REG Questions

A CPA's adjusted gross income (AGI) for the preceding 12- month tax year exceeds
$150,000. Which of the following methods is (are) available to the CPA to compute the
required annual payment of estimated tax for the current year in order to make timely
estimated tax payments and avoid the underpayment of estimated tax penalty?
I. the annualization method
II. the seasonal method I only

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income
from the operation of their retail candy shop. Their adjusted gross income was $50,000. The
Burgs itemized their deductions on Schedule A. The following unreimbursed cash
expenditures were among those made by the Burgs during the year:
without regard to the adjusted gross income percentage threshold, what amount may the
burgs claim in their current year return as qualifying medical expenses? $4,300
what amount should the burgs deduct for gifts to charity in their itemized deductions on
schedule A for the current year? $60
what amount should the burgs deduct for taxes expense in their itemized deductions on
Schedule A for the current year? $1,200
without regard to the $100 "floor" and the adjusted gross income percentage threshold, what
amount should the burgs deduct for the casualty loss in their itemized deductions on schedule
A for the current year? $0
alternative minimum tax preferences include: tax-exempt interest from private activity
bonds = yes
charitable contributions of appreciated capital gain property = no

an employee who has had social security withheld in an amount greater than the maximum
for a particular year may claim: the excess as a credit against income tax, if that excess
resulted from correct withholding by two or more employers
an individual starts paying student loan interest in the current year. how many years may the
individual deduct a portion of the student loan interest? duration of time that interest is
paid
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest
investment expenses, and $5,000 in investment interest expense. How much is the taxpayer
allowed to deduct on the current-year's tax return for investment interest expenses?
$5,000
an individual taxpayer reports the following information:
what amount of investment interest can the taxpayer deduct in the current year? $100
an individual's losses on transactions entered into for personal purposes are deductible only
if: the losses qualify as casualty or theft losses
Andre Davis is 17 years old and lives at home with his parents. He earned $5,000 in the
current tax year mowing lawns. Andre also received $3,000 in interest on a corporate bond
that his grandmother gave him. Assuming the 2019 "kiddie tax" threshold of $2,200 (and
standard deduction of $1,100), at what marginal tax rate is Andre's $8,000 of income taxed?
$7,2000 less the standard deduction is taxed at andre's marginal tax rate. $800 is taxed
at the rate applicable to estates and trusts
Beginning in 2013, a new Medicare tax was levied on certain income. Which of the following
statements is true regarding this new tax? The tax is 3.8% and is levied on the lesser of (1)
the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold
amount.
Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the
regular standard deduction for a couple married filing jointly is $24,400. What is the
maximum standard deduction available to Bob and Nancy? $27,000
Carroll, a 35-year-old unmarried taxpayer with an adjusted gross income of $100,000,
incurred and paid the following unreimbursed medical expenses for 2018:
Doctor bills resulting from a serious fall $5,000
Cosmetic surgery that was necessary to correct a congenital deformity $15,000
Carroll had no medical insurance. For regular income tax purposes, what was Carroll's
maximum allowable medical expense deduction, after the applicable threshold limitation, for
the year? $10,000
charitable contributions subject to the 60-percent limit that are not dully deductible in the
year made may be: carried forward five years
Chris Baker's adjusted gross income on her current year tax return was $160,000. The amount
covered a 12-month period. For the next tax year, Baker may avoid the penalty for the
underpayment of estimated tax if the timely estimated tax payments equal the required annual
amount of:
I. 90% of the tax on the return for the current year paid in four equal installments.
II. 110% of prior year's tax liability paid in four equal installments. both I and II
Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the
current applicable standard deduction for dependents is $950, how much of Chris' income
will be taxed at rates that apply to estates and trusts?$1,100
cole earned $3,000 in wages, incurred $1,000 in unreimbursed emplyee business expenses,
paid $400 as interest on a student loan, and contributed $100 to a charity? what is cole's
adjusted gross income? $2,600
davis, a sole proprietor with no employees, has a keogh profit-sharing plan to which he may
contribute and deduct 25% of his annual earned income. for this purpose, "earned income" is
defined as net self-employment earnings reduced by the: deductible keogh contribution
and one-half of the self-employment tax
Dawn White's adjusted gross income on her Year 1 tax return was $100,000. The amount
covered a 12-month period. For the Year 2 tax year, the minimum payments required from
White to avoid the penalty for the underpayment of estimated tax is: 90% of the current
tax on the return for the current year paid in four equal installments or 100% of the prior
year's tax liability paid in four equal installments
Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet's adjusted
gross income was $40,000 and he made a $1 ,500 substantiated cash donation directly to a
needy family. Deet also donated art, valued at $11 ,OOO, to a local art museum. Deet had
purchased the art work two years earlier for $2,000. What was the maximum amount of the
charitable contribution allowable as an itemized deduction on Deet's current year income tax
return? $11,000
don mills, a single taxpayer, had $70,000 in taxable income in the current year. mills had no
tax preferences. his itemized deductions were as follows:
what amount did mills report as alternative minimum taxable income before the AMT
exemption? $77,000
doyle has gambling losses totaling $7,000 during the current year. doyle's adjusted gross
income is $60,000, including $3,000 in gambling winnings. doyle can itemize the deductions.
what amount of gambling losses is deductible? $3,000
During the current year, Wood's residence had an adjusted basis of $150,000 and it was
destroyed by a tornado. The location was a federally declared disaster area. An appraiser
valued the decline in market value at $175,000. Later in the current year, Wood received
$130,000 from his insurance company for the property loss and did not elect to deduct the
casualty loss in an earlier year. Wood's current year adjusted gross income was $60,000 and
he did not have any casualty gains. What total amount can Wood deduct as a current year
itemized deduction for casualty loss, after the application of the threshold limitations?
$13,900
During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of
$1 ,200 to move household goods and $2,500 in temporary living expenses. Barlow was not
reimbursed for any of these expenses. What amount should Barlow deduct as itemized
deduction for moving expense? $0
During the year, Scott charged $4,000 on his credit card for his dependent son's medical
expenses. Payment to the credit card company had not been made by the time Scott filed his
income tax return in the following year. In addition, in the current year, Scott paid a
physician $2,800 for the medical expenses of his wife, who died in the prior year.
Disregarding the adjusted gross income percentage threshold, what amount could Scott claim
in his current year income tax return for medical expenses? $6,800
farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following
deductions for regular income tax purposes:
what are farr's total allowable itemized deductions for computing alternative minimum
taxable income? $11,000
for regular tax purposes, with regard to the itemized deduction for qualified residence
interest, home equity indebtedness incurred during a year: is only deductible when used to
buy, build, or substantially improve the taxpayer's home that secures the loan
For the current year, Jennifer has self-employment net income of $50,000 before any Keogh
deduction and no other earned income for the year. The total amount of self- employment tax
related to Jennifer's earnings was $7,064. What is the maximum amount Jennifer may deduct
for contributions to her Keogh plan for the year? $9,294
For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000
in wages from his teaching job. He is covered by the university's pension plan. Sheila is a
volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in
interest income and $50 in prize winnings from a local radio contest. Each would like to
make a deductible contribution to an individual retirement account for the current year. They
also believe they will be eligible to claim a tax credit for these contributions. Which of the
following is correct? deductible contribution = yes
claim credit = yes

