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All of the following types of accounts are permitted for Individual Retirement Arrangements except:
A.
Simplified Employee Pension accounts
B.
An individual retirement annuity
C.
An employer and employee association trust account
D.
Joint IRA accounts for married couples.
Joint IRAs are not allowed.Correct Answer: D
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Connie's mother, Denise, died during January 2010. Denise had lived in Switzerland since 1975 after transferring most of her property to Connie. Denise was the beneficiary of the estate of her brother, who died in 2009. Which of the following tax credits are allowed on the Estate Tax Return (Form 706)?
A.
Credit for foreign death taxes
B.
Credit for Federal gift taxes (pre-1977)
C.
Credit for tax on prior transfers
D.
All of the above
The following credits can reduce estate tax: the unified credit, a credit for foreign death taxes paid, and the credit for tax on prior transfers (if estate tax is paid on property transferred to the estate from a person who died within 10 years prior or 2 years after the decedent).
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Dave owns several apartment buildings in San Francisco that are managed by his uncle's real estate company. The apartment buildings produced a loss $40,000 for 2010. Dave earned $80,000 in wages for the year. His wife earned $20,000 from a part-time job. They had no other income. How much of the rental loss is deductible on their joint income tax return for 2010?
A.
$ 0
B.
$25,000
C.
$40,000
D.
None of the above
The rental real estate exception applies to those with active participation. The question implies that Dave's uncle, not Dave manages the property. No other clues are available regarding Dave's role in actively managing the property. Dave's rental activity is passive because his uncle manages the apartment buildings. Passive activity losses can only offset passive income. But Dave and his wife don't have any other passive activities with income. Therefore, none of the rental loss is deductible for 2010. Active participation does not require regular, continuous, and substantial involvement in activities. Rather, it merely requires that the taxpayer participate in making management decisions in a significant and bona fide way-Madler v. Commissioner, T.C. Memo 1998-112 (Mar. 18, 1998).Practice Tip: Use of a management company will usually derail any argument that the taxpayer actively participates. Therefore, if a taxpayer wants to tax advantage of this exception, a management company should be used only for ministerial functions (such as collecting rents) and all decision making should be done by the taxpayer.
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In 2003 Mackenzie purchased 200 shares of Rattlers Inc. stock for $100,000. Rattlers Inc. met all the requirements of Section 1244 (small business) stock. She purchased it directly from the company. In 2011 she sold one-half of her stock for $45,000. The loss from the sale of the stock will be reported on her joint return as:
A.
Long-term loss.
B.
Ordinary loss.
C.
Short-term loss.
D.
Ordinary loss subject to limitations.
Certain C corporations with gross assets under $50 million may qualify under section 1244 as qualified small business stock. If so, any gain on the sale of stock is a capital gain if the stock is a capital asset. A taxpayer may deduct as an ordinary loss, rather than as a capital loss, the loss on the sale, trade, or worthlessness of section 1244 stock. The deduction as ordinary loss under 1244 is limited to $50,000/yr ($100,000 /yr MFJ) each year. It is not stated whether or not Mackenzie has other losses on 1244 stock; but it is important to understand that ther are limitations to the deduction.
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Kirk passed away in 2011. At his death he had a traditional IRA with a basis of 25,000 and a FMV of $50,000. Kirk had taken no distributions and all the contributions he made were non-deductible. As the spousal beneficiary, which of the following applies to his wife Jenny?
A.
Kirk's $25,000 basis in the IRA may be treated as basis to Jenny upon Kirk's death
B.
When Jenny receives the distribution she must roll it over to her own traditional IRA or pay tax on all income earned in the account
C.
Jenny must begin receiving periodic distributions by December 31 of the fifth year following Kirk's death
D.
Jenny must pay a 10% penalty on the funds in the IRA if she receives an immediate distribution after Kirk's death
The basis in a traditional IRA, along with the untaxed income in respect of a decedent (IRD) transfers to the beneficiary. A surviving spouse can treat the IRA as her own, or begin taking distributions from the IRA according to the rules established for beneficiaries. The spouse of the decedent is the only beneficiary that can roll an inherited IRA into their own traditional IRA. Distributions due to death are not subject to a 10% penalty.
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Ray sold his main home in 2010 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2009 and claimed $500 depreciation. What is the taxable amount of Ray's gain, and where must he report it?
A.
$500, Form 4797
B.
$500, Schedule D
C.
$30,000 Form 4797
D.
$30,000 Schedule D
Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain, exclusion, and the taxable gain of $500 on Schedule D (Form 1040).
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Even if a request to pay by installment is granted, the taxpayer is still subject to _________?
A.
Interest
B.
Late payment penalty
C.
Both of the above
D.
None of the above
The taxpayer will be charged interest and late payment penalties on any tax not paid by its due date, even if a request to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full. To limit interest and penalty charges, file the return on time and pay as much of the tax as possible with the return (or notice). IRS Form 9465.
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Herman gave Gomez a creepy, old rental house. Both of their families were creepy and liked it. Herman had purchased the property in 1995 for $60,000 and has taken $8,000 in depreciation. Herman's adjusted basis was $52,000. The fair market value of the rental house on the day of transfer from Herman to Gomez was $135,000. If Gomez sells the house at a gain, his basis in the property will be:
A.
$52,000
B.
$60,000
C.
$127,000
D.
$135,000
The FMV exceeds the donor's basis at the time the gift is made so Gomez's basis is the donor's adjusted basis at the time the he received the gift, $52,000.
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John Wesley is an ordained minister at New Wave Church, which is FICA exempt. He received a salary of $20,000 in 2010 that was reported on a W-2. He also received a $12,000 housing allowance. His housing costs for the year are $14,000. What is Rev. Wesley's self-employment income?
A.
$20,000
B.
$32,000
C.
$34,000
D.
$28,000
A member of the clergy is self-employed for self-employment tax purposes. Self-employment tax is based upon net earnings from self-employment. If a church is FICA exempt, the W-2 wages are considered income from self-employment. However, the rental value of the home or the housing allowance must be included as earnings for self-employment purposes (on Schedule SE) when applicable. The rental value of a home (including utilities) or any designated housing allowance is not income for federal tax purposes. The exclusion cannot be more than the reasonable pay for services rendered. Exclude any allowance designated for utility costs, up to the actual utility cost. The home or allowance must be compensation for services rendered as an ordained, licensed, or commissioned minister.Correct Answer: B
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Moe, Larry, Curly, and Martha provide support for the following individuals in 2010. Which of them is not eligible for a filing status as Head of Household?
A.
Moe, whose mother lives with him and whom he claims as a dependent.
B.
Larry, whose married adopted son lives with him and whom he claims as a dependent.
C.
Curly, whose foster daughter lives with him and whom he claims as a dependent.
D.
Martha, who provided for all the support of her aunt who lives in a nursing home.
To qualify for head of household, a person must be unmarried or considered unmarried (file a separate return and spouse did not live in home the last 6 months of the tax year) on the last day of the year and pay more than half the cost of keeping up a home for the year. A qualifying person must live with the taxpayer over half the year, with the exception of a mother or father. A qualifying person is a qualifying child or qualifying relative for whom they can claim an exemption. The aunt did not meet the residency test, even though she is a qualifying relative for purposes of the dependency exemption.
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Which of the following is not real property?
A.
Undeveloped land.
B.
Buildings.
C.
Appliances.
D.
Fixtures.
Real property is land and anything built on it (i.e., buildings) on or attached to it (i.e., fixtures). When a taxpayer buys real property, certain fees and other expenses become part of the cost basis in the property and are subject to the capitalization rules. IRS Pub. 551.
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Tiki is a nonresident alien. Which of the following is not a requirement for Tiki to elect taxation as a U.S. resident for the entire tax year?
A.
He must be married.
B.
His spouse must be a U.S. citizen or resident alien on the last day of the tax year.
C.
He must file a joint return for the year of the election using Form 1040, 1040A, or 1040EZ.
D.
He must not include worldwide income on his return.
The taxpayer must include worldwide income for the whole year on the return, subjecting the entire amount to taxation under U.S. tax laws.
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James is calculating his miscellaneous deductions for the tax year. Which of the following is not reduced by the 2% limitation on miscellaneous deductions?
A.
Gambling losses up to the amount of gambling winnings
B.
Investment manager fees
C.
James' new work clothes because he likes to look good
D.
None of the above
A taxpayer may deduct the following items as miscellaneous itemized deductions, not subject to the 2% limit:
- Amortizable premium on taxable bonds.
- Casualty and theft losses from income-producing property.
- Federal estate tax on income in respect of a decedent.
- Gambling losses up to the amount of gambling winnings.
- Impairment-related work expenses of persons with disabilities.
- Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
- Losses from Ponzi-type investment schemes.
- Repayments of more than $3,000 under a claim of right.
- Unrecovered investment in an annuity.Correct Answer: A
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Which of the following entities are required to file Form 709, United States Gift Tax Return?
A.
An individual
B.
An estate or trust
C.
