax preparer, explains to Scott that the foreign income taxes he paid may be claimed in which of the following ways on his 2020 tax return? a) Only reported on Schedule 3 (Form 1040), line 1 b) Only reported on Schedule A as “Other taxes” if he can itemize deductions c) Both on Schedule 3 (Form 1040), line 1 and on Schedule A as “Other taxes” if he itemizes deductions d) Either on Schedule 3 (Form 1040), line 1 or on Schedule A as “Other taxes” if he itemizes deductions Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 10 44. Zoey and Keith have four children, ages 12, 15, 17, and 19. Their AGI is $196,500, and their tax liability is $26,267. During the tax year, their 19-year-old son decided to postpone going to college and got a job instead. He earned wages of $9,800 and provided most of his support. What is the amount of their credit for other dependents? a) $2,000 b) $1,000 c) $1,500 d) $3,000 45. The Tax Cuts and Jobs Act suspended AGI phase-outs for which of the following? a) Exemption b) Child Tax Credit c) Education Credits d) Tuition and fees deduction 46. Elijah receives dependent care benefits from his employer for his son’s daycare expenses. Which circumstance would make the benefits taxable? a) When the taxpayer’s payments exceed the allowable amount on which the credit can be calculated for dependent care. b) If the taxpayer’s income is too high. c) When the taxpayer’s dependent care benefits are less than the amount of employer-provided assistance. d) Once all the benefits have been used. 47. Tom is a retired railroad worker and receives both Tier I and Tier II Railroad Retirement benefits. His Tier I Railroad Retirement benefits are reported on Form RRB-1099. Where should Tom report his Tier I benefit? a) They are not taxable. b) Form 1040, line 4a and b. c) Schedule 1 (Form 1040), line 8 d) Form 1040, line 6a and 6b 48. Tom’s Tier II Railroad Retirement benefits are reported on Form RRB-1099-R. Tom’s tax preparer must know all the following to calculate the taxable amount of Tier II Railroad Retirement benefits using the Simplified Method, except: a) The age at which the taxpayer started drawing retirement b) The number of payments received in the year c) How much has been recovered tax-free since 1986 d) The current age of the taxpayer Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 11 49. Steve and Naomi are both age 41. Steve decided to quit his job and received a total distribution from his 401(k). Steve received the distribution on 2/28/2020. He used $4,000 to pay off his car loan and rolled over the remaining distribution to the 401(k) plan at his new job on April 15, 2020. Steve did not add the withheld federal and state tax withholding to the remaining distribution that was rolled over. Steve’s Form 1099-R is shown below. How much of the distribution is taxable to Steve?  CORRECTED (if checked) PAYER’S name, street address, city or town, state or province, country and ZIP or foreign postal code, and phone no. Sunco Retirement Fund 9847 Gaskins Road Your City, Your State – Your ZIP 1. Gross distribution $ 79,934.00 OMB No. 20XX Form 1099-R Distributions from pensions, annuities, retirement or Profit-sharing plans, IRAs, insurance contracts, etc. 2a.Taxable amount $ 79,934.00 2b.Taxable amount Total not determined distribution COPY B Report this income on your federal income tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return. This information is being furnished to the Internal Revenue Service. Payer’s TIN 54- Recipient’s TIN 3. Capital gain (included in box 2a) $ 4.Federal income tax withheld $ 15,986.00 Recipient’s name Steve Rudolph Street address (including apt. no.) 9811 Macon Street City or town, state or province, country, and ZIP or foreign postal code Your City, Your State – Your ZIP 5.Employee contributions /Designated Roth contributions or insurance premiums $ 6. Net unrealized appreciation in employer’s securities $ 7. Distribution Code(s) 1 IRA/SEP/ SIMPLE  8. Other % 9a. Your percentage of total distribution % 9b Total employee contribution $ 110,500 10. Amount allocable to IRR within 5 years $ 11. 1st year of design. FACTA filing requirement Roth Cont.  12. State tax withheld $ 3,996.00 $ 13. State/Payer’s state number 14. State distribution $ 79,934.00 $ Account number (see instructions) 15. Local income tax withheld $ $ 16. Name of locality 17. Local distribution $ $ Form 1099-R a) $79,934 b) $75,934 c) $ 4,000 d) $23,982 50. Hank has contributed more than the maximum allowable amount to his IRA. What is the penalty for excess contributions to an IRA? a) 6% on the account balance in the year the excess is deposited b) 6% per year on the excess amount for as long as the excess remains in the account c) 6% on the excess amount in the year the excess is deposited d) 6% per year on the account balance for as long as the excess remains in the account 51. Jack, 60, retired in March on disability. Before retirement, his employer paid 100% of his disability insurance premiums and included the amount in his wages. Jack received a total of $5,800 disability benefits this year. How much of Jack’s disability payments are taxable? a) $5,800 b) $2,900 c) $1,450 d) $ 0 