For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and
was covered by his employer's qualified pension plan. Pat was unemployed and received
$5,000 in alimony payments (from a divorce agreement executed in 2017) for the first four
months of the year before remarrying. The couple had no other income. Each contributed
$5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return
is: $10,000
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur
expenses of $4,000 for after- school care for each child. Their only income is from wages.
Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and
Dependent Care Credit may the Woods claim on their joint tax return? $500
how may taxes paid by an individual to a foreign country be treated? as a credit against
federal income taxes due
in the current year, an unmarried individual with modified adjusted gross income of $25,000
paid $1,000 interest on a qualified education loan entered into on july 1. how may the
individual treat the interest for income tax purposes? as a $1,000 deduction to arrive at
AGI for the year
In the current year, Joan Frazer's residence was totally destroyed by a hurricane. It was
located in a federally declared disaster area. The property had an adjusted basis and a fair
market value of $130,000 before the hurricane. During the year, Frazer received insurance
reimbursement of $120,000 for the destruction of her home. Frazer's current year adjusted
gross income was $70,000. Frazer had no casualty gains during the year. What amount of the
storm loss was Frazer entitled to claim as an itemized deduction on her current year tax
return? $2,900
In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages
and was covered by his employer's qualified pension plan. Jane was employed part- time and
received $7,000 in wages. The couple had no other income. Each contributed $5,000 to an
IRA account. The allowable IRA deduction on their current year joint tax return is:
$10,000
In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a
tornado. The residence was located in a federally declared disaster area. An appraiser valued
the decline in market value at $425,000. Later that same year, Kane received $200,000 from
his insurance company for the property loss and did not elect to deduct the casualty loss in an
earlier year. Kane's Year 1 adjusted gross income was $100,000 and he did not have any
casualty gains. What total amount can Kane deduct as a Year 1 itemized deduction for
casualty loss, after the application of the threshold limitations? $39,900
In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal
property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced
amount under protest and immediately started legal action to recover the overstatement. In
November, Year 11, the matter was resolved in Farb's favor, and he received a $5,000 refund.
Farb itemizes his deductions on his tax returns. Which of the following statements is correct
regarding the deductibility of the property taxes? farb should deduct $8,000 in his year 10
income tax return and should report the $5,000 refund as income in his year 11 income tax
return
Jackson owns two residences. The second residence, which has never been used for rental
purposes, is the only residence that is subject to a mortgage. The following expenses were
incurred for the second residence in the current year: Mortgage interest $5,000 Utilities $1 ,
200 Hazard insurance $6,000 For regular income tax purposes, what is the maximum amount
allowable as a deduction for Jackson's second residence in the current year? $5,000 as
an itemized deduction
Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During
the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution
carryover from his prior year church contribution. What was the maximum amount of
properly substantiated charitable contributions that Jeffrey could report as an itemized
deduction for the current year? 24,500
jim had gambling losses totaling $2,500 for the year. he is including a lottery prize of $5,000
in his gross income this year. the gambling losses are: a deduction from adjusted gross
income
Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income
was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year,
Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four
months earlier for $1,500. What was the maximum amount of the charitable contribution
allowable as an itemized deduction of Jimet's current year income tax return? $1,500
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income
tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in
federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9,
Krete timely filed an extension request to file her individual tax return and paid $300 of
additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her
return on April 30, Year 9, and paid the remaining income tax liability balance. What amount
would be subject to the penalty for the underpayment of estimated taxes? $200
Madison and Nick Koz have two children, ages 8 and 10. Both children meet the definition of
qualifying child. The Koz family has adjusted gross income of $300,000. What is the amount
of the child tax credit on the couple's income tax return? $4,000
matthews was a cash basis taxpayer whose current year records showed the following:
what total amount was matthews entitled to claim for taxes on her current year schedule A
form 1040? $1,900
Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year
she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover
from her prior year church contribution. What was the maximum amount of properly
substantiated charitable contributions that Moore could claim as an itemized deduction for the
current year? $28,000
mr. and mrs. sloan incurred the following expenses during the year when they adopted a
child:
without regard to the limitation of the credit, what amount of the above expenses are
qualifying expenses for the adoption credit? $11,000
On December 1 of the current year, Krest, a self- employed cash basis taxpayer, borrowed
$200,000 to use in her business. The loan was to be repaid on November 30 of the following
year. Krest paid the entire interest amount of $24,000 on December 1 of the current year.
What amount of interest was deductible on Krest's current year income tax return?$2,000
On December 1 of the prior year, Michaels, a self- employed cash basis taxpayer, borrowed
$100,000 to use in her business. The loan was to be repaid on November 30 of the current
year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What
amount of interest was deductible on Michaels' current year income tax return? $11,000
On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to
purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity
line of credit and used the cash to pay bills and take a vacation. That same year they took out
a $7,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest on first loan $19,000
Interest on home equity line of credit $2,500
Auto loan interest $500
For Year 4, how much interest is deductible?$19,000

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to
purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash
to add a new room to their residence. That same year they took out a $5,000 auto loan. The
following information pertains to interest paid in Year 4:
for year 4, how much interest is deductible? $18,500

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the
year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no
insurance. Pat resides in a federally declared disaster area. Pat purchased the car for $20,000.
Immediately before the hurricane, the car's fair market value was $11 ,OOO and immediately
after the hurricane its fair market value was $6,900. What amount should Pat deduct as a
casualty loss for the current year after all threshold limitations are applied?$0
Poole is 45 years old and unmarried. Assume that he is subject to a 15% tax bracket. He had
adjusted gross income of $30,000. Assume a 10% adjusted gross income floor for medical
expenses. The following information applies to Poole:
poole wishes to minimize his income tax. what is poole's total income tax? $2,550
robert had current-year adjusted gross income of $100,000 and potential itemized deductions
as follows:
what are robert's itemized deductions for alternative minimum tax? $17,000
Robinson's personal residence was partially destroyed by a hurricane. Robinson resided in a
federally declared disaster area. The fair market value (FMV) before the hurricane was
$500,000, and the FMV after the hurricane was $300,000. Robinson's adjusted basis in the
home was $350,000. Robinson settled the insurance claim for $175,000. If Robinson's
adjusted gross income for the year is $120,000, what amount of the casualty loss may
Robinson claim after consideration of threshold limitations? $12,900
Sam's Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For
Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to
avoid a penalty for underpayment of estimated tax, what is the minimum amount of Year 3
estimated tax payments that Sam can make? $33,000
smith, a single individual, made the following charitable contributions during the current
year. smith's adjust gross income is $60,000.
what amount should smith deduct as a charitable contribution? $7,000

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and
qualified to itemize deductions. Stein had no charitable contribution carryovers and only
made one contribution during the year. Stein donated stock, purchased seven years earlier for
$17,000, to a tax- exempt educational organization. The stock was valued at $25,000 when it
was contributed. What is the amount of charitable contributions deductible on Stein's current
year income tax return? $24,000
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year.
During the current year, Taylor donated land to a church and made no other contributions.
Taylor purchased the land 15 years ago as an investment for $14,000. The land's fair market
value was $25,000 on the day of the donation. What is the maximum amount of charitable
contribution that Taylor may deduct as an itemized deduction for the land donation for the
current year? $25,000
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 13. During
Year 13, Taylor donated land to a church and made no other contributions. Taylor purchased
the land in Year 1 as an investment for $14,000. The land's fair market value was $25,000 on
the day of the donation. What is the maximum amount of charitable contribution that Taylor
may deduct as an itemized deduction for the land donation for Year 13? $25,000
The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At
the time of the loan, the fair market value of their home was $400,000, and it was
unencumbered by other debt. The interest on the loan qualifies as: nondeductible interest
the credit for prior year alternative minimum tax liability may be carried: forward
indefinitely
the deduction by an individual taxpayer for interest on investment indebtedness is:limited to
the taxpayer's net investment income for the year
The question below includes actual dates that must be used to determine the appropriate tax
treatment of the transaction. For 2019, the Stevensons are filing married filing jointly, and
their adjusted gross income was $58,250. Additional information is as follows:
what amount may the stevensons claim as itemized deductions on their 2019 schedule A
$8,700
treatment of the transaction.
In 2019, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-
employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony for a divorce
finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the
taxpayer's adjusted gross income for the year ended 12/31/2019? $40,000
treatment of the transaction. Pat's divorce decree, finalized in 2016, requires Pat to make the
following transfers to Pat's former spouse during 2019: • Alimony payments of $9,000 to be
reduced to $7,000 when their child attains the age of 18. Property division of stock with a
basis of $2,000 and a fair market value of $3,500. What is the amount of Pat's alimony
deduction for the year ending 12/31/2019? $7,000
treatment of the transaction. Tana's 2015 divorce decree requires Tana to make the following
transfers to Tana's former spouse during 2019:
what is the amount of tana's alimony deduction for the year ended 12/31/2019? $3,000
The Rites are married, file a joint income tax return, and qualify to itemize their deductions in
the current year. Their adjusted gross income for the year was $55,000, and during the year
they paid the following taxes:
what total amount of the expenses should the rites claim as an itemized deduction on their
current-year joint income tax return? $3,500
the self-employment tax is: one-half deductible from gross income in arriving at adjusted
gross income
The Tiller family has a modified adjusted gross income of $50,000. The Tillers have two
children, ages 12 and 13, who qualify as dependents. All of the Tillers' income is from wages
and their tax liability is $1 ,OOO before the child tax credit. What total amount of the child
tax credit will the Tillers use as a credit? What portion of this amount is refundable?
child tax credit taken = $3,800
refundable portion = $2,800