A corporation
D.
All of the above
Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.
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How many months does a taxpayer have to complete making installment payments?
A.
60 months
B.
72 months
C.
90 months
D.
120 months
Generally, the taxpayer can have up to 72 months to pay under an installment agreement. In certain circumstances, the taxpayer may be granted a longer period over which to pay or an agreement can be approved for an amount that is less than the amount of tax owed. IRS Form 9465.Correct Answer: B
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The first-time homebuyer's credit must be repaid if the main home is _________?
A.
Sold
B.
Destroyed
C.
Condemned
D.
All of the above
Generally, a taxpayer must repay the credit if, during the 36-month period beginning on the purchase date, the main home is sold (including through foreclosure); entirely converted for home business or rental use; or destroyed, condemned, or disposed of under threat of condemnation. IRS Form 5405.Correct Answer: D
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What type of contribution is excluded from the retirement contribution credit?
A.
Rollover contribution
B.
Enrollment contribution
C.
Tax-exempt contribution
D.
Charitable contribution
A taxpayer may not claim a retirement contribution credit that was a rollover. A rollover is a tax-free movement of assets between retirement plans. IRS Form 8880.
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Terry has a law practice in Denver and provides several types of fringe benefits to his one employee. Which benefit does he report as wages on Form W-2 for the employee?
A.
Health insurance coverage paid by the business.
B.
Amounts paid under a qualified plan for child care services.
C.
The fair market value of less than $175 per month for a space in the parking garage next to the office.
D.
Group-term life insurance premiums for coverage in excess of $50,000.
All fringe benefits listed are non-taxable fringe benefits, with the exception of Premiums paid for group-term life insurance in excess of $50,000. Premiums for benefits that are less than $50,000 are not included in income.Correct Answer: D
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Joey's mother, Jane, is 83 and lived with Joey for all of 2010. He needs to determine if Jane's income is low enough to qualify her as a dependency exemption. Her income in 2010 consisted of $600 of wages, $3,600 of Social Security benefits, $2,200 of municipal bond interest, $1,200 of interest from a corporate bond, $900 of stock dividends, $1,200 of rental income, and $200 of rental expenses. What is the correct gross income that Joey determines for his mother in calculating the dependency exemption?
A.
$7,300
B.
$6,300
C.
$9,700
D.
$3,900
Gross income is all income in the form of money, property, and services that is not exempt from tax. Social Security benefits (in this example) and municipal bond interest are not taxable and not included in gross income for this test. Gross receipts from rental property are gross income. Do not deduct taxes, repairs, etc., to determine the gross income from rental property.Correct Answer: D
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Warren had investment income of $15,000 in 2010. He paid interest of $12,000 on a loan to purchase 10 acres of land he holds for investment, $6,575 on a personal loan, $2,700 for a cash advance on a credit card to make improvements to his primary residence, and $625 for a loan used to invest in tax-free bonds. How much interest expense does Warren deduct on Schedule A before limitations?
A.
$12,000
B.
$18,575
C.
$14,700
D.
$12,625
Warren may claim a deduction for investment interest paid on money borrowed for investment, up to the amount of his investment income. The loan interest of $625 is not deductible because Warren uses the loan proceeds to purchase tax-free bonds. Investment interest is not deductible when the investment income is tax-free. None of the other items are deductible.Correct Answer: A
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Janet's husband Brad died on March 7, 2011. Brad had no income for 2011 and Janet has not remarried. Their two minor children continue living with Janet. She paid all of the costs for maintaining her home for the year and she paid for all the support of Brad and the children. What filing status results in the lowest tax rate for Janet for tax year 2011?
A.
Qualifying widower with dependent child.
B.
Head of household.
C.
Single.
D.
Married filing jointly.
Because Brad died during the tax year and Janet has not remarried she can use a married filing jointly status, which provides the best of all possible tax rates. For two tax years following the year a spouse dies a taxpayer may file as a Qualifying Widow(er) with dependent child, provided the requirements are met. The tax rates and standard deduction are the same as for married filing joint.Correct Answer: D
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Rick Johnson purchased 100 shares of Andy's Practical Solutions stock for $15,000. Andy's practical solutions is a qualifying small business stock under section 1244. The following year he contributes an additional $5,000, making his total investment in Andy's Practical Solutions $20,000. He then sold all of his shares for $12,000. What is the amount and character of loss that Rick can deduct on his return for the year of sale?
A.
$8,000 ordinary loss
B.
$8,000 capital loss
C.
$3,000 capital loss
D.
$6,000 ordinary loss and $2,000 capital loss
If you add additional capital to a qualified section 1244 small business the additional capital is added to the basis of the original stock. However, the additional capital cannot be treated as section 1244 stock. Therefore any gain recognized on the sale from the additional capital will be treated as a capital gain and not as ordinary income.Rick bought 100 shares of section 1244 stock for $15,000. He later made a $5,000 contribution to capital which increased the total basis of the 100 shares to $20,000. Rick then sold the 100 shares for $12,000 and incurred a loss of $8,000. Under these rules he can deduct only $6,000 ($8,000 x $15,000/$20,000) as an ordinary loss. The remaining $2,000 is a capital loss.Correct Answer: D
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Which of the following students might qualify as a qualifying child on their parents tax return?
A.
Manuel, who on Dec 31 is age 20 and enrolled part-time at Rutgers.
B.
Patsy, who on Dec 31 is age 24 and enrolled full-time at Yale
C.
Jules, who on Dec 31 is age 23. She was enrolled full-time for the first 6 months of the year at UCLA, but has since graduated.
D.
Jerimiah, who on Dec 31 is 20 and enrolled full-time at Florida State. Jerimiah provides his own support.
A full-time student must be enrolled at a school for the number of hours or classes that the school considers full-time. The student must have been a full-time student for some part of each of 5 calendar months during the year. The months need not be consecutive. The student must be under age 24 at the end of the year and cannot provide more than half of his own support.Correct Answer: C
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Greg owns a four-unit apartment building in San Jose. He advertises for tenants, negotiates leases with tenants, collects rents, and makes repairs. His cousin, Rafael, owns similar apartment buildings in the same neighborhood as Greg's building. Rafael spends more than half his time developing, constructing, renting, managing, and operating his apartment buildings as well as providing regular cleaning, linen service and maid service for the convenience of the tenants. Does either Greg or Rafael have self-employment income from these activities?
A.
Yes, Greg does.
B.
Yes, Rafael does.
C.
Yes, they are both self-employed.
D.
Neither is self-employed.
Rafael has self-employment income because he provides substantial services that are primarily for the convenience of his tenants such as cleaning, maid service, and linen service. Rafael reports his income and expenses on Schedule C, as income from self-employment and it is subject to self-employment tax. Rental income received for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax when such services are provided for occupants. Services are considered provided to the occupants if the services are for the convenience of the occupants and are not services normally provided with the rental of rooms or space for occupancy only. Maid service, for example, is a service provided for the convenience of occupants, while heat and light, cleaning of stairways, and the collection of trash are not. Greg does not provide these services. Greg has rental income, which he will report on Schedule E along with his expenses.Correct Answer: B
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Over how many years does a taxpayer have to repay the first time home buyer's credit if the home was purchased in 2008?
A.
5 years
B.
10 years
C.
15 years
D.
20 years
For homes purchased in 2008, a taxpayer has 15 years to make repayments. The taxpayer must repay at least 1/15 of the credit with every tax return during the repayment period until the year the credit is paid in full. The taxpayer may choose to repay more than the minimum amount with any tax return, thus the final payment may be less than the required minimum amount. IRS Form 5405. To claim the first-time homebuyer credit for 2011, the taxpayer (or spouse if married) must have been a member of the uniformed services or Foreign Service or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after December 31, 2008, and ending before May 1, 2010.Correct Answer: C
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Warren is itemizing deductions and had an extended illness in 2010. When totaling all of his medical expenses, which of the following does he not include?
A.
His out-of-pocket costs for hospital bills.
B.
Prescription medications he bought while in Mexico, without a prescription.
C.
Eyeglasses and hearing aids.
D.
A wheelchair that his doctor required him to use.
Controlled substances in violation of Federal law are specifically disallowed.Correct Answer: B
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For purposes of the Credit for Qualified Retirement Savings Contributions (Form 8880), a taxpayer must report recent distributions from which of the following sources?
A.
Loans from a qualified employer plan
B.
Tax-exempt distributions
C.
Military requirement plans
D.
Qualified retirement plans
The amount of retirement distributions from a qualified retirement plan as defined in section 4974(c) must be reported by the taxpayer. The following payments are not reported: loans from a qualified employer plan, tax-exempt distributions, and military requirement plan. IRS Form 8880.Correct Answer: D
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Fred incurred some losses from gambling in 2010. Which of the following is the correct way for Fred to report these gambling losses on his tax return?
A.
He deducts his gambling losses from gambling winnings and reports the net loss as negative miscellaneous income.
B.
He deducts his gambling losses up to the amount of his gambling winnings as a miscellaneous itemized deduction not subject to the 2% AGI limit.