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 12 52. Chuck is 65 years old and started receiving his pension in May 2020. Chuck contributed to his pension plan (after-tax dollars) over the years of his employment. Chuck wants to use the Simplified Method to determine his tax-free portion of the pension. Which of the following pension or annuity plans would not allow him to use the Simplified Method? a) 403(b) b) Private annuity c) Qualified employee plan d) Qualified employee annuity 53. Fred has an IRA. He lost his job in February 2020. Although Fred found another job in August, he did not have enough savings to cover expenses for his period of unemployment. Fred took a distribution of $8,000 from his IRA and used it to pay household expenses. Since federal taxes of 20% were withheld, he received a net amount of $6,400. Fred is 58 years old, earned wages of $25,000 for the year, and files as Married Filing Jointly. His wife Joan is 66. What will Fred’s taxable income be for 2020? a) $8,200 b) $6,600 c) $6,900 d) $5,300 54. Doris was 72 on May 15, 2020. The bank which held her IRA account had indicated that she would be required to take a Required Minimum Distribution (RMD) of $3,000. She took her first RMD on June 30, 2022. Assume that her federal tax rate is 22%. What amount of federal taxes must she pay on her $3,000 withdrawal? a) $ 660 b) $2,160 c) $1,500 d) $ 960 55. Steve, age 55, retired last year on disability due to back problems. Before retirement, his employer paid 75% of his disability insurance premiums. Last year, Steve received $1,350 per month from disability (for 12 months). How much of Steve’s disability payments are reported as taxable income? a) $12,150 b) $16,200 c) $ 4,050 d) $ 0 56. Miguel is 71 years old and his wife, Carmelita, is 57 years old. Miguel is retired and receives Social Security in the amount of $19,260 per year. Carmelita withdrew $7,500 from her IRA to pay for a new car. Miguel and Carmelita are filing a joint return and use the standard deduction; they have no other income to report. What is their tax liability? a) $ 0 b) $196 c) $750 d) $946 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 13 57. Abner was 72 on April 20, 2020. The bank which held his IRA account had indicated that he would be required to take an (RMD) of $4,500. Abner failed to take his RMD in a timely manner because of a reasonable error. He took his RMD on June 30, 2022. Assume that his federal tax rate is 15%. What amount of federal taxes must he pay on her $4,500 withdrawal? a) $ 675 b) $2,925 c) $2,250 d) $1,125 58. Chris divorced Ken in November 2020. Which of the following items may be considered alimony for Ken? a) Monthly cash payments b) Child support. c) Chris allowing Ken to use tools to maintain property. d) The car Ken received as part of the divorce settlement. 59. Kevin operates a floral retail store as a sole proprietorship. During tax year 2020, he had a net profit of $150,000. What is the correct amount of his self-employment tax? a) $21,194 b) $22,950 c) $20,497 d) $21,093 60. Justin, a teacher, spent a total of $500 on classroom supplies for his third-grade students. He asks his tax preparer if he is able to deduct any of these expenses. How much is he able to deduct, if any, and where does he report this amount on his tax return? a) The money Justin has spent out-of-pocket is not deductible. b) Justin can report all his expenses as an adjustment to income on Schedule 1 (Form 1040), line 10. c) Justin can deduct $250 as an adjustment to income on Schedule 1 (Form 1040), line 10. The remainder can be reported on Schedule A as an unreimbursed employee expense. d) Justin can report $250 as an adjustment to income on Schedule 1 (Form 1040), line 10 and the remaining $250 is not deductible. 61. Grayson works for a small business. His employer established a SIMPLE IRA for each employee’s retirement. All the following statements regarding the SIMPLE plan are correct, except: a) An employer with 100 or fewer employees who earned $5,000 or more is eligible to set up a SIMPLE plan for the employees. b) SIMPLE plans include SIMPLE IRA and SIMPLE 401(k). c) A SIMPLE plan is a written agreement between the taxpayer and the employer that allows the taxpayer to choose to reduce his compensation by a certain percentage each pay period. d) All plan participants must be 21 years of age or older. Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 14 62. Steve (age 55) and May (age 48) are married and will file a joint return. Steve is an elementary school teacher, and May is unemployed. During the year, Steve contributed $7,000 to his traditional IRA and May contributed $6,000 to her traditional IRA. Steve had wages of $10,500 for the year. Steve also received $8,500 in unemployment compensation during the year. They received $1,580 in interest income and $3,560 in dividend income. What would the couple’s IRA deduction be for the tax year? a) $13,000 b) $12,000 c) $ 7,000 d) $10,500 63. Diane, single, works for a company that does not have a retirement plan. Diane is considering making contributions to a Roth IRA. Which of the following is a condition for making contributions to a Roth IRA? a) The taxpayer must have earned taxable income during the year and has not reached age 72 by the end of the year. b) The taxpayer must have unearned income and be under the age of 72 by the end of the year. c) The taxpayer must have earned taxable income during the year and not reach age 59-½ by the end of the year. d) The taxpayer must have earned taxable income during the year, and the modified AGI must be less than $139,000. 