the welles family has three children. which of the children listed below would be subject to
the "kiddie tax"? wilson: 20 years old, full-time college student, fully supported by his
parents
when computing alternative minimum tax, the individual taxpayer may take a deduction for
which of the following items?casualty losses
which allowable deduction can be claimed in arriving at an individual's adjusted gross
income? alimony payment pursuant to a divorce settlement executed on or before
12/31/18
which of the following credits can result in a refund even if the individual had no income tax
liability? earned income credit
which of the following is not a deduction to arrive at adjusted gross income? mortgage
interest
which of the following is not a refundable tax credit? retirement savings contribution
credit
which of the following is not an adjustment or preference to arrive at alternative minimum
taxable income? deductible contributions to individual retirement accounts
which of the following is not an adjustment to arrive at adjusted gross income? qualified
mortgage interest paid
which of the following may not be deducted in the computation of alternative minimum
taxable income of an individual? state income taxes
which of the following requirements must be met in order for a single individual to qualify
for the additional standard deduction? must support dependent child or aged parent =
no
must be age 65 or older or blin = yes
which of the following statements about the alternative minimum tax (AMT) of an individual
is correct? AMT credits may be carried forward to future tax years
which of the following statements about the child and dependent care credit is correct? the
credit is nonrefundable
which of the following statements is correct regarding the deductibility of donations made to
qualifying charities by a cash-basis individual taxpayer? a charitable contribution
deduction is not allowed for the value of services rendered to a charity
which of the following would qualify as a deductible contribution in year 1 for an individual
taxpayer? a $200 contribution to the taxpayer's church charged by credit card on
december 31, year 1
which one of the following expenditures qualifies as a deductible medical expense for tax
purposes? transportation to physician's office for required medical care
which one of the following statements is correct regarding the deductibility of an individual's
medical expenses? a medical expense deduction is allowed for payments made in the
current year for medical services received in earlier years
Wilson, CPA, uses a commercial tax software package to prepare clients' individual income
tax returns. Upon reviewing a client's computer- generated year 1 itemized deductions,
Wilson discovers that the schedule's deductible investment interest expense is less than the
amount paid by the taxpayer and the amount that Wilson entered into the computer. After
analyzing the entire tax return, Wilson determines that the computer-generated investment
interest expense deduction is correct. Why is the computer-generated investment interest
expense deduction correct?
I. The client's investment interest expense exceeds net investment income.
II. The client's qualified residence interest expense reduces the deductible amount of
investment interest expense. I only
A calendar-year individual filed an income tax return on April 1. This return can be amended
no later than:
a.
Ten months and 15 days after the end of the calendar year.
b.
Three years after the return was filed.
c.
Four months and 15 days after the end of the calendar year.
d.
Three years, three months, and 15 days after the end of the calendar year. Explanation
Rule: An individual may file an amended tax return (Form 1040X) within three (3) years of
the date the original return was filed or within two (2) years of the date the tax was paid,
whichever is later. An original return filed early is considered filed on the due date of the
return.
Choice "d" is correct. In this question, the return was filed early (April 1), so the return is
considered filed as of the due date, on April 15. There is no information on when the tax was
paid, but it can be reasonably assumed that the tax was properly paid on April 1 with the
return. So the latter of the two dates is three years. The question that arises is "three years
from when," and here the question falls somewhat short.
Three of the answers to this question are worded in terms of "the" calendar year. These
answers have to mean the prior calendar year. Three years from April 15 (when the return
was considered to be filed) would be three years, three months, and 15 days from the end of
the prior calendar year.
Choice "c" is incorrect. The date is not four months and 15 days after the end of the (prior)
calendar year. This answer ignores the three years. It appears to be trying to trick candidates
into thinking that April is four months. However, that would mean that the last day that an
amended return could be filed was the date of the filing of the original return.
Choice "a" is incorrect. The date is not ten months and 15 days after the end of the (prior)
calendar year.
Choice "b" is incorrect. The date is not three years after the (original) return was filed. This
answer looks good at first glance, but note that the return was actually filed on April 1. The
Rule above considers an original return filed early to be filed on the due date of the return.
However, the answer says "after the return was filed" and not "after the return was considered
to be filed."
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer
obtained a six-month extension to file until October 15 but did not file the return until
November 1. What is the latest date that an IRA contribution can be made in order to qualify
as a deduction on the prior year's return?
a.
August 15.
b.
October 15.
c.
April 15.
d.
November 1. Choice "c" is correct. For IRAs, the adjustment is allowed for a year ONLY if
the contribution is made by the due date of the tax return for individuals (April 15). The due
date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions
are NOT considered).
Choices "b", "a", and "d" are incorrect, per the above explanation.
A calendar-year taxpayer files an individual tax return for Year 2 on March 20, Year 3. The
taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on
the tax return. What is the latest date that the Internal Revenue Service can assess tax and
assert a notice of deficiency?
a.
March 20, Year 5.
b.
April 15, Year 6.
c.
April 15, Year 5.
d.
March 20, Year 6. Choice "b" is correct. When the return is filed early, the latest date the
IRS can assess tax is 3 years from the date the return is due (April 15, Year 6 in this case).
A claim for refund of erroneously paid income taxes, filed by an individual before the statute
of limitations expires, must be submitted on Form:
a.
1040X
b.
1045
c.
1139
d.
843 Explanation
Choice "a" is correct. An individual submits a claim for refund of erroneously paid income
taxes on Form 1040X.
Choice "c" is incorrect. Form 1139 is used for refund of corporate, not individual, income
taxes.
Choice "b" is incorrect. Form 1045 is used for a quick refund of individual income taxes due
to the carry back of a net operating loss, not for refund of erroneously paid income tax.
Choice "d" is incorrect. Form 843 is used to request a refund of taxes other than income tax.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the definition of a
tax shelter as defined in the Internal Revenue Code. Under the AICPA Statements on
Standards for Tax Services, the CPA should inform the taxpayer of the penalty risks unless
the transaction, at the minimum, meets which of the following standards for being sustained
if challenged?
a.
Realistic possibility.
b.
Substantial authority.
c.
Not frivolous.
d.
More likely than not. Choice "d" is correct. The CPA should inform the taxpayer of the
penalty risks with respect to the tax effects (tax return position) of a transaction unless the
transaction, at the minimum, meets the more-likely-than-not standard.
Choices "c", "a", and "b" are incorrect.
Reason: "Not frivolous," "realistic possibility," and "substantial authority" are lesser
standards than the more-likely-than-not standard. So, if the transaction meets only one of
these lesser standards, the CPA must inform the taxpayer of the penalty risks with respect to
the tax effects (tax return position) of a transaction.
A CPA prepares income tax returns for a client. After the client signs and mails the returns,
the CPA discovers an error. According to Treasury Circular 230, the CPA must:
a.
Prepare an amended return within 30 days of the discovery of the error.
b.
Promptly resign from the engagement and cooperate with the successor accountant.
c.
Promptly advise the client of the error.
d.
Document the error in the workpapers. Explanation
Choice "c" is correct. When a CPA discovers an error in a previously filed return, the CPA
must promptly notify the client of the error.
Choice "d" is incorrect. Documentation is not sufficient. The client must be notified of the
error.
Choice "a" is incorrect. The CPA cannot prepare an amended return without the client's
permission. Furthermore, the CPA is expressly prohibited from notifying the taxing authority
of the error without permission of the client, except when required by law.
Choice "b" is incorrect. When a CPA discovers an error in a previously filed return, the CPA
must promptly notify the client of the error. If the client does not cooperate with correcting
the error, the CPA may then consider whether to continue the professional relationship with
the client.
A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds
$150,000. Which of the following methods is (are) available to the CPA to compute the
required annual payment of estimated tax for the current year in order to make timely
estimated tax payments and avoid the underpayment of estimated tax penalty?
I.
The annualization method.
II.
The seasonal method.
a.
I only.
b.
Both I and II.
c.
II only.
d.
Neither I nor II. Explanation
Choice "a" is correct. In computing the amount of estimated payments due, an individual
taxpayer may choose between the annualized method (90% of current year's tax), or the prior
year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds
$150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example
can use the annualized method. The seasonal method is not permitted.
Choices "c", "b", and "d" are incorrect, per the above explanation.
A member would be in violation of the Standards for Tax Services if the member
recommends a return position under which of the following circumstances?
a.
It does not meet the realistic possibility standard but the member feels the return has a
minimal likelihood for examination by the IRS.
b.
It might result in penalties and the member advises the taxpayer and discusses avoiding such
penalties through disclosing the position.
c.
It does not meet the realistic possibility standard but is not frivolous and is disclosed on the
return.
d.
It meets the realistic possibility standard based on the well-reasoned opinion of the taxpayer's
attorney. Choice "a" is correct. In general, a tax preparer should only recommend a tax
return position if the tax preparer has a good faith belief that the position has a realistic
possibility of being sustained administratively or judicially on its merits if challenged.
However, if a tax return position does not meet the "realistic possibility standard," the
taxpayer may still take the position and the tax preparer may still prepare and sign the return
provided the position is adequately disclosed on the tax return and the position is not
frivolous. The tax preparer should advise the client that it might be possible to avoid certain
penalties if the tax return position is disclosed on the return. However, a tax preparer may not
advise a client to take a position due to the fact that they are unlikely to be audited (playing
the audit lottery). Therefore, the return position in "a" cannot be taken since the tax preparer
is relying upon the unlikelihood of being audited.
Choice "c" is incorrect. In general, a tax preparer should only recommend a tax return
position if the tax preparer has a good faith belief that the position has a realistic possibility
of being sustained administratively or judicially on its merits if challenged. However, if a tax
return position does not meet the "realistic possibility standard," the taxpayer may still take
the position and the tax preparer may still prepare and sign the return provided the position is
adequately disclosed on the tax return and the position is not frivolous. The tax preparer
should advise the client that it might be possible to avoid certain penalties if the tax return
position is disclosed on the return. The return position taken in choice "c" falls within this
guidance.
Choice "b" is incorrect. In general, a tax preparer should only recommend a tax return
of being sustained administratively or judicially on its merits if challenged. However, if a tax
return position does not meet the "realistic possibility standard," the taxpayer may still take
the position and the tax preparer may still prepare and sign the return provided the position is
adequately disclosed on the tax return and the position is not frivolous. The tax preparer
should advise the client that it might be possible to avoid certain penalties if the tax return
position is disclosed on the return. The return position taken in choice "b" falls within this
guidance.
Choice "d" is incorrect. In general, a tax preparer should only recommend a tax return
of being sustained administratively or judicially on its merits if challenged. The return
position taken in "d" falls within this guidance.
A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment
tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also
contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income?
a.
$46,000
b.
$55,000
c.
$40,000
d.
$50,000 Choice "c" is correct. Adjusted gross income is gross income plus or minus
certain other amounts. Half of the $8,000 self-employment tax is an adjustment for AGI, as is
the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution
to a traditional IRA. All of these amounts (total of $17,000) are subtracted from the $57,000
gross income to arrive at AGI. The AGI is thus $40,000.
Choice "b" is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000
IRA contribution.
Choice "d" is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and
the $2,000 IRA contribution.
Choice "a" is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000
self-employed health insurance.
A single-member LLC engages a CPA to prepare the year 2 income tax return. In the course
of preparing the tax return, the CPA discovers that a partnership return was filed for year 1.
Under the AICPA Statements on Standards for Tax Services, which of the following
statements is not true regarding the CPA's duties upon discovering an error in filing the year
1 partnership return?
a.
The CPA must inform the client that an incorrect return was filed; under the AICPA standard,
the CPA has the duty to report the error to the taxpayer.
b.
The CPA should make sure the LLC files the correct return for year 2; under the AICPA
standard, the CPA has the duty to take reasonable steps not to repeat the error.
c.
The CPA should let the LLC decide whether it wants to correct the error; under the AICPA
standard, the CPA has the duty to let the LLC make the decision to correct the error.
d.
The CPA must inform the IRS that the LLC filed an incorrect tax return for year 1; under the
AICPA standard, the CPA has the duty to report the error to all relevant taxing agencies.
Choice "d" is correct. Under the Statements of Standards for Tax Services, a CPA
does not have the duty to report an error on a previously-filed tax return to taxing agencies,
nor does the CPA have the responsibility of making the decision of whether to correct the
error—that decision is left to the taxpayer.
Choice "a" is incorrect. Under the Statements of Standards for Tax Services, a CPA must
inform a client of an error made on a previously-filed tax return.
Choice "b" is incorrect. Under the Statements of Standards for Tax Services, a CPA has the
responsibility to take reasonable steps to not repeat an error made on a previously-filed tax
return.
Choice "c" is incorrect. Under the Statements of Standards for Tax Services, although a CPA
has the responsibility to inform a client of an error made on a previously-filed tax return, the
CPA does not have the responsibility of making the decision of whether to correct the error—
that decision is left to the taxpayer.
A tax preparer can recommend a tax return position according to the Statements on Standards
for Tax Services No. 1:
a.
All of the above.
b.
If the tax position complies with the standards imposed by the applicable tax authority.
c.
If the tax authority has no written standards and the tax preparer has a good-faith belief that
the position has a realistic possibility of being sustained if challenged.
d.
If the tax authority has no written standards and the tax preparer has a reasonable basis for the
position and it is adequately disclosed on the tax return. Choice "a" is correct. The AICPA
Statement on Standards for Tax Services No. 1 states that a tax professional should comply
with the standards, if any, imposed by the applicable tax authority for recommending a tax
position, or preparing or signing a tax return. If the tax authority has no written standards,
then the tax professional may recommend a tax return position or prepare or sign a return
when she has a good-faith belief that the position has a realistic possibility of being sustained
if challenged, or if there is a reasonable basis for the position and it is adequately disclosed on
the tax return.
Choice "d" is incorrect. Choices "d", "c", and "b" are all true statements.
Choice "c" is incorrect. Choices "d", "c", and "b" are all true statements.
Choice "b" is incorrect. Choices "d", "c", and "b" are all true statements.
A tax preparer has advised a company to take a position on its tax return. The tax preparer
believes that there is a 75% possibility that the position will be sustained if audited by the
IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty
would apply. What is the tax preparer's responsibility regarding disclosure of the penalty to
the company?
a.
The tax preparer is responsible for disclosing only the late-payment penalty to the company.
b.
The tax preparer is responsible for disclosing both penalties to the company.
c.
The tax preparer is responsible for disclosing only the accuracy-related penalty to the
company.
d.
The tax preparer has no responsibility for disclosing any potential penalties to the company,
because the position will probably be sustained on audit. Explanation
Choice "b" is correct. This position passes the realistic probability standard. Given the facts,
the position meets the more-likely-than-not standard; that is, a greater than 50% likelihood
that the position, if it is challenged, will be upheld on the position's merits. Therefore, it is
proper for the tax preparer to recommend the position to the client. However, the tax preparer
is required to inform the client of all possible penalties that the IRS could collect if the IRS
disallows the position and, if upon subsequent appeal by the taxpayer the courts conclude that
the taxpayer has not met the more-likely-than-not standard.
Choices "c", "a", and "d" are incorrect based on the above explanation.
A taxpayer has had one issue under audit by the Internal Revenue Service for several years.
Unless the taxpayer agrees otherwise, the IRS has at most how many years to assess taxes
after the taxpayer's return was filed?
a.
Four.
b.
Three.
c.
Five.
d.
Seven. Explanation
Choice "b" is correct. The statute of limitation on assessments is the statutory period during
which the government can assess an additional tax. The statute of limitations applies to all
taxable entities. Absent fraud, a 25 percent understatement of gross income, or agreement
from the taxpayer, the statute of limitations is three years from the later of the original due
date of the return or the date the return is filed.
Choices "a", "c", and "d" are incorrect, per the above rule.
A taxpayer wants to take a position on a tax return that the CPA determines is frivolous.
However, the CPA and the taxpayer determine that the possibility of the return being selected
for audit is remote and that even if the return is selected for audit the issue most likely will
not be raised. According to the AICPA Statements on Standards for Tax Services, under these
circumstances the CPA
a.
Cannot sign or prepare the return with this position.
b.
Can sign or prepare the return with this position because there is a realistic possibility that the
position will not be challenged.
c.
Can sign or prepare the return with this position if the taxpayer signs a tax preparer waiver of
liability.
d.
Can sign or prepare the return with this position as long as the CPA advises the taxpayer that
the position is frivolous. Choice "a" is correct. The CPA cannot sign or prepare a tax
return with a known frivolous position. The likelihood of audit or the raising of the issue is
not relevant in this determination.
Choices "d", "b", and "c" are incorrect, based on the above explanation.
According to the AICPA Statements on Standards for Tax Services, which of the following
factors should a CPA consider in choosing whether to provide oral or written advice to a
client?
a.
The client's business acumen.
b.
The likelihood that current tax litigation will impact the advice.
c.
The tax sophistication of the client.
d.
Whether the client will seek a second opinion. Choice "c" is correct. In determining
whether to provide advice in writing, the tax preparer should consider, among other factors,
the sophistication of the tax client.
Choice "d" is incorrect. Whether the client will seek a second opinion should not impact
giving verbal or written advice.
Choice "b" is incorrect. Verbal or written advice should not be determined by tax legislation.
Choice "a" is incorrect. The client's business acumen should not be considered when deciding
to give them verbal as opposed to written advice.
factors should a CPA consider in choosing whether to provide oral or written advice to a
client?
a.
Whether there is a specific agreement to update the advice for tax law changes.
b.
The amount of fees that the client is willing to pay for the service.
c.
The technical complexity of the advice.
d.
The likelihood that the CPA will not assist the client in implementing the advice. Choice "c"
is correct. In deciding on the form of advice provided to a taxpayer, a CPA should consider
such factors as the following:
a.
The importance of the transaction and amounts involved
b.
The specific or general nature of the taxpayer's inquiry
c.
The time available for development and submission of the advice
d.
The technical complexity involved
e.
The existence of authorities and precedents
f.
The tax sophistication of the taxpayer
g.
The need to seek other professional advice
h.
The type of transaction and whether it is subject to heightened reporting or disclosure