C.
He deducts his gambling losses up to the amount of his gambling winnings as a miscellaneous itemized deduction subject to the 2% AGI limit.
D.
His gambling losses are not deductible
Gambling losses are deductible up to the amount of gambling winnings as a miscellaneous itemized deduction not subject to the 2% limit.Correct Answer: B
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John and Rebecca are married, both are employed, and they have three children all under the age of 10. The two youngest children are in preschool and the oldest child is in grade school. They claim their children as dependents and file a joint return. Their adjusted gross income (AGI) is $35,000. John earned $29,000 and Rebecca earned $6,000. During the year, they paid $2,000 each for the two children to attend preschool. They also paid Rebecca's mother $3,000 to watch the oldest child after school. How much of their childcare payments are eligible to calculate the child and dependent care credit on their return?
A.
$3,200
B.
$4,000
C.
$6,000
D.
$7,000
A taxpayer may include up to $6,000 of expenses paid for the care of two or more qualifying persons to figure the child and dependent care credit, provided the amount of expenses claimed does not exceed the gross earnings of the lower earning taxpayer. The expenses paid to Rebecca's mother are acceptable; however, Rebecca must provide her mother's name, SSN, name and address on form 2441. A taxpayer should combine the total qualifying expenses for all qualifying persons. In this case John and Rebecca would combine the amounts paid for the two preschool children of $4,000 and the amount paid for after school care of $3,000. However, the total of $7,000 exceeds the maximum of $6,000 therefore they may only use $6,000 of the child care expenses to calculate the child and dependent care credit. Please note, that if there is only one child the maximum amount of expenses to figure the child and dependent care credit is $3,000.Correct Answer: C
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How many months does a taxpayer have to complete making installment payments?
A.
60 months
B.
72 months
C.
90 months
D.
120 months
Generally, the taxpayer can have up to 72 months to pay under an installment agreement. In certain circumstances, the taxpayer may be granted a longer period over which to pay or an agreement can be approved for an amount that is less than the amount of tax owed. IRS Form 9465.Correct Answer: B
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How many months does a taxpayer have to complete making installment payments?
A.
60 months
B.
72 months
C.
90 months
D.
120 months
Generally, the taxpayer can have up to 72 months to pay under an installment agreement. In certain circumstances, the taxpayer may be granted a longer period over which to pay or an agreement can be approved for an amount that is less than the amount of tax owed. IRS Form 9465.Correct Answer: B
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Carla sold her vacation home in 1999 on the installment method. In order to obtain cash she needed in 2010 she sold the note for $7,500 when it had a remaining balance of $9,000. Her gross profit percentage on the sale was 47.5%. How much profit does Carla report from selling the note?
A.
$2,775
B.
$7,500
C.
$0
D.
$3,225
In an installment sale, the amount reported as income is the gross profit percentage of each payment (excluding interest). Of the $9,000 still owed to Carla, $4,275 is uncollected profit ($9,000 x 47.5%). This leaves her with a basis of $4,725 ($9,000 - $4,275) in the note. Since she received $7,500 for the note, her profit is $2,775 ($7,500 - $4,725).Correct Answer: A
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Nora received the following sources of income for 2010.1. interest from a municipal bond used to construct a sports arena2. employee achievement award3. veterans benefits4. workers compensationWhich of the sources is included in her 2010 gross income?
A.
1
B.
2
C.
2 and 3
D.
3 and 4
Interest on bonds used for private activities is not exempt from income tax. A bond is generally considered a private activity bond if the amount of proceeds used for loans to persons other than government units is more than 5% of the total proceeds or $5 million -- whichever is less.Correct Answer: A
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In 2011 Kane's only capital transactions were securities he sold which resulted in a long term loss of $8,000 and a short term gain of $1,000 . Kane and his wife Lisa separated in November and they decided to file separate returns for 2011. His taxable income was $32,000. What amount of capital loss can he deduct on his 2011 return and what amount can he carry over to 2012?
A.
$1,500 in 2011 and $2,250 carry over to 2012.
B.
$3,000 in 2011 and $4,000 carry over to 2012.
C.
$4,000 in 2011 and $3,000 carry over to 2012.
D.
$1,500 in 2011 and $5,500 carry over to 2012.
A taxpayer with MFS filing status may deduct only $1,500 of capital losses on the current year return but the remaining $5,500 is carried to the next year.Correct Answer: D
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Which of the following is not a requirement for Audrey to claim head of household filing status?
A.
She is unmarried or considered unmarried on the last day of the year.
B.
If her son is a qualifying person, he must have lived with Audrey for 6 months.
C.
If her father is a qualifying person, he must live in her home for at least 6 months.
D.
She must have paid more than half of the cost of keeping up her house for the entire year.
Filing as head of household usually results in lower tax rates than those for single or married filing separately. To qualify, a person must be unmarried or considered unmarried (file a separate return and spouse did not live in home the last 6 months of the tax year) on the last day of the year and pay more than half the cost of keeping up a home for the year. A qualifying person must live with the taxpayer over half the year, with the exception of a mother or father. A qualifying person is a qualifying child or qualifying relative for whom they can claim an exemption. The taxpayer must pay more than half the cost of maintaining the parent's home (or the cost of a facility), if claiming based on a dependent parent.Correct Answer: C
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Lenny, age 52, and Norma, age 49, file a joint return for tax year 2011. 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 2011, which of the following is correct:
A.
Both may make a deductible contribution of $5,000.
B.
Norma may make a deductible contribution of $5,000 and Lenny may make a deductible contribution of $6,000.
C.
Norma may not make any contribution.
D.
Both may make a deductible contribution of $6,000.
For 2011, an individual that is not covered by a retirement plan at work may make an IRA contribution up to $5,000 ($6,000 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 $6,000 ($5,000 + $1,000 catch-up contribution) deductible contribution because he is over age 50 and Norma can make a $5,000 deductible contribution.Correct Answer: B
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Reportable tips include _________?
A.
Cash received from customers
B.
Charges distributed by the employer
C.
Tip-sharing arrangements
D.
All of the above
The taxpayer must report any tip exceeding $20 per month to his or her employer. This includes all tips, including cash tips received from customers, charged tips distributed by the employer, and tips received from other employees under any tip-sharing arrangement. IRS Form 4137.Correct Answer: D
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Jake bought four shares of common stock for $200. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution the common stock had a FMV of $60 per share and preferred stock had a FMV of $40 per share. What is Jake's basis per share of the common and preferred stock after the nontaxable stock dividend?
A.
$60 common; $40 preferred.
B.
$37.50 common; $25 preferred.
C.
$33.33 common; $33.34 preferred.
D.
$50 common; $0 preferred.
Jake must allocate a portion of his $200 basis in the common stock to the preferred stock, according to the relative value on the date of distribution. On the date of distribution, the four shares of common stock are valued at $240 and the two shares of preferred stock are valued at $80, totaling $320. The common represents 75% of the total value and the preferred represents 25%. 75% of $200 is $150 and 25% is $50.To calculate basis per share, divide the basis for each class of stock by the number of shares of that class owned directly after the split.Common $37.50 ($150/4)Preferred $25 ($50/2)Correct Answer: B
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Dean and Cathy are married filing a joint tax return for 2010. They were both 74 years old at the end of that year. Each of them received $7,500 of Social Security benefits in 2010. In addition, they received taxable pension payments totaling $12,000 for Dean and $6,000 for Cathy. How much of the Social Security benefits received by Dean and Cathy is taxable?
A.
$15,000
B.
$10,500
C.
$7,500
D.
$0
Their total income from sources other than social security is $18,000. Total social security income is $15,000, one-half of which is $7,500. Combine one-half of social security benefits and total income from other sources to arrive at provisional income. Social security benefits are not taxed when provisional income is below $32,000 on a joint tax return. This is the case for Dean and Cathy ($18,000 + $7,500 = $25,500).Correct Answer: D
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Ray sold his main home in 2010 at a $30,000 gain. He has no gains or losses from the sale of property other than the gain from the sale of his home. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home as a business office in 2009 and claimed $500 depreciation. Which of the following statements is incorrect?
A.
He reports a $30,000 capital gain on Schedule D
B.
He writes SECTION 121 EXCLUSION and subtracts $29,500 on Schedule D
C.
He does not report the $29,500 portion of excluded gain on Schedule D
D.
He reports a $500 Unrecaptured Section 1250 gain on Schedule D
Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. In addition, he does not have to report any part of the gain on Form 4797. But since Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. He reports his gain of $30,000 as a long-term capital gain on Schedule D, on the line below he writes 'section 121 exclusion' and enters the exclusion amount of ($29,500) as a negative number. He reports the $500 portion of his gain as Unrecaptured Section 1250 gain on Schedule D, page 2.Correct Answer: C
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Taxpayers with more deductions than the standard deduction amount may wish to itemize on Schedule A. What items are includible on Schedule A?
A.
IRA contributions.
B.
Alimony.
C.