64. Jodie, age 52, filed her tax return using the Married Filing Separately status and lived with her husband during the year. Her modified AGI is $68,000. She is considering making a contribution to her Roth IRA. What amount is Jodie allowed to contribute to her Roth IRA for the tax year? a) $3,000 b) $6,000 c) $ 0 d) $7,000 65. Jack (age 45) and Jill (age 42) are married, and their filing status is Married Filing Jointly. Jack is an engineer, and Jill is a homemaker. During 2020, Jack had wages of $115,000 and was covered by a retirement plan at work. They also had interest income of $2,850 and dividend income of $8,580. Jack contributed $6,000 to his traditional IRA account. Jill contributed $3,500 to her traditional account and $2,500 to her Roth IRA account. What amount would their IRA deduction be for the year? a) $11,000 b) $ 9,000 c) $ 6,000 d) $ 3,500 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 15 66. The Jenkins, a married couple who file Married Filing Jointly, want to set up Traditional IRA accounts. If neither are covered by a retirement plan at work, what is the limit of their modified AGI in order for the Jenkins to be able to contribute to a Traditional IRA? a) Less than $124,000 b) Limits do not apply c) Less than $206,000 d) Less than $65,000 67. Randy, age 42, wants to open an IRA for retirement. Randy meets the eligibility requirements necessary to make an IRA contribution. Which of the following statements regarding Randy’s IRA contributions is correct? a) Randy can only make a traditional IRA contribution. b) Randy can only make a Roth IRA contribution. c) If Randy chooses to make a contribution to a traditional IRA, his contribution will be nondeductible due to his age. d) Randy can contribute to a traditional or Roth IRA; however, his contribution could be limited. 68. In June 2020, Rick moved from Norfolk, Virginia, where he was stationed in the military, to Los Angeles, California, his new base. He drove his car from Norfolk, Virginia to Los Angeles, California. The total mileage is 3,250 miles. He paid $180 for parking and tolls, $680 for lodging, and $300 for meals during the trip. What amount of the moving expenses can Rick deduct as an adjustment to income on his 2019 tax return if he chooses to use the standard mileage rate? a) $1,712.50 b) $1,412.50 c) $1,562.50 d) $1,232.50 69. Jake is a self-employed carpenter. Last year his net self-employment income was $25,200. How much would Jake’s self-employment tax be on line 4 of Schedule 2 (Form 1040)? a) $1,781 b) $3,561 c) $1,928 d) $3,856 70. Sylvia graduated from college last year and started repaying her student loans. She received a statement from the bank showing she paid $2,750 in interest on her student loans for the year. Her total income before adjustments is $38,500, and she meets all requirements to be able to deduct the interest. How much, if any, will Sylvia be allowed to deduct as an adjustment to her income? a) $ 0 b) $1,375 c) $2,500 d) $2,750 Copyright © 2021, The Income Tax School, Inc. – All Rights Reserved FE - 16 71. Joseph cashed in a CD (certificate of deposit) early because he needed money quickly to buy a new car. Unfortunately, the bank charged him an early withdrawal penalty of 5% which amounted to $250. Can Joseph deduct the penalty on his taxes and, if so, how much can be deducted? a) No, Joseph will not be allowed to deduct any of the early withdrawal penalty. b) Yes, but Joseph can only deduct the early withdrawal penalty if he uses Schedule A and itemizes his deductions. c) Yes, but only half of the early withdrawal penalty may be deducted. d) Yes, Joseph can deduct $250 on line 17 of Schedule 1 (Form 1040) as an adjustment to income. 72. Avery and Jenna divorced in December 2017. Avery was ordered by the court to pay Jenna $750 each month for child support and $250 each month in alimony. He made the payments for the entire year. How much of the payments will Avery be able to claim as a deduction when he files his 2020 tax return? a) $ 3,000 b) $ 9,000 c) $12,000 d) $ 0 73. Darren and Amy are married and filing separate returns for 2020. During 2020, Darren paid $3,500 in interest on his student loan. His modified AGI is $61,580. How much of the student loan interest can Darren deduct as an adjustment to income on his 2020 tax return? a) $3,500 b) $1,750 c) $ 0 d) $2,500 74. In 2020, Charlotte had to relocate to another city as required by her employer. The new home is 800 miles away from her previous home. She paid $5,000 for moving costs and drove her car 800 miles to her new home. She paid $150 for one-night lodging on the trip and $50 for meals during the trip. She also received a $2,000 reimbursement from her employer. How much is Charlotte’s moving expense adjustment? a) $5,294 b) $3,294 c) $ 0 d) $3,344