requirements
i.
The potential penalty consequences of the tax return position for which the advice is rendered
j.
Whether any potential applicable penalties can be avoided through disclosure

k.
Whether the member intends for the taxpayer to rely upon the advice to avoid potential
penalties
Choices "d", "b", and "a" are incorrect. In deciding on the form of advice to provide to a
taxpayer, a CPA should consider the factors listed in the explanation above.
identifies the requirements for a tax advisor who believes that a taxpayer penalty might be
assessed related to a position on a tax return?
a.
The tax advisor may not sign a return if the possibility of a penalty exists and the tax position
is not disclosed.
b.
The tax advisor should not recommend a position that could possibly result in a taxpayer
penalty.
c.
The tax advisor is responsible for disclosing the position on the tax return, with or without the
taxpayer's permission.
d.
The tax advisor should advise the taxpayer to disclose the position on the tax return, but the
taxpayer is responsible for deciding whether and how to disclose. Explanation
Choice "d" is correct. A practitioner may prepare or sign a tax return which takes a position
on which a penalty may be assessed, as long as the practitioner has a good-faith belief that the
position has at least a realistic possibility of being sustained, there is a reasonable basis for
the position, and the practitioner advises the taxpayer to appropriately disclose that position.
Choices "a", "b", and "c" are incorrect per the explanation above.
Repair and maintenance of motorized wheelchair for physically handicapped dependent child
$ 300
Tuition, meals, and lodging at special school for physically handicapped dependent child in
the institution primarily for the availability of medical care, with meals and lodging furnished
as necessary incidents to that care
4,000
State income tax
1,200
Self-employment tax
7,650
Four tickets to a theatre party sponsored by a qualified charitable organization; not

considered a business expense; similar tickets would cost $25 each at the box office
160
Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair
value $600 before accident and $200 after accident
90
Fee for breaking lease on prior apartment residence located 20 miles from new residence
500
Security deposit placed on apartment at new location
900
What amount should the Burgs deduct for gifts to charity in their itemized deductions on
Schedule A for the current year?
a.
$0
b.
$60
c.
$160
d.
$100 Choice "b" is correct. $60
Payment to qualified charity $ 160
Fair value of 4 tickets at $25 (100)
Charitable contribution $ 60
$ 300
4,000
State income tax
1,200
Self-employment tax
7,650
160
90
500
900
What amount should the Burgs deduct for taxes expense in their itemized deductions on
a.
$7,650
b.
$1,200
c.
$3,825
d.
$5,025 Choice "b" is correct. $1,200 tax deduction for state income tax.
Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in
arriving at AGI.
$ 300
4,000
State income tax
1,200
Self-employment tax
7,650