Unreimbursed employee expense.
D.
All of the above.
The items which are included in Schedule A are unreimbursed employee expenses, as well as unreimbursed medical and dental expenses, state and local taxes, and interest paid on home mortgages. IRA contributions and Alimony are above the line deductions appearing on the first page of Form 1040. Form 1040 Instructions.Correct Answer: C
-
Which of the following disqualify Tom from obtaining the Electric Vehicle Credit?
A.
The vehicle is manufactured primarily for use on public streets, roads and highways.
B.
Tom is the original purchaser.
C.
The vehicle is modified from a nonelectric vehicle.
D.
The vehicle is used predominantly in the United States.
A qualified plug-in electric vehicle must be made by a manufacturer. The credit is for new vehicles, not modifications.Correct Answer: C
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Jackson made several gifts during 2011. They include: a painting he painted valued at $16,000 given to his father, payment of his neighbor's medical bills in the amount of $2,500, and $13,000 to both of his nephews. What is his total annual gift exclusion for 2011?
A.
$41,500
B.
$39,000
C.
$37,000
D.
$27,000
Generally, the IRS does not consider paying another's tuition or medical expenses a gift if the medical or educational institutions receive the payments directly, therefore, the $2,500 medical bill paid for his neighbor is not a gift. For 2011, a taxpayer generally can give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable. The $26,000 ($13,000 x 2) cash gifts to his nephews and $13,000 of the $16,000 gift to his father make up his annual gift exclusion of $39,000.Correct Answer: B
-
Terry has a law practice in Denver and provides several types of fringe benefits to his one employee. Which benefit does he report as wages on Form W-2 for the employee?
A.
Health insurance coverage paid by the business.
B.
Amounts paid under a qualified plan for child care services.
C.
The fair market value of less than $175 per month for a space in the parking garage next to the office.
D.
Group-term life insurance premiums for coverage in excess of $50,000.
All fringe benefits listed are non-taxable fringe benefits, with the exception of Premiums paid for group-term life insurance in excess of $50,000. Premiums for benefits that are less than $50,000 are not included in income.Correct Answer: D
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Jose and Rosemary have agreed to live separately but no legal divorce proceedings have commenced. Under their agreement, Jose paid Rosemary $5,000 each month during 2010. Their 10-year-old child lived with Rosemary all year. How much of the payments that Rosemary received are income for her in 2010?
A.
$60,000
B.
None because they are not divorced.
C.
None because all the payments are support of their child.
D.
None because the payments are not required by a divorce or separation instrument.
Payments that are not required by a divorce or separation instrument are not alimony.Correct Answer: D
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Katie purchased 20 shares of qualified small business stock in 2003 for $6,200. During 2011, Katie sold 5 shares for $2,450. What is her taxable gain?
A.
$900
B.
$0
C.
$450
D.
$1,800
If the stock is held for at least 5 years, 50% of the gain from the sale of qualified small business stock is excludable under Section 1202.Katie would recognize $450 in gain calculated as follows: ($6,200/20=$310 basis per share, $310 x 5 =$1,550 basis for 5 shares, $2,450 -$1,550= $900 gain realized on sale, $900/2=$450 gain recognized.Correct Answer: C
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Fred loaned $10,000 to Ricky in 2008. Ricky ran away to Cuba in 2009. Fred was unable to contact Ricky for over a year and does not expect to ever collect any of the money he loaned. When preparing his 2010 tax return, Fred finds that the loss on this nonbusiness bad debt is:
A.
deductible as a short-term capital loss.
B.
deductible as a long-term capital loss.
C.
deductible only if he itemizes deductions.
D.
not deductible.
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 does not matter.Correct Answer: A
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Greg and Marsha bought 10 acres of land in 1990 for $60,000. Greg died in 2009, leaving his 1/2 share of the property to Marsha in his will. At the date of his death the land was valued at $100,000. Marsha sold the land for in 2010 for $200,000 on an installment sale. What is Marsha's gross profit percentage?
A.
90%
B.
60%
C.
70%
D.
50%
Marsha received a step up in basis for Greg's half of the property upon his death. Her basis of $80,000 is calculated as follows:$30,000 for her original half of the purchase price$50,000 step-up basis for the half she received upon Greg's deathThe gross profit on the sale is therefore $120,000 ($200,000 - $80,000). The resulting gross profit percentage is 60% ($120,000 divided by $200,000). Correct Answer: B
-
Greg and Marsha are married cash basis taxpayers with a large number of investments. Greg earned substantial income in 2010 as a self-employed writer. Consequently, Greg and Marsha reinvested some of their 2010 investment income. They received $12,000 of dividends from corporate stocks and reinvested $4,000 of dividends earned on mutual funds. They also earned $5,000 of interest on certificates of deposit. In addition, they loaned money to Marsha's unemployed brother that accrued $2,000 of interest he did not pay. What amount of interest and dividends is taxable in 2010 for Greg and Marsha?
A.
$21,000.
B.
$23,000.
C.
$14,000.
D.
$16,000.
The CD interest, the mutual fund dividends, and the corporate stock dividends are all taxable. Interest and dividend income is taxable when it is constructively received. Reinvesting the interest or dividends does not change this. So the total is $21,000 ($12,000 + $5,000 + $4,000). The $2,000 of accrued interest on the loan to Marsha's brother was not constructively received in 2010 so it is not reported.Correct Answer: A
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Mona and Clifford, a married couple, purchased their home in 1997 for $150,000. They replaced the roof in 2005 for $30,000 and added a game room in 2007 for $25,000. In 2011 they sold their home for $700,000. They paid real estate commission of $36,000 and other settlement costs of $4,000. What is their taxable gain?
A.
$360,000
B.
$0
C.
$455,000
D.
$391,000
Mona and Clifford received $660,000 ($700,000 - $40,000 commissions and settlement costs) from the sale. Their adjusted basis in the property is $205,000 ($150,000 + $30,000 + $25,000). They realize a gain on the sale of $455,000 ($660,000-$205,000). After applying their $500,000 homeowner exclusion, there is no gain to recognize.Correct Answer: B
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The IRS will notify the taxpayer of the due dates of any remaining payments _________?
A.
Only after IRS grants the installment request
B.
After each payment is made
C.
On a yearly basis
D.
It never sends notification
After each payment, the IRS will send the taxpayer a notice showing the remaining amount owed, and the due date and amount of the next payment. However, if the taxpayer has chosen to have payments automatically withdrawn from their checking account, no notice will be sent. IRS Form 9465.Correct Answer: B
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Fred and Ethel are married filing a joint tax return for 2010. They have $110,000 in wages and gambling winnings of $5,000. Their deductions consist of $8,500 for mortgage interest, $2,500 for property tax on their home, $500 of charitable contributions, and $15,000 of losses from gambling. What is the total of itemized deductions that Fred and Ethel have for 2010?
A.
$24,300
B.
$15,800
C.
$26,500
D.
$16,500
Gambling losses are deductible up to the amount of gambling winnings as a miscellaneous itemized deduction not subject to the 2% limit. The itemized deductions allowable to Fred and Ethel for 2010 total $16,500 ($8,500 mortgage interest + $2,500 property taxes + $500 charitable contributions + $5,000 gambling losses).Correct Answer: D
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Henry owned stock in Braves Corporation with a cost basis of $15,000. He sold the stock to his brother Tommy in May 2010 for $8,000. Tommy later sold the same stock to his boss for $20,000. What is Henry's recognized gain or loss?
A.
$12,000 gain
B.
$7,000 gain
C.
$7,500 loss
D.
$ 0
Henry cannot recognize a loss on the sale of stock to a related party. Henry has a realized loss of $7,000, but Henry cannot recognize the loss. His brother has a realized gain of $12,000, but only recognizes a gain of $5,000 when the stock is sold to his boss. Tommy is not required to recognize a portion of his gain equal to the loss previously disallowed to Henry.Correct Answer: D
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Jan and Peter purchased their home in 1998 for $100,000 and lived in it as their primary residence until selling the property for $300,000 in 2010. Jan is a writer and used 1/6 of the house as an office. She deducted 1/6 of all costs including depreciation since she purchased the property. The original value of the house assessed $40,000 for the land and $60,000 for the house. Jan used the straight-line method to claim $6,667 in depreciation. What is Jan and Peter's recognized gain on the sale?
A.
None
B.
$200,000
C.
$206,667
D.
$6,667
Basis starts at $100,000. She claims depreciation of $6,667. This depreciation reduces basis to $93,333. She realizes a gain on the sale of $206,667 (sales price - basis). Taxpayers may be able to exclude gain from the sale of a home that they have used for business or to produce rental income if they 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 they were not actually claim them), 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. 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%. Her recognized gain is $6,667.Correct Answer: D
-
Bill is Single and uses the maximum percantage to determine his Credit for Qualified Retirement Savings Contributions. His contributions total $8,000. What is the amount of his credit?
A.
$5,000
B.
$10,000
C.
$2,000
D.
