EA EXAM PART 1 (IRS SEE) QUESTIONS WITH COMPLETE ANSWERS

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 - ANS~ 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 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. - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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. - ANS~ 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. - ANS~ 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 - ANS~ 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% - ANS~ 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. - ANS~ 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. - ANS~ 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. - ANS~ 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 - ANS~ 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. C) The current social security and Medicare tax rate is used. D) All of the above. - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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). 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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. - ANS~ C) Short-term capital loss reduces the basis of the investment. A capital gain (loss) does not impact the basis of an investment. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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) 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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). 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ C) Contributions to Leah's Roth IRA Contributions to a Roth IRA are non-deductible and cannot be used as an adjustment to income. Which of the following is NOT eligible as an investment within an IRA? A) Bank CD B) Artwork C) Mutual Fund D) Annuity - ANS~ 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. 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 - ANS~ 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 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 - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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 - ANS~ 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. 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. - ANS~ 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. 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. - ANS~ 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. 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 - ANS~ 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 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 - ANS~ 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. 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 - ANS~ 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%. 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 - ANS~ 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). 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 - ANS~ 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). 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. - ANS~ 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. 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