160
90
500
900
Without regard to the adjusted gross income percentage threshold, what amount may the
Burgs claim in their current year return as qualifying medical expenses?
a.
$0
b.
$4,000
c.
$4,300
d.
$300 Choice "c" is correct. $4,300 medical expenses.
Wheelchair repair $ 300
School for handicapped 4,000
Total $ 4,300
$ 300
4,000
State income tax
1,200
Self-employment tax
7,650

160
90
500
900
Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what
amount should the Burgs deduct for the casualty loss in their itemized deductions on
a.
$0
b.
$90
c.
$400
d.
$300 Choice "a" is correct. $0 casualty loss deduction on Schedule A because damage
caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does
not qualify as a "casualty."
Alternative minimum tax preferences include:
Tax exempt
interest from private
activity bonds
Charitable
contributions of
appreciated capital
gain property
a.
No
No
b.
No
Yes
c.
Yes
No
d.
Yes
Yes Explanation
Choice "c" is correct. Tax exempt interest from private activity bonds (generally) and
accelerated depletion, depreciation, or amortization are alternative minimum tax preference
items. Charitable contributions of appreciated capital gain property are not alternative
minimum tax preferences.
An employee who has had social security tax withheld in an amount greater than the
maximum for a particular year, may claim:
a.
Such excess as either a credit or an itemized deduction, at the election of the employee, if that
excess resulted from correct withholding by two or more employers.
b.
Reimbursement of such excess from his employers, if that excess resulted from correct
withholding by two or more employers.
c.
The excess as a credit against income tax, if that excess was withheld by one employer.
d.
The excess as a credit against income tax, if that excess resulted from correct withholding by
two or more employers. Choice "d" is correct. An employee who has had social security
tax withheld in an amount greater than the maximum for a particular year, may claim the
excess as a credit against income tax, if that excess resulted from correct withholding by two
or more employers.
Choice "a" is incorrect. The excess resulting from the correct withholding by two or more
employers may only be claimed as a credit against income tax.
Choice "b" is incorrect. The employee may not seek reimbursement of the excess if the
excess resulted from correct withholding by two or more employers.
Choice "c" is incorrect. The employee may not claim the excess as a credit against income
tax, if that excess was withheld by one employer. The employer must adjust the excess for the
employee.
An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the
individual wants to file a claim for refund of federal income taxes that were paid at that time.
The individual must file the claim for refund within which of the following time periods after
those taxes were paid?
a.
Three years.
b.
Two years.
c.
Four years.
d.
One year. Explanation
Choice "b" is correct. When a tax return has not been filed, any claim for refund must be
made within two years from the time the tax was paid.
Choices "d", "a", and "c" are incorrect per the above explanation.
An individual starts paying student loan interest in the current year. How many years may the
individual deduct a portion of the student loan interest?
a.
Five years.
b.
Duration of time that interest is paid.
c.
Ten years.
d.
Current year only. Rule: IRC Section 221 allows the deduction of student loan interest
(above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for
the tax year. There is a phase-out for the deduction in 2016, and there are other minor
restrictions, such as a married couple must file joint returns to take the deduction.
Choice "b" is correct. There is no limitation of the number of years that the interest may be
deducted, other than that the interest may be deducted only when paid.
Choices "d", "a", and "c" are incorrect, based on the above rule.
An individual taxpayer agreed to a finding of fraud on an income tax return filed two years
ago. What is the maximum time limitation, if any, after which the IRS may not assess any
additional taxes against the taxpayer for this tax return?
a.
There is no time limitation.
b.
Two years.
c.
One year.
d.
Three years. Explanation
Choice "a" is correct. There is no statute of limitations for fraud or filing false tax returns.
Choice "c" is incorrect. There is no one year statute of limitations for assessment of tax.
Choice "b" is incorrect. There is no two year statute of limitations for assessment of tax.
Choice "d" is incorrect. The three year statute of limitations will apply to good faith mistakes
with an understatement of income of less than 25%.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest
investment expenses, and $5,000 in investment interest expense. How much is the taxpayer
allowed to deduct on the current-year's tax return for investment interest expenses?
a.
$5,000
b.
$0
c.
$2,000
d.
$3,000 Explanation
Choice "c" is correct. The deduction for investment interest expenses is limited to net taxable
investment income which is defined as taxable investment income minus all related
investment expenses (other than investment interest expense). If the investment expense is an
itemized deduction, then only those expenses exceeding 2% of AGI are considered.
Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income
tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related
expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer
elects not to claim the net capital gains reduced tax rate.
Calculation:
Investment income
$ 10,000
Less: Related investment expenses other than investment interest expenses
(8,000)
Net investment income
$ 2,000
The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i) $2,000
net investment income or (ii) $5,000 investment interest expense.
Choices "b", "d", and "a" are incorrect per the above rule and per the above computations.
An individual taxpayer reports the following information:
U.S. Treasury bond income
$100
Municipal bond income
$200
Rental income
$500
Investment interest expense
$1,000
What amount of investment interest can the taxpayer deduct in the current year?
a.
$1,000
b.
$300
c.
$100
d.
$800 Choice "c" is correct. Investment interest expense deduction is an itemized deduction
limited to net investment income. Taxable interest is included in net investment income.
Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S.
Treasury bond interest.
Choice "b" is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest.
Choice "d" is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and
the rental income.
Choice "a" is incorrect. $1,000 would be correct if all of the interest qualified for deduction
without limitation.
An individual's losses on transactions entered into for personal purposes are deductible only
if:
a.
No part of the transactions was entered into for profit.
b.
The losses qualify as casualty or theft losses.
c.
The losses do not exceed $3,000 ($6,000 on a joint return).
d.
The losses can be characterized as hobby losses. Explanation
Choice "b" is correct. An individual's losses on transactions entered into for personal
purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the
individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per
casualty.
Choice "d" is incorrect. If the losses can be characterized as hobby losses, none of the loss is
deductible.
Choice "c" is incorrect. Losses entered into for personal purposes other than casualty losses
are not deductible in any amount.
Choice "a" is incorrect. If no part of the transaction was entered into for profit, none of the
related loss is deductible.
Arthur Younger, a CPA and a member of the AICPA, is preparing a federal tax return for his
client, Albert Capon, a reputed member of an organized crime family near Chicago. Capon is
very reluctant to provide any information to Younger to answer questions that are posed on
the return.
According to the AICPA's Statements on Standards for Tax Services, which of the following
statements is correct for this situation?
a.
If Younger cannot obtain the information to answer the questions, he can answer them as he
thinks they should be answered given his knowledge of the facts of the situation.
b.
Not all questions on a return are of equal importance. However, Younger must make a
reasonable effort to answer all questions.
c.
Younger should make an effort to extract from Capon the information needed to answer the
questions, and, if he cannot obtain the information, he can just "forget" to answer the
questions.
d.
With his responsibility as an advocate for Capon, Younger should answer only those
questions that are advantageous or neutral to Capon and should omit those questions that
might not be advantageous. Explanation
Choice "b" is correct. Not all questions on a return are of equal importance. However,
Younger must make a reasonable effort to answer all questions because an answer to a
question might impact the determination of taxable income or loss and tax liability and the
failure to answer a question might result in an incomplete return or a penalty. Reasonable
grounds for failure to answer a question are that (1) the answer is not easily obtainable and
insignificant, (2) there is uncertainty regarding the meaning of the question, or (3) the answer
is voluminous and a statement to that effect is included on the return.
Choice "c" is incorrect. Younger should make a reasonable effort to obtain from Capon the
information needed to answer the questions. If he cannot obtain the information, he cannot
just "forget" to answer the questions.
Choice "a" is incorrect. If Younger cannot obtain the information to answer the questions, he
cannot just answer them as he thinks they should be answered given his knowledge of the
facts of the situation, especially if he has to sign a preparer's declaration that the return is true,
complete, and correct.
Choice "d" is incorrect. When recommending a tax return position, a preparer has both the
right and the responsibility to be an advocate for the taxpayer with respect to that position.
However, he should not omit an answer merely because it might prove disadvantageous to
Capon.
Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the
regular standard deduction for a couple married filing jointly is $12,600. What is the
maximum standard deduction available to Bob and Nancy?
a.
$15,100
b.
$12,600
c.
$13,850
d.
$13,800 Choice "a" is correct. Because both Bob and Nancy are 65 or older, they are
entitled to the additional standard deduction of $1,250 each in addition to the regular amount.
$12,600 + $1,250 + $1,250 = $15,100
Choices "b", "d", and "c" are incorrect. Per the above explanation, they would each be
entitled to the additional standard deduction in the amount of $1,250 each.
Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby
generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper
reporting of the income and expenses related to the activity?
a.
Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as an
itemized deduction subject to the 2% limitation.
b.
Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction
not subject to the 2% limitation.
c.
Sales and expenses are netted and deducted for AGI.
d.
Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an
itemized deduction subject to the 2% limitation. Choice "d" is correct. Based upon the
facts presented ("Brenda makes jewelry as a hobby..."), this activity is not a trade or business
activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as
itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as
state and local income taxes and property taxes, which would be allowed regardless of
whether or not the activity were engaged in for profit and (ii) all other expenses that would be
allowed if such activity were engaged in for profit. However, the amount of these "other
expenses" cannot exceed gross income reduced by the expenses described in "(i)," above.
Furthermore, the allowable "other expenses" are subject to the "2% of AGI" limitation.
Because Brenda had only $2,000 of gross income, the most she can deduct is $2,000 of the
$3,000 travel expenses she incurred. Because the travel expenses constitute "all other
expenses" (see "(ii)," above), this amount is subject to the "2% of AGI" limitation.
Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason:
that presumption applies only if the activity shows a profit for at least three taxable years
during the five consecutive taxable year period ending with the year in question (year 2 for
this question). Because the facts do not state that during the five year period ending with year
2 Brenda had a profit in at least three of those five years, the presumption is not available to
Brenda. If the presumption would have been available to her and if she had had a profit in at
least three of the five consecutive, ending with year 2, then the sales and expenses would
have been netted and deducted for AGI.
Choices "a", "b", and "c" are incorrect per the above rules.
Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000,
incurred and paid the following unreimbursed medical expenses for the year:
Doctor bills resulting from a serious fall
$ 5,000
Cosmetic surgery that was necessary to correct a congenital deformity
15,000
Carroll had no medical insurance. For regular income tax purposes, what was Carroll's
maximum allowable medical expense deduction, after the applicable threshold limitation, for
the year?
a.
$0
b.
$20,000
c.
$15,000
d.
$10,000 Choice "d" is correct. Both medical expenses are deductible. The cosmetic
surgery is not elective, since it was necessary to correct a congenital deformity.
Doctor Bills
$ 5,000
Surgery
15,000
$ 20,000
AGI Limitation ($100,000 × 10%)
(10,000)
Deduction
$ 10,000
Choices "a", "c", and "b" are incorrect, per the computation above.
Carter incurred the following expenses in the current year: $500 for the preparation of a
personal income tax return, $100 for custodial fees on an IRA, $150 for professional
publications, and $2,000 for union dues. Carter's current year adjusted gross income is
$75,000. Carter, who is not self-employed, itemizes deductions. What will Carter's deduction
be for miscellaneous itemized deductions after any limitations in the current year?
a.
$0
b.
$2,750
c.
$1,250
d.
$750 Choice "c" is correct. Miscellaneous itemized deductions are deductible to the extent
that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI).
AGI:
$ 75,000
Tax preparation:
$ 500
× 2%
Custodial Fees:
100
2% of AGI:
$ 1,500
Publications:
150
Union Dues:
2,000
Total Miscellaneous Deductions:
2,750
(1,500)
2% of AGI
$ 1,250
Allowable Misc. Deductions