$1,000
The maximum percentage for any filing status is 50%. Bill may not cosider more than $2,000 of his contributions for purposes of this credit, which limits the credit to $1,000. IRS Form 8880.Correct Answer: D
-
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?
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.
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.Correct Answer: C
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Kathy is single and owns an apartment building with 12 units that she manages personally. She collects the rents and arranges for ordinary repairs. In 2010, Kathy had a loss of $30,000 on this rental activity and had no reportable passive income. Her adjusted gross income before considering the rental loss is $50,000. How much of the rental loss does Kathy deduct on her 2010 return?
A.
$20,000
B.
$25,000
C.
$30,000
D.
$ 0
Because of her active participation, Kathy is allowed to offset ordinary income with a loss of up to $25,000. If rental losses are less than $25,000 and the taxpayer or spouse actively participate in the rental activity, the passive activity limits may not apply. Active participation is a less stringent standard than material participation. Active participation includes management decisions such as approving tenants, deciding rental terms, approving expenditures, etc.If a taxpayer (S or MFJ) has modified adjusted gross income (MAGI) over $100,000, the $25,000 special allowance is limited to 50% of the difference between $150,000 and MAGI. There is no allowance when MAGI is over $150,000.Correct Answer: B
-
Jason is a doctor who provides humanitarian services for the Red Cross. He is required to file a US tax return, but on the due date for his return, he is in Afghanistan performing duties for the Red Cross. He arrived in Afghanistan on December 1, 2009 and returned home August 20, 2012. When is latest date that Jason can file and pay his 2011 taxes?
A.
Jason is not in the military so he must file by April 18, 2012, his normal tax filing deadline.
B.
He must file within 180 days of leaving the combat zone.
C.
He must file within 180 days of leaving, plus an additional 3 1/2 months.
D.
He can file and pay by June 15, 2012 under an automatic 2-month extension as he is out of the country.
A person serving in the Red Cross or under the direction of the military while in a qualified combat zone receives the same treatment as military personnel. When individuals serve in a qualified combat zone, the filing deadline increases by 180 days after the latter of the last day in a qualified combat zone, or the last day of a continuous hospitalization related to injury from service. In addition to the 180 days, a service member in a qualified combat zone can receive a deadline extension of up to three and a half months, based on the number of days remaining to file upon entering the combat zone. This is representative of the time normally allotted for filing taxes (January 1 - April 15). If entering the combat zone before the first of the year, the service member may add the entire three and a half months to the 180-day extension.Correct Answer: C
-
A taxpayer may not claim the tuition and fees deduction for 2011 if the taxpayer's adjusted gross income exceedes what amount?
A.
$200,000
B.
$100,000
C.
$80,000
D.
$60,000
The taxpayer's modified adjusted gross income must not be more than $80,000 (or $160,000 if filing a joint return) in order to claim the tuition and deduction payments in 2011. IRS Form 8917.Correct Answer: C
-
Under what condition is the taxpayer exempt from having to repay the first time homebuyer's credit?
A.
Value of home drops below purchase price
B.
Foreclosure
C.
Death
D.
None of the above
If the taxpayer dies, repayment of the credit is not required. For joint filers, the surviving spouse must repay his or her half of the credit if required. IRS Form 5405.Correct Answer: C
-
Sam receives money from a variety of sources in 2010. Which of the following amounts does he report as income on his 2010 tax return?
A.
$1,000 per month that Sam directs the tenant of his rental house to pay his ex-wife.
B.
$2,000 for construction by the tenant of the rental house, without Sam's knowledge, of a deck and patio as additions that add $2,000 of value to the property.
C.
$10,000 for the value of Sam's coin collection that he sent to a dealer on consignment to sell for $10,000.
D.
$7,000 that the consignment vendor receives after commission for selling Sam's coins and places in an escrow account controlled by the vendor.
Items C and D referencing the consignment vendor are not income because Sam does not yet have constructive receipt of the income. Item B is not income because it is a capital improvement that increases the value of the rental property. But the amounts in item A are taxable income for Sam because he has constructive receipt of the income according to the lease terms and directs payment to his ex-wife.Correct Answer: A
-
Maria believed in Teachers Unite, inc. so much that she purchased all of the original stock when it was issued on September 16, 2003 for $10,000. Teachers Unite, inc. met all the requirements under Section 1244 Small Business Stock. When they began having financial difficulty in 2005 Maria contributed an additional $10,000. In 2010, Maria had financial needs and was forced to sell all of her stock for $10,000. How much loss should Maria report on her 2010 return and is the loss capital or ordinary?
A.
Deduct $5,000 as ordinary loss and $5,000 as capital loss subject to limitations.
B.
Deduct $3,000 of her loss on Schedule D as a capital loss and carryover the remainder.
C.
Deduct her $10,000 loss as an ordinary loss.
D.
None of the above.
A loss on the sale of Section 1244 Small Business Stock can be deducted as an ordinary loss. Section 1244 stock is stock that was issued for money or property in a domestic small business corporation. Maria has a stock basis of $20,000 but only $10,000 of the basis was derived from the issuance of Section 1244 stock. The $10,000 in contributed capital does not qualify as Section 1244 stock basis when determining the ordinary loss deduction. Maria has an ordinary loss of $5,000 and a capital loss of $5,000. The Section 1244 ordinary loss is determined by allocating the percentage of Section 1244 basis to the actual loss. Maria's Section 1244 basis represents 50% of her total basis (10,000 / 20,000 = 50%). The sale results in a Section 1244 ordinary loss of $5,000 [(20,000 total basis - 10,000 sales price) x 50%]. The remaining $5,000 stock loss is treated as a capital loss.Correct Answer: A
-
Amanda received a taxable distribution of $8,000 from her traditional IRA in 2010. She owes a 10 percent tax penalty for premature distribution if:
A.
her AGI is $30,000 and she had $13,000 in unreimbursed deductible medical expenses which exceed 7.5% of her adjusted gross income
B.
she paid the college tuition of $10,000 for her son
C.
she is under age 59 1/2, the distribution is not part of a series of equal periodic payments, and she has no qualifying expenses or exempt conditions
D.
the distribution was the result of an IRS levy on her IRA
Items A, B and D are among the specifically listed exceptions to the premature distribution penalty. The distribution under item C is subject to the 10 percent early withdrawal penalty because Amanda was not age 59 1/2, the distribution was not part of a series of equal periodic payments, and no other exempt conditions were met.Correct Answer: C
-
The amount of tuition and fees paid by the taxpayer for the taxable year is found on _________?
A.
Form 1098-T
B.
Form 1040
C.
Form 1099-A
D.
Form 8863
The college or university should provide the taxpayer with Form 1098-T, Tuition Statement. This form reports either payments received (box 1) or amounts billed (box 2). The amounts paid for qualified expenses should be reported on Form 8917. IRS Form 8917.Correct Answer: A
-
Frank borrowed money in 2008 for a new boat but stopped making payments in 2009. He voluntarily returned the boat, which the lender sold and applied the money to the debt. However, Frank still owed more on the loan. The lender sued Frank and was awarded a court judgment. In 2010, the lender obtained a garnishment order from the court requiring Frank to pay the lender $10,000 from his IRA. The court order did not include withholding of any kind. Frank was age 35 at the end of 2010. His adjusted gross income for 2010 is $35,000. What is Frank's penalty on early distributions for 2010?
A.
$ 0
B.
$1,000
C.
$500
D.
$350
There is no exception to the penalty on early distributions for a court ordered payment from a retirement plan or IRA even if the court did not require withholding. Frank's penalty on the early distributions for 2010 is $1,000 ($10,000 x 10%).Correct Answer: B
-
Mr. Trump's butler, Gordon, has adjusted gross income of $120,000 and itemized deductions of $6,000 for the 6-month period from January 1 through June 30. His exemptions total $14,600 (4 people). Gordon received an approved change to his tax year and he must file a short tax year return. What is Gordon's taxable income for his short year return?
A.
$ 99,400
B.
$120,000
C.
$213,400
D.
$106,700
Individuals filing short year returns must itemize. They cannot take the standard deduction. AGI minus the itemized deductions minus the pro rata personal exemptions results in taxable income. Pro rata exemptions are determined by multiplying the dollar amount of exemptions by the number of months in the short tax year and dividing the result by 12. ($14,600 x 6/12 = $7,300)$120,000 - $6,000 - $7,300 = $106,700 Modified Taxable IncomeThe next step is to annualize the income by multiplying the modified taxable income by 12 then dividing by the number of months in the short period. $106,700 x 12 / 6 = $213,400. This prevents a reduction in tax rates due to a short tax year.Correct Answer: C
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Tom Smith has been doing very well playing cards in a regularly held illegal poker game. He has won nearly $50,000. Because he knows his wife disapproves of gambling, he has not told her about any of this and has kept the money he's won in a box in their attic. The IRS found out about the card game and sought to recover taxes due from Tom and his wife, who have always filed MFJ. What should his wife do to protect herself from liability?
A.
Promptly file an injured spouse form.