Cassidy, an individual, reported the following items of income and expense during the
current year:
Salary
$ 50,000
Alimony paid to a former spouse
10,000
Inheritance from a grandparent
25,000
Proceeds of a lawsuit for physical injuries
50,000
What is the amount of Cassidy's adjusted gross income?
a.
$40,000
b.
$115,000
c.
$50,000
d.
$125,000 Choice "a" is correct. Gross income includes salary, but it excludes inheritance
and proceeds from a lawsuit for physical injuries. Alimony paid is an adjustment from gross
income to arrive at Adjusted Gross Income, as follows:
Gross Income:
Salary
$ 50,000
Inheritance
Proceeds from physical injury lawsuit
Adjustments:
Alimony paid
(10,000)
Adjusted gross income
$ 40,000
Choice "c" is incorrect. Although salary is the only item of taxable gross income on the list,
alimony is an allowable adjustment to arrive at adjusted gross income.
Choice "b" is incorrect. This answer choice includes all items of income given and deducts
the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are NOT
items of taxable gross income.
Choice "d" is incorrect. This answer choice includes all items of income given and does not
deduct the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are
NOT items of taxable gross income, and alimony IS an allowable deduction from gross
income.
Charitable contributions subject to the 50-percent limit that are not fully deductible in the
year made may be:
a.
Carried back two years or carried forward twenty years.
b.
Neither carried back nor carried forward.
c.
Carried forward five years.
d.
Carried forward indefinitely until fully deducted. Choice "c" is correct. Charitable
contributions subject to the 50% limit that are not fully deductible in the year made may be
carried forward five years.
Choice "b" is incorrect. Charitable contributions subject to the 50% limit that are not fully
deductible in the year made may be carried forward.
Choice "a" is incorrect. Net operating losses, not charitable contributions, are carried back 2
years and forward 20 years.
Choice "d" is incorrect. Individual capital losses, not charitable contributions, are carried
forward indefinitely until used up (or taxpayer's death).
Chris Baker's adjusted gross income on her current year tax return was $160,000. The amount
covered a 12-month period. For the next tax year, Baker may avoid the penalty for the
underpayment of estimated tax if the timely estimated tax payments equal the required annual
amount of:
I.
90% of the tax on the return for the current year paid in four equal installments.
II.
110% of prior year's tax liability paid in four equal installments.
a.
I only.
b.
II only.
c.
Neither I nor II.
d.
Both I and II. Choice "d" is correct. Both.
I.
Payment of 90% of the tax on the return for the current year avoids the penalty for
underpayment of estimated tax.
II.
Generally, payment of 110% of the prior year's tax liability avoids the penalty for
underpayment of estimated tax when the taxpayer's AGI from the prior year exceeds
$150,000.
Note: Payment of the lesser of the two above will provide "safe harbor" to the taxpayer.
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses,
paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's
adjusted gross income?
a.
$2,500
b.
$1,600
c.
$3,000
d.
$2,600 Choice "d" is correct. Adjusted Gross Income (AGI) is gross income less adjustments
or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment
listed is $400 in student loan interest, resulting in an AGI of $2,600.
Choice "c" is incorrect. Student loan interest is a deduction to arrive at AGI.
Choice "a" is incorrect. Charitable contributions are itemized deductions subtracted from
AGI.
Choice "b" is incorrect. Unreimbursed employee business expense is an itemized deduction

subtracted from AGI.
Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson
incurred the following moving expenses:
Moving the household goods
$ 2,000
Temporary living expenses in Atlanta
400
Lodging on the way to Atlanta
100
Meals
40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not
included in form W-2) for moving expenses?
a.
$520
b.
$500
c.
$120
d.
$100 Choice "d" is correct. The moving expense deduction is allowable only for direct
moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's
family and (ii) transportation, to the new location, of the taxpayer's household goods and
personal effects. Deductible expenses must be reduced by the amount of employer
reimbursements not properly included on IRS form W-2. No longer is there a deduction for
either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses.
Moving the household goods
$ 2,000
Lodging on the way to Atlanta
100
Less: employer reimbursement not included on IRS form W-2
(2,000)
Deduction (adjustment) for (towards) AGI
$ 100
Choices "c", "b", and "a" are incorrect per the above rule: The $400 temporary living
expenses in Atlanta and the $40 meal expense are not deductible.
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may
contribute and deduct 25% of his annual earned income. For this purpose, "earned income" is
defined as net self-employment earnings reduced by the:
a.
Deductible Keogh contribution and one-half of the self-employment tax.
b.
Self-employment tax.
c.
Deductible Keogh contribution.
d.
Self-employment tax and one-half of the deductible Keogh contribution. Choice "a" is
correct. For Keogh plans, earned income is defined as net self-employment earnings reduced
by the amount of the allowable Keogh deduction and ½ the self-employment tax.
Choice "c" is incorrect. For Keogh plans, earned income is also reduced by ½ the self-
employment tax.
Choice "b" is incorrect. For Keogh plans, earned income is reduced by ½ the self-
employment tax, not the entire tax.
Choice "d" is incorrect. For Keogh plans, earned income is reduced by ½ the self-
employment tax and the full amount of the deductible Keogh contribution.
Dawn White's adjusted gross income on her Year 1 tax return was $100,000. The amount
covered a 12-month period. For the Year 2 tax year, the minimum payments required from
White to avoid the penalty for the underpayment of estimated tax is:
a.
110% of the prior year's tax liability paid in four equal installments only.
b.
90% of the current tax on the return for the current year paid in four equal installments or
110% of the prior year's tax liability paid in four equal installments.
c.
100% of the prior year's tax liability paid in four equal installments only.
d.
90% of the current tax on the return for the current year paid in four equal installments or
100% of the prior year's tax liability paid in four equal installments. Explanation
Choice "d" is correct. The requirement is 90% of the current tax on the return for the current
year paid in four equal installments or 100% of the prior year's tax liability paid in four equal
installments.
Choice "b" is incorrect. 110% of the prior year's tax liability is only required if AGI is in
excess of $150,000.
Choices "a" and "c" are incorrect. There is always an option to pay 90% of the current year's
tax.
Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet's adjusted
gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a
needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had
purchased the art work two years earlier for $2,000. What was the maximum amount of the
charitable contribution allowable as an itemized deduction on Deet's current year income tax
return?
a.
$3,500
b.
$11,000
c.
$12,500
d.
$2,000 Choice "b" is correct. The $1,500 donation is not deductible because it was made
directly to the needy family rather than to a qualified organization. Because the artwork had
been held for more than one year, the fair market value could be deducted. In this case, the
$11,000 was within the taxpayer's limitation of $12,000 (30% of AGI of $40,000) for
donations of appreciated property.
Choice "c" is incorrect. The $1,500 donation is not deductible because it was made directly to
the needy family rather than to a qualified organization.
Choice "a" is incorrect. The $1,500 donation is not deductible because it was made directly to
the needy family rather than to a qualified organization. Furthermore, the fair market value of
the artwork could be deducted because it had been held for more than one year and that value
fell within the 30% of AGI overall limitation for appreciated property.
Choice "d" is incorrect. The fair market value of the artwork could be deducted because it had
been held for more than one year and that value fell within the 30% of AGI overall limitation
for appreciated property.
Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in
the current year. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes
$ 5,000
Home mortgage interest on loan to acquire residence
6,000
Miscellaneous deductions that exceed 2% of adjusted gross income
2,000
What amount did Mills report as alternative minimum taxable income before the AMT
exemption?
a.
$72,000
b.
$75,000
c.
$83,000
d.
$77,000 Choice "d" is correct. Mills' alternative minimum taxable income starts with
his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and
miscellaneous deductions that exceed 2% of adjusted gross income ($2,000) for a total of
$77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not
increase alternative minimum taxable income.
Choice "a" is incorrect. State and local income taxes must be added back to Mills' taxable
income in calculating alternative minimum taxable income.
Choice "b" is incorrect. Miscellaneous deductions that exceed 2% of AGI must be added back
to Mills' taxable income in calculating alternative minimum taxable income.
Choice "c" is incorrect. Home mortgage interest is not added back to Mills' taxable income to
calculate alternative minimum taxable income.
Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross
income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the
deductions. What amount of gambling losses is deductible?
a.
$0
b.
$3,000
c.
$5,800
d.
$7,000 Explanation
Choice "b" is correct. Gambling losses are miscellaneous itemized deductions not subject to
the 2% AGI limitation. The deduction for gambling losses are, however, limited to gambling
winnings.
Choice "a" is incorrect. Gambling losses are deductible up to gambling winnings.
Choice "c" is incorrect. Gambling losses are not subject to the 2% limitation.
Choice "d" is incorrect. The deduction for gambling losses cannot exceed gambling winnings.
During the current year, Tarbet's residence was destroyed by a hurricane. Tarbet's basis in the
property was $150,000. The fair market value determined by an appraiser shortly before the
hurricane was $450,000. In November of the current year, Tarbet received $300,000 from the
insurance company. Tarbet's adjusted gross income was $75,000 and she did not have any
casualty gains during the year. What total amount can Tarbet deduct as a current year
casualty loss itemized deduction, after the application of the threshold limitations?
a.
$142,400
b.
$75,000
c.
$450,000
d.
$0 Explanation
Choice "d" is correct. The calculation for the deduction is as follows:
Smaller loss (lesser of cost or decrease in FMV)
$ 150,000
Less: Insurance Recovery
(300,000)
Taxpayer's Loss
(150,000)
negative, thus it is treated as zero
Less: Floor Amount of $100
(100)
Eligible Loss
Less: 10% of AGI
$ (7,500)
Deductible Loss
0
During the current year, Wood's residence had an adjusted basis of $150,000 and it was
destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in
the current year, Wood received $130,000 from his insurance company for the property loss
and did not elect to deduct the casualty loss in an earlier year. Wood's current year adjusted
gross income was $60,000 and he did not have any casualty gains.
What total amount can Wood deduct as a current year itemized deduction for casualty loss,
after the application of the threshold limitations?
a.
$20,000
b.
$13,900
c.
$25,000
d.
$19,900 Choice "b" is correct. Casualty losses are generally computed as the decline in
fair market value, except that the fair market value is limited to the property's basis, here
$150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this
loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900.
Finally, the remaining total amount of all casualty losses (here there is only one) are
deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000
- $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.)
Choice "c" is incorrect. This is the market value decline minus the adjusted basis.
Choice "a" is incorrect. This is the adjusted basis minus the insurance reimbursement,
without any limitations being applied.
Choice "d" is incorrect. In addition to the $100 per loss nondeductible portion of each
separate casualty loss, there is an overall limitation that the remaining total amount of all
casualty losses is deductible only to the extent that it exceeds 10% of AGI.
During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of
$1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not
reimbursed for any of these expenses. What amount should Barlow deduct as itemized
deduction for moving expense?
a.
$0
b.
$2,700
c.
$3,700
d.
$3,000 Choice "a" is correct. There is no itemized deduction for temporary living expenses,
and the direct moving expenses (such as the costs to move the goods and the costs to move
the taxpayer's family from the old to the new location) are deductible before adjusted gross
income, not as an itemized deduction.
During the year, Scott charged $4,000 on his credit card for his dependent son's medical
expenses. Payment to the credit card company had not been made by the time Scott filed his
income tax return in the following year. In addition, in the current year, Scott paid a
physician $2,800 for the medical expenses of his wife, who died in the prior year.
Disregarding the adjusted gross income percentage threshold, what amount could Scott claim
in his current year income tax return for medical expenses?
a.
$0
b.
$2,800
c.
$6,800
d.
$4,000 Choice "c" is correct. $6,800. Scott could claim $6,800 on his current year tax return
for medical expenses.
Rules:
1.Medical expenses charged to a credit card is expensed in the year the charge is made. It
does not matter when the amount charged is actually paid.
2.Expenses paid for the medical care of a decedent by the decedent's spouse are included as
medical expenses in the year paid, whether they are paid before or after the decedent's death.
Choices "a", "b", and "d" are incorrect, per the above rules.
During the year, the Andradis', who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter's medical
condition
$ 2,300
Mrs. Andradis' face lift
4,000
Physical therapy for their dependent son's soccer injury
3,000
Massage therapy fees at Mr. Andradis' health club obtained because he enjoys massages
500
The Andradis' adjusted gross income for the current year was $65,000. What amount could
be claimed on the Andradis' current year tax return for medical expenses?
a.
$2,300
b.
$5,300
c.
$0
d.
$4,875 Choice "c" is correct. Deductible medical expenses are limited to the amount that
exceeds 10% of the taxpayer's adjusted gross income. Deductible medical expenses are those
expenses that are "necessary" (such as doctors, prescriptions, required surgery, etc.) Non-
deductible expenses are such things as elective surgeries, health club memberships and
unnecessary medical expenditures. The Andradis' AGI is $65,000; 10% of that is $6,500.
Qualified medical expenses are $2,300 for their daughter's prescriptions and $3,000 for
physical therapy for their son. Total allowable gross expenditures of $5,300 are less than the
threshold of $6,500. So the answer is zero.
Choice "a" is incorrect. The son's physical therapy is also a deductible expenditure, and the
$2,300 does not take into account the 10% threshold.
Choice "d" is incorrect. This answer is the threshold, which should then be compared to the
qualified expenses in order to figure the amount to be deducted on Schedule A.
Choice "b" is incorrect. This answer is the total deductible medical expenses; however, the
answer does not take into account the 10% threshold.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable
plan. Easel does not require employees to provide proof of expenses and allows employees to
keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400
per month for business automobile expenses. At the end of the year Mel informs Easel that
the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents
per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund
the overpayment to Easel. What amount should be reported in Mel's gross income for the
year?
a.
$0
b.
$3,600
c.
$1,200
d.
$4,800 Explanation
Choice "d" is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months)
must be reported as part of Mel's gross income for the year (in fact, the $4,800 will be
included as part of Mel's taxable wages on Mel's W-2).
Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any
amounts received by an employee from the employer must be reported by the employer as
part of wages on the employee's W-2 for the year (and subject to income tax withholding
requirements). The gross amount received is reported as income.
Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g.,
the car mileage expenses and the reimbursement to the company) are considered
miscellaneous itemized deductions and are subject to the 2% AGI limitation.
Note: The examiners have attempted to trick the candidate into thinking that this is in some
way an accountable plan because they provided for a return of excess funds received to the
employer. However, remember that the question specifically states that the plan is
nonaccountable.
Choices "a", "c", and "b" are incorrect, per the above rules.
Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following
deductions for regular income tax purposes:
Home mortgage interest on a loan to acquire a principal residence $ 11,000
Miscellaneous itemized deductions above the threshold limitation 2,000
What are Farr's total allowable itemized deductions for computing alternative minimum
taxable income?
a.
$0
b.
$13,000
c.
$11,000
d.
$2,000 Explanation
Choice "c" is correct. Both mortgage interest and miscellaneous itemized deductions are
deductible for regular (schedule A) tax purposes. However, miscellaneous itemized
deductions are "adjustments" and, therefore, are not allowed as deductions for alternative
minimum tax (AMT) purposes.
Choice "a" is incorrect. Mortgage interest is allowed as a deduction for AMT purposes.
Choice "d" is incorrect. Miscellaneous itemized deductions are not allowed for AMT
purposes
Choice "b" is incorrect. The $2,000 miscellaneous itemized deductions are an add back for
AMT purposes.
For regular tax purposes, with regard to the itemized deduction for qualified residence
interest, home equity indebtedness incurred during a year:
a.
Is limited to $100,000 on a joint income tax return.
b.
Must exceed the taxpayer's net equity in the residence.
c.
Includes acquisition indebtedness secured by a qualified residence.
d.
May exceed the fair market value of the residence. Choice "a" is correct. Home equity
indebtedness is limited to $100,000 on a joint income tax return (or single return), but only
$50,000 if married filing separately.
Choices "c" and "d" are incorrect. Home equity indebtedness is all debt, other than
acquisition debt, that is secured by a qualified residence to the extent it does not exceed the
fair market value of the residence reduced by any acquisition indebtedness.
Choice "b" is incorrect. There is no requirement that home equity indebtedness must exceed
the taxpayer's net equity in the residence.
For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000
in wages from his teaching job. He is covered by the university's pension plan. Sheila is a
volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in
interest income and $50 in prize winnings from a local radio contest. Each would like to
make a deductible contribution to an individual retirement account for the current year. They
also believe they will be eligible to claim a tax credit for these contributions. Which of the
following is correct?
Deductible Contribution
Claim Credit
a.
No
No
b.
Yes
No
c.
Yes
Yes
d.
No
Yes Choice "c" is correct. Although Seth is covered by a plan, the second factor (the
income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be
deductible. In addition, both should qualify for a portion of the credit.
Choices "b", "d", and "a" are incorrect based upon the above explanation.
For the current year, the Stevenson's are filing married filing joint, and their adjusted gross
income was $58,250. Additional information is as follows:
Interest paid on their home mortgage
$ 5,200
State taxes paid
2,000
Medical expenses in excess of 10% AGI
1,500
Deductible contributions to IRAs
4,000
Alimony paid to Mr. Stevenson's first wife
5,000
Child support paid for Mr. Stevenson's daughter