B.
Promptly file an innocent spouse form.
C.
She can't protect herself from liability because he won the money while they were married.
D.
Promptly file for divorce and provide documentation to the IRS.
A spouse who reasonably did not know about income her spouse did not report should file Form 8857, Request for Innocent Spouse Relief, as soon as she becomes aware of a tax liability for which she believes only her spouse or former spouse should be held responsible. Without filing for relief, if the Smiths divorced, Mrs. Smith would still be liable for the tax on the unreported gambling income because it was income during their marriage. Spouses who file MFJ are jointly and severally liable for tax liability that arises during their marriage.Correct Answer: B
-
Nick is a management consultant who travels constantly to the headquarters of different companies that contract with his employer for services. Nick does not have a regular place of business. He reports to his employer from the various places he is temporarily assigned or from his house in Houston when he is not traveling. He does not have a permanent office at the headquarters of his employer in New York City. Nick determines his tax home based upon:
A.
Where he performs part of his business and uses for lodging while doing business in the area.
B.
Where he has living expenses as his main home that are duplicated because his business requires him to be away from that home.
C.
Where he has not abandoned as both his traditional place of lodging and his main home; where members of his family live; or where he often uses for lodging.
D.
All of the above.
A, B, and C are the three factors used to determine a tax home in this situation. A tax home is the place where a taxpayer permanently or indefinitely engages to work as an employee or self-employed individual. Generally, a tax home is the entire city or general area where the main place of business or work is located, regardless of where the individual maintains the family home.Correct Answer: D
-
In December 2010, Bubba Corporation provided a free turkey or ham to every employee who asked for one. Do the employees who received a turkey or ham have any tax consequence?
A.
No, because these are holiday gifts of nominal value.
B.
No, because these gifts are part of a qualified plan.
C.
Yes, the fair market value of the turkey or ham is added to the W-2 wages of each recipient.
D.
Yes, recipients have to report the fair market value of the turkey or ham as other income on their tax returns.
If an employer provides his employees with a turkey, ham, or other item of nominal value at Christmas or other holidays, the employee should not include the value of the gift in his income.Correct Answer: A
-
Warren owns several types of bonds. Which of the following is not true about original issue discount (OID)?
A.
The OID rules do not apply to U.S. Savings Bonds.
B.
OID is included as income over the term of a debt security regardless of whether payments are received from the issuer.
C.
The amount of OID is the difference between the stated redemption price at maturity and the par value.
D.
OID is 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.
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.Correct Answer: C
-
Congressman Smith filed a joint tax return for 2010. However, his filing status for 2011 is single. Which of the following statements is true if the congressman files Form 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return, by April 17, 2012?
A.
He is granted a 6-month extension for filing his return and paying any tax due for 2011.
B.
He receives an automatic 6-month extension to file his tax return without filing Form 4868 if he is out of the country for diplomatic business on April 17, 2012.
C.
Interest is assessed on tax not paid by the due date of the return even when Form 4868 is filed on time.
D.
The congressman must file a paper Form 4868 because the IRS doesn't accept electronic filing of this form.
The 2011 individual income tax return is due on April 17, 2012 (for calendar year filers). Any tax owed but not paid by that date is subject to penalty and interest charges. Form 4868 is a request for a 6 month extension to file the tax return. It has no effect on the date tax payment is required. If you are a United States citizen or resident alien, who is either: (1) living outside of the United States and Puerto Rico and your main place of business or post of duty is outside of the United States and Puerto Rico; or (2) in military or naval services on duty outside of the United States and Puerto Rico on the due date of your return, you are allowed an automatic 2-month extension until June 15 to file your return and pay any tax due. Electronic filing of Form 4868 is permitted. Correct Answer: C
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Ron rented an apartment in New York City during 2001 when the building was converted to condominiums. He bought his apartment on October 30, 2005. Due to illness In 2009, he moved into his daughter's home in New Jersey. While still living at his daughter's home, he sold his condominium for a gain on July 10, 2010. Can he exclude the gain from his taxable income?
A.
No, because he originally rented the property before buying it.
B.
No, because he did not live in the property for the entire time he owned it.
C.
Yes, because his move was due to illness.
D.
Yes, because he meets both the ownership and use tests.
A taxpayer can meet the ownership and use tests during different two-year periods. However, the taxpayer must meet both tests during the five-year period ending on the date of the sale. So, Ron can exclude gain on the sale of his condominium because he met the ownership and use tests during the five-year period ending July 10, 2010. He owned the condominium from October 30, 2005, to July 10, 2010, which is more than 2 years. In addition, he lived in the property from at least October 30, 2005 until 2009 when he moved in with his daughter. This is more than two years. The time Ron lived in his daughter's home during the five-year period can be counted toward his period of ownership. The time he lived in his rented apartment during the five-year period can be counted toward his period of use.Correct Answer: D
-
The penalty for failure to report tips to the employer may be avoided if there is _________?
A.
Reasonable cause
B.
Probable cause
C.
Negligence
D.
Willful neglect
The penalty can be avoided if it can be shown that the failure to report tips to the employer was due to reasonable cause and not due to willful neglect. To do so, a statement can be attached to the return explaining why the taxpayer did not report tips to the employer. The IRC 6652(b) penalty is 50% of FICA tax on tip income that the employee failed to report to his or her employer. This penalty, though applicable to employment tax, is assessed and collected as a part of the taxpayer's income tax. IRS Form 4137.Correct Answer: A
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Jason is a doctor who provides humanitarian services for the Red Cross. He is required to file a US tax return. He went to Haiti to perform duties for the Red Cross. He arrived in Haiti on December 1, 2010 and returned home April 21, 2011. When is latest date that Jason can file and pay his 2010 taxes?
A.
Jason must file and pay his 2010 taxes by January 31, 2012.
B.
He must file within 180 days of leaving the combat zone.
C.
Jason must file and pay by April 15, 2011, his normal tax filing deadline.
D.
He can file and pay by June 15, 2011 under an automatic 2-month extension as he is out of the country.
Deadlines for taking care of a variety of federal tax matters are automatically extended for persons serving in a combat zone or a contingency operation. Operation Unified Response (Haiti relief) is a contingency operation, thus giving designated persons providing earthquake relief in Haiti the same extensions that are available to military and support personnel serving in Iraq, Afghanistan, and other combat zone localities. The normal tax filing deadline for his 2010 return is extended to January 31, 2012 (285 days after leaving the contingency operation on April 21, 2011). The time allotted to the extension related to the contingency operation is 180 days + 105 days in 2011 he had to file and was performing services in support of the military. Correct Answer: A
-
In 2010, Gil sold the house he used as his primary residence. Which of the following is not true about the sale?
A.
Gil may exclude at least some of the gain from sale of the house even if he used part of it as an office for his home-based business as long as he meets the ownership and use tests.
B.
Gil may take depreciation deductions for the time he used part of the house as an office for home-based business.
C.
Gil cannot exclude the part of his gain from sale of the house equal to depreciation deductions Gil had after May 6, 1997, for using part of the house as an office for his home-based business.
D.
Gil cannot exclude any gain from sale of the house if it is a mobile home.
D is an incorrect statement, which is why it is the correct answer. 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.Correct Answer: D
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In 2011, current legislation requires the executor of an estate to file the following tax returns:
The final income tax return (Form 1040) for the decedent
Fiduciary income tax returns (Form 1041) for the estate during administration
Estate Tax Return (Form 706), if the fair market value of the assets of the estate exceed $5 million, or Form 8939, if the executor elects out of the estate tax and elects to apply the new carryover basis rules.
A.
1 only
B.
1 and 2 only
C.
2 and 3 only
D.
1, 2 and 3
Current legislation requires the executor of an estate to file the following tax returns:
- The final income tax return (Form 1040) for the decedent
- Fiduciary income tax returns (Form 1041) for the estate during administration
- Estate Tax Return (Form 706), if the fair market value of the assets of the estate exceed $5 million, or Form 8939, if the executor elects out of the estate tax and elects to apply the new carryover basis rules.In addition, if the executor files Form 8939, then no later than 30 days after the filing of Form 8939, the executor must send a written statement to each recipient of property that contains the information on Form 8939.Correct Answer: D
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Mike and Carol have total wages of $74,600 plus interest income of $3,000 and dividends of $2,000. They paid mortgage interest of $7,000, car loan interest of $2,000, mobile home interest of $4,000, personal loan interest of $1,000 and margin interest of $6,000. The amount of interest Mike and Carol deduct on Schedule A is:
A.
$16,000
B.
$13,000
C.
$20,000
D.
$12,000
Interest for the home mortgage and second (mobile) home is deductible. In addition, $5,000 of the $6,000 investment interest is deductible. $4,000 mobile home + $7,000 mortgage + $5,000 investment interest = $16,000. The investment interest deduction is limited to the amount of investment income ($3,000 + $2,000). Interest on personal or car loans is not deductible.Correct Answer: A
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In January 2008 Mr. Brown, single and age 47, began taking a monthly distribution from his traditional IRA. He uses the Uniform Lifetime Table and his account balance from the prior year to arrive at a distribution of $100 each month. In February 2009, Mr. Brown converted the entire amount of his traditional IRA to his Roth IRA and continued his monthly distribution. After the conversion, will Mr. Brown have to pay the 10% additional tax on each monthly distribution?
A.
Yes, because he has not reached his 71st birthday.
B.
Yes, because he converted his traditional IRA.
C.
Yes, because he has not reached his 60th birthday.
D.
No, because he has been taking periodic distributions.
If a taxpayer has started taking substantially equal periodic payments from a traditional IRA, he can convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions, as long as they are part of a series of substantially equal periodic payments. In order to avoid the 10% on the converted amount, Mr. Brown must maintain the periodic distributions until he reaches age 591/2 .Correct Answer: D
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Jerry purchased a new yacht in 2009 for $125,000. He takes delivery of the yacht on December 24, 2009. On January 30, 2010, Jerry received a rebate check from the yacht manufacturer for $5,000. Does he report the $5,000 on his 2010 tax return?
A.
Yes. He reports it on Schedule D.
B.
Yes. He reports it as other income on Line 21 of Form 1040.
C.
No, because the manufacturer paid gift tax on the $5,000.
D.
No, because the $5,000 is not income.
Any cash rebate that a taxpayer receives from a dealer or manufacturer of an item purchased by the taxpayer is not income. The taxpayer reduces the item's basis by the amount of the rebate.Correct Answer: D
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Tips reported to the employer constitute gross income in the year when _________?
A.
Received
B.
Reported
C.
Realized
D.
Recognized
Tips must be reported to the employer by the 10th day of the month following the month they are received. Tips are considered income in the month the employee reports them. For example, tips received in December 2011 that are reported to the employer by January 10, 2012, are considered income in 2012 and should be included on the employee's 2012 Form W-2. IRS Form 4137.Correct Answer: B
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Steve and Laura are married and file their tax returns as MFS. On May 31, 2009 Steve purchased 200 shares of REI stock, for $50 per share. On October 28, 2009, he sold the 200 shares for $45 per share. Laura, purchased 200 shares of REI stock for $40 per share, on November 22, 2009. She sold the stock on September 30, 2010, for $55 per share. What is the proper tax treatment on their separate returns for the gains or losses on the sales of REI stock?
A.
Steve has a short-term loss of $1,000 on his 2009 tax return.
B.
Laura has short-term gain of $3,000 on her 2010 tax return.
C.
Laura will have a short-term gain of $3,000 on her 2010 tax return and Steve takes the short term loss $1,000 on his 2009 tax return.
D.
Laura will have a long-term gain of $2,000 on her 2010 tax return and Steve will not have any capital loss on his 2009 tax return.
If substantially identical securities are purchased by a spouse within 30 days the sale is treated as if the transaction occurred between related parties. The loss is disallowed. The basis of the new securities increases by the amount of the disallowed loss. The holding period on securities acquired in a wash sale includes the holding period of the securities sold.Steve's 2009 $1,000 short-term capital loss is disallowed as a wash sale. The basis of Laura's stock is increased by the amount of disallowed loss. Her holding period begins on the date of Steve's original purchase. Her transaction belongs on her 2010 return as that is the year of disposition. Correct Answer: D
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Rick Johnson purchased 100 shares of Andy's Practical Solutions stock for $15,000. Andy's practical solutions is a qualifying small business stock under section 1244. The following year he contributes an additional $5,000, making his total investment in Andy's Practical Solutions $20,000. He then sold all of his shares for $12,000. What is the amount and character of loss that Rick can deduct on his return for the year of sale?
A.
$8,000 ordinary loss
B.
$8,000 capital loss
C.
$3,000 capital loss
D.
$6,000 ordinary loss and $2,000 capital loss
If you add additional capital to a qualified section 1244 small business the additional capital is added to the basis of the original stock. However, the additional capital cannot be treated as section 1244 stock. Therefore any gain recognized on the sale from the additional capital will be treated as a capital gain and not as ordinary income.Rick bought 100 shares of section 1244 stock for $15,000. He later made a $5,000 contribution to capital which increased the total basis of the 100 shares to $20,000. Rick then sold the 100 shares for $12,000 and incurred a loss of $8,000. Under these rules he can deduct only $6,000 ($8,000 x $15,000/$20,000) as an ordinary loss. The remaining $2,000 is a capital loss.Correct Answer: D
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Earl had a part-time job in 2010 for which he received a W-2 reporting $10,000 of wages. He also performed some contract work for which he received a Form 1099-MISC reporting non-employee compensation of $6,000. In addition, Earl was in a partnership with his brother. Earl's half of the partnership ordinary business income was $3,000. How much of Earl's income is subject to self-employment tax?
A.
$9,000
B.
$19,000
C.
$6,000
D.
$ 0
Wage, salaries and tips received by employees are not subject to self-employment tax. The employer withholds Social Security and Medicare taxes. Non-employee compensation, profits from a sole proprietorship, and distributive share of partnership income are all considered income from self-employment.Correct Answer: A
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Pradeep lives and works in Bangalore, India as a self-employed contractor where he helps U.S. companies outsource computer programming projects to Indian software designers. He is not a U.S. citizen or resident at any time during the year. All of Pradeep's income is from his U.S. contracts. Which of the following is true regarding Pradeep's tax obligations to the United States?
A.
He has U.S. source income, and must report it on Form 1040NR.
B.
His customers must withhold 30% of the payments made to him.
C.
It is not necessary for Pradeep to file a U.S. income tax return.
D.
Pradeep must file Form 1040-SS to report his income from self-employment.
The factor determining the source of Pradeep's income is the country where he performs the services. Pradeep's income from his personal services is not U.S. source income, and accordingly he does not need to file a U.S. income tax return. A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.Correct Answer: C
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Jacob Marley went to a third-party tax office to get his taxes done. His tax preparer informed him that he is subject to the alternative minimum tax. Jacob must include the following adjustments or tax preference items for computing alternative minimum tax, except:
A.
Dependency exemptions.
B.
Standard deduction.
C.
Itemized deduction for state and local taxes.
D.
Interest income.
AMTI includes certain adjustments to the taxpayer's taxable income:
- Add amount claimed for personal or dependency exemptions,
- Add amount claimed for the standard deduction, or certain itemized deductions for state and local taxes, certain interest expenses (not eligible mortgage on main home), most miscellaneous deductions, and part of medical expenses not greater than 10% of AGI,
- Subtract any refund of state and local taxes included in gross income.Correct Answer: D
-
An offset reduces the amount of refund by past due _________?
A.
Federal tax
B.
Child support
C.
Student loans
D.
All of the above
A refund may be used to pay past-due federal tax or certain other debts. The latter includes past-due amounts state income tax, child support, spousal support, or certain federal nontax debts, such as student loans. The past-due amounts will be deducted first from the deposit to the account with the lowest routing number. Any remaining amount due will be deducted from the deposit to the account with the next lowest routing number and then from the deposit to the account with the highest routing number. IRS Form 8888.Correct Answer: D
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Mr. McFly had an adjusted basis of $30,000 in Lyon Estates, real estate he held for investment. He exchanged it for other real estate in Hilldale to be held for investment with a fair market value of $25,000, a truck with a fair market value of $6,000 and $2,000 cash. What is the total basis of the real estate and the truck?
A.
$28,000
B.
$31,000
C.
$30,000
D.
$33,000
The basis of property received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property given up. Increase this amount by any cash paid, exchange expenses, and any gain recognized. Reduce this amount by any cash or unlike property received, any loss recognized, and any liability assumed by the other party. The basis in the real estate given up is $30,000. Add $3,000 of recognized gain ($33,000 value of property received - $30,000 basis of property given up). Deduct the $2,000 cash received and $6,000 for the truck (unlike property received) and the new basis of the building is $25,000. The question asks for the basis of the truck and the building. That amount is $31,000.Correct Answer: B
-
Which of the following donations does not qualify as a deductible contribution in 2010?
A.
Mileage expenses to the Red Cross building to volunteer
B.
$500 to your local food Bank
C.
$1,500 cash donation to the Carnegie Library
D.
$5,000 to Race for the Cure Foundation as stated in a will.
In order for a contribution to be deductible it must not be conditioned on a future event such as a death.A deduction is allowed for contributions to certain nonprofit charitable organizations including churches, charitable organizations (Red Cross and the United Way), educational organizations (Girl Scouts of America, colleges and museums), hospitals and medical research organizations, public parks and recreation facilities, volunteer fire companies, utility company emergency energy programs, and civil defense organizations.Correct Answer: D
-
What will the IRS do if Form 8888 contains crossed out numbers or letters?
A.
Reject the allocation of refund
B.
Issue a paper check refund
C.
Both of the above
D.
None of the above
The IRS will reject an allocation of refund and savings bond purchases and send a check instead if the taxpayer files a Form 8888 on which there is crossed out any numbers or letters. IRS Form 8888.Correct Answer: C
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Ben loaned $10,000 to Warren so that he could film a documentary about Yellowstone. Warren signed a note agreeing to repay the loan at a 4 percent interest rate in monthly payments of $100. Warren ran out of money in 2010 before completing the film project and filed for bankruptcy. Ben's loan was discharged by the court as part of Warren's bankruptcy. The balance owed to Ben on the loan is $7,000. Ben's only income for 2010 is from wages. How much of a deduction can Ben claim for 2010 as an adjustment to his gross income?
A.
$10,000
B.
$7,000
C.
$3,000
D.
$0
Ben's basis in this non-business bad debt is $7,000. This amount is reported on Schedule D as a short-term capital loss. (All non-business bad debts are short term capital losses no matter how long the money was loaned.) Since he has no capital gains, he is limited to a deduction of $3,000 for the year.Correct Answer: C
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When Carlos injured his ACL playing basketball, he was unable to work for two months. During this time, he received $2,500 in sick pay from his employer. He also received $1,000 from an insurance policy he had personally purchased several years ago. How much of the amount Carlos received while not working is taxable income?
A.
$-0-
B.
$2,500
C.
$1,000
D.
$3,500
Pay received from an employer while sick or injured is part of salary or wages. In addition, employees must include in income sick pay benefits received from a welfare fund, state sickness or disability fund, an association of employers or employees, and an insurance company, if the employer paid for the plan. However, if the employee paid the premiums on an accident or health insurance policy, the benefits received under the policy are not taxable.Correct Answer: B
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In 2006, Lew bought property that consisted of a house, a stable, and 35 acres. He used the house and 7 acres as his main home and used the stable and 28 acres in his business for the next 4 years. He sold the entire property in 2010 at a $10,000 gain. Which of the following statements is incorrect?
A.
Lew met the ownership and use tests for the house but did not meet the use test for the stable.
B.
Lew must report the entire gain on his return, but he can claim a section 121 exclusion on Schedule D for his main home.
C.
Lew reports the gain on the business part of his property on Form 4797.
D.
He can exclude the gain on the part of the property that was his main home.
Lew met the ownership and use tests for the house but did not meet the use test for the stable. Since the business part was separate from his home, Lew must allocate the basis of the property and the amount realized between the part of the property he used for his home and the part he used for his business. Lew reports the gain on the business part of his property on Form 4797. He can exclude the gain on the part of the property that was his main home. He does not report the gain from the part used as his home because he can exclude all of it.Correct Answer: B
-
Ben is single and retired in September 2010. He received taxable pension payments of $10,000 and Social Security benefits of $5,000 during the year. He also received $2,000 of unemployment payments during January and February of 2010. Ben has no other income or deductions. What is his adjusted gross income for 2010?
A.
$10,000
B.
$12,000
C.
$15,000
D.
$17,000
One-half of the Social Security benefits plus all other income is below the base amount of $25,000 for single filing status. Therefore, none of his Social Security is taxable. His AGI is the remaining income of $12,000.Correct Answer: B
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What does Rafael accomplish by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return?
A.
An automatic extension of 2 months to file his tax return if he's out of the country on April 15
B.
An automatic extension of 4 months to file his return
C.
An automatic extension of 6 months to file his return
D.
An automatic extension of 6 months to pay any tax due with his tax return
Explanation: A request for an automatic 6-month extension is filed via paper Form 4868 or electronically prior to the due date of the return. This allows most taxpayers until October 15 to submit a return. Form 4868 does not affect the due date for paying tax. A taxpayer who is a U.S. citizen (or resident) may receive an automatic two-month extension to file a return and pay any federal income tax due if, on the due date of the return, he is in the military or naval service on duty outside the United States and Puerto Rico, or lives and maintains a main place of business outside the United States and Puerto Rico. Interest applies from the due date until paid. The taxpayer must attach a statement to his return explaining which situation applies.Correct Answer: CFFA EA Book Reference: CH 1 Filing InformationSubsection: Tax Returns for Individuals Taxpayer DataSubject: Filing requirements for tax returns and extensions (e.g., dates)
A request for an automatic 6-month extension is filed via paper Form 4868 or electronically prior to the due date of the return. This allows most taxpayers until October 15 to submit a return. Form 4868 does not affect the due date for paying tax. A taxpayer who is a U.S. citizen (or resident) may receive an automatic two-month extension to file a return and pay any federal income tax due if, on the due date of the return, he is in the military or naval service on duty outside the United States and Puerto Rico, or lives and maintains a main place of business outside the United States and Puerto Rico. Interest applies from the due date until paid. The taxpayer must attach a statement to his return explaining which situation applies.Correct Answer: C
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Thelma works for Louise and received land as payment for her services on Louise's 1965 Cadillac Sedan. Louise's basis in the land was $3,000 and the land had a FMV of $5,000. Thelma's basis in the land is:
A.
$0
B.
$2,000
C.
$3,000
D.
$5,000
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.Correct Answer: D
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Bruce contributed $75,000 in 2011 to the Iowa 529 qualified tuition plan for his daughter, Scout. He elects to treat this initial contribution ratably over a five-year period. Bruce makes no other transfers to the qualified plan for Scout in 2011. What is the amount treated as a taxable gift for the 2011 tax year?
A.
$65,000
B.
$42,000
C.
$10,000
D.
$0
Bruce contributes $75,000 to the qualified tuition plan, and his election to treat the contribution ratably over a 5-year period (a special provision with 529 plans) allows him to offset $65,000 of the gift with 5-years worth of his annual exclusion ($13,000 x 5). The $10,000 balance of the amount over $65,000 is a taxable gift in the year of his contribution.Correct Answer: C
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Kevin and Missy Cramer have been married for three years and file a joint return. Kevin sold stock which resulted in a short term loss of $10,000 and Missy sold stock which resulted in a short term gain of $4,000. The Cramer's had no other capital transactions during the year and their taxable income was $75,000. How much of the capital loss is deductible on their 2011 joint return and how much must be carried over to the next year?
A.
$6,000 loss; $0 carryover.
B.
$3,000 loss; $0 carryover.
C.
$3,000 loss; $3,000 carryover.
D.
$0 loss; $6,000 carryover.
When a married couple file a joint return their capital transactions are reported together on a schedule D. A maximum $3,000 capital loss is allowed each year. The remainder is carried to the next year.Correct Answer: C
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Troy has income from several sources in 2010.
He was a shareholder in an S corporation
He received guaranteed payments for services he provided to business in which he is a limited partner
He was paid sales commissions, and received fringe benefits from his job as an insurance agentWhich of the income sources is NOT considered earnings from self-employment?
A.
Income from the S Corporation
B.
Guaranteed payments from the partnership
C.
Commissions
D.
Fringe Benefits
Income passed through to S corporation shareholders is not self-employment income for self-employment tax purposes. This is one of the main advantages of S corporations. Payment of commissions, or fringe benefits could be part of income from self-employment if the recipient is self-employed.Correct Answer: A
-
Which one of the following is a qualifying person for purposes of the child and dependent care credit?
A.
Spouse who was physically not able to care for themselves since August of the current year.
B.
Child who was age 13 when the care was provided and for whom you can claim an exemption.
C.
Child who was age 12 and lived with you all year but your ex-spouse is claiming the dependency exemption.
D.
Spouse who was physically unable to care for himself or herself and lives with his parents since May of the current year.
A dependent child must be under age 13 when the care is provided. In the case of a child of divorced or separated parents living apart, only the custodial parent may claim the credit. However, If the custodial parent has given a release for the dependency exemption they are still entitled to claim the credit. The qualifying person must reside with the taxpayer for more than half the year to qualify for the child and dependent care credit and must be unable to care for themselves for more than half of the year. In determining whether a person is a qualifying person, treat someone who was born or who died during the tax year as having lived with the taxpayer for the entire tax year only if the taxpayer's home was the person's home the entire time he or she was alive. A spouse is never a dependent of the other spouse; but can qualify for the child and dependent care credit provided the conditions are met. One requirement for a spouse that is incapable of self-care is that the spouse must have the same principal place of abode as you for more than half of the year.Correct Answer: C
-
Which of the following situations requires the individuals named to report the funds received as taxable income?
A.
Dean, who is given money for highway tolls by the passengers in his car pool.
B.
Marilyn, who is given money by a real estate developer to influence her vote as a city council member for a new municipal football stadium.
C.
Joey, who is given a subsidy by a public utility for purchase of energy efficient appliances for his home.
D.
Peter, who inherits a 1951 Mickey Mantle baseball card from his deceased uncle.
The bribe paid to Marilyn is income. In fact, all income from illegal activities must be reported on a taxpayer's Form 1040, either on Line 21 or on Schedule C. The money Frank received from car pool passengers comprise reimbursements. The subsidy paid to Joey by a public utility for energy conservation is excluded from income. Bequests, such as the one Peter received, are also excluded from income -- even if the bequest is cash.Correct Answer: B
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