5,100
What amount may the Stevenson's claim as itemized deductions on their current year
Schedule A?
a.
$13,800
b.
$12,300
c.
$8,700
d.
$7,200 Choice "c" is correct. Interest on a home mortgage, state taxes paid, and medical
expenses in excess of 10% AGI are itemized deductions reported on Schedule A.
Contributions to IRAs and alimony paid are adjustments to gross income to arrive at AGI.
Child support is neither an adjustment nor an itemized deduction.
Home mortgage interest
$ 5,200
State taxes paid
2,000
Medical expenses
1,500
Total itemized deductions
$ 8,700
Choice "d" is incorrect. This answer includes only the interest paid on the mortgage and the
state taxes. The medical expenses in excess of 10% AGI are also deductible on Schedule A.
Choice "b" is incorrect. This answer includes the interest, state taxes paid and the child
support. It does not include the medical expenses (as is proper) and should not include the
child support.
Choice "a" is incorrect. This is the total of all items listed, three of which (the IRA
contributions, alimony, and child support) should not be included.
For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and
was covered by his employer's qualified pension plan. Pat was unemployed and received
$5,000 in alimony payments for the first 4 months of the year before remarrying. The couple
had no other income. Each contributed $5,000 to an IRA account. The allowable IRA
deduction on their current year joint tax return is:
a.
$2,000
b.
$10,000
c.
$0
d.
$5,000 Choice "b" is correct. In 2016, taxpayers can contribute and deduct up to $5,500 per
year to an IRA, and alimony is considered earned income for IRA purposes. For couples
filing a joint return where at least one spouse is an active participant in a retirement plan, the
deductible portion of the contribution is phased out. For a spouse who is an active participant,
the phase-out range in 2016 begins at AGI of $98,000 and is complete at $118,000. For a
spouse who is not an active participant, but is married to someone who is, the phase-out range
begins at $184,000 and is complete at $194,000 (2016). The earned income for IRA purposes
here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse
receives a deduction of the $5,000 contribution actually made.
Choice "d" is incorrect. Pat's alimony is deemed "earned income" for the IRA contributions.
However, even if Pat had no earned income, a spouse with no earned income can deduct up
to $5,500, provided the couple's combined earned income is at least $11,000.
Choice "a" is incorrect. The $2,000 was a pre-2002 rule for IRA contribution limits for
individuals and is a distractor in this case.
Choice "c" is incorrect. When a taxpayer or taxpayer's spouse is an active participant in a

pension plan at work, the full deduction is allowed if the earned income of the couple is
below the phase-out ranges (as is in this case).
Four years ago, an individual taxpayer purchased silver coins at face value for $200. The
coins were stolen in the current year, when their fair market value was $1,000. The coins
were not covered by insurance. Without considering the limit based on AGI, what is the
maximum amount of loss that the taxpayer can deduct on the current year's tax return?
a.
$100
b.
$900
c.
$1,000
d.
$200 Explanation
Choice "a" is correct. This is a casualty and theft loss. The loss starts at the lesser of decrease
in FMV or adjusted basis. That is $200. There is no insurance recovery by which to reduce
the loss. However, the tax code requires a reduction of $100 per event. This brings the $200
loss down to $100.
Choice "d" is incorrect. $200 is the full amount of the loss before the reduction of $100 per
event.
Choice "b" is incorrect. $900 incorrectly uses the FMV of $1,000 and then reduces it by the
$100 per event.
Choice "c" is incorrect. $1,000 is the FMV of the coins, which is not relevant.
Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur
expenses of $4,000 for after school-care for each child. Their only income is from wages.
Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and
Dependent Care Credit may the Woods claim on their joint tax return?
a.
$500
b.
$1,200
c.
$800
d.
$1,600 Choice "a" is correct. First of all we need to determine the eligible expenses. Only
expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000
spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000.
Then it is further limited because it is limited to the lowest earned income of either spouse.
That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit
range. The credit is 20% of $2,500, or $500.
Choices "d", "c", and "b" are incorrect, per the above explanation.
Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of
the current year, Grey was permanently transferred to Florida by his employer. Grey worked
full-time for the entire year. In the current year, Grey incurred and paid the following
unreimbursed expenses in relocating:
Lodging and travel expenses while moving
$ 1,000
Pre-move househunting costs
1,200
Costs of moving household furnishings and personal effects
1,800
What amount was deductible as moving expense on Grey's current year tax return?
a.
$1,800
b.
$2,800
c.
$1,000
d.
$4,000 Choice "b" is correct. The $1,000 lodging and travel expenses are fully deductible. A
pre-move househunting trip is not deductible. The $1,800 expense of moving household
furnishings and personal effects is fully deductible. The total deductible amount is $2,800
($1,000 + $1,800).
Choice "d" is incorrect. Pre-move househunting costs are not deductible.

Choice "a" is incorrect. Lodging and travel expenses while moving are fully deductible.
Choice "c" is incorrect. Costs of moving household furnishings and personal effects are fully
deductible.
How may taxes paid by an individual to a foreign country be treated?
a.
As an itemized deduction subject to the 2% floor.
b.
As a nondeductible expense.
c.
As an adjustment to gross income.
d.
As a credit against federal income taxes due. Choice "d" is correct. A taxpayer may claim a
credit against federal income taxes due for foreign income taxes paid to a foreign country or a
U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In
lieu of this credit, an individual might find it better to deduct the taxes as an itemized
deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this
question is choice "d"; however, also note that the other option for treating the taxes paid to
the foreign country is not included as an answer option.
Choice "a" is incorrect. Although taxes paid by an individual to a foreign country are
allowable itemized deductions, they are NOT subject to the 2% floor.
Choice "c" is incorrect. An adjustment is not allowed for taxes paid by an individual to a
foreign country. A taxpayer may claim a credit against federal income taxes due for foreign
income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an
individual might find it better to deduct the taxes as an itemized deduction (NOT subject to
the 2% floor) instead.
Choice "b" is incorrect. A taxpayer may claim a credit against federal income taxes due for
foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an
individual might find it better to deduct the taxes as an itemized deduction (NOT subject to
the 2% floor) instead.
If an individual paid income tax in the current year but did not file a current year return
because his income was insufficient to require the filing of a return, the deadline for filing a
refund claim is:
a.
Three years from the date the tax was paid.
b.
Two years from the date a return would have been due.
c.
Three years from the date a return would have been due.
d.
Two years from the date the tax was paid. Explanation
Choice "d" is correct. Two years from the date the tax was paid.
Rule: A taxpayer may file a claim for refund within three years from the time the return was
filed, or two years from the time the tax was paid, whichever is later. Since no return has
been filed, the refund claim must be filed within two years from the time the tax was paid.
Choices "b", "a", and "c" are incorrect, per the above rule.
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest
authoritative value for tax planning of transactions?
a.
IRS agents' reports.
b.
IRS regulations.
c.
Internal Revenue Code.
d.
Tax court decisions. Explanation
Choice "c" is correct. According to the IRS's website under Tax Code, Regulations and
Official Guidance, the "federal tax law begins with the Internal Revenue Code (IRC), [which
was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.)." The IRC holds
the most authoritative value.
Choice "b" is incorrect. According to the IRS's website under Tax Code, Regulations and
Official Guidance, the IRS regulations or "Treasury regulations (26 C.F.R.)—commonly
referred to as Federal tax regulations—pick up where the Internal Revenue Code (IRC)
leaves off by providing the official interpretation of the IRS by the U.S. Department of
Treasury." Regulations give directions on how to apply the law outlined in the Internal
Revenue Code. Regulations have the second most force and effect, second only to the IRC.
Choice "d" is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not
have the authority of the IRC.
Choice "a" is incorrect. The reports of IRS agents are used to report on specific taxpayer
situations. IRS agents' reports apply the Internal Revenue Code, IRS regulations, and other
forms of authoritative literature, but they do not hold the value that the IRC, the IRS
regulations, or even tax court decisions have.
In the current year, an unmarried individual with modified adjusted gross income of $25,000
paid $1,000 interest on a qualified education loan entered into on July 1. How may the
individual treat the interest for income tax purposes?
a.
As a $1,000 deduction to arrive at AGI for the year.
b.
As a nondeductible item of personal interest.
c.
As a $1,000 itemized deduction.
d.
As a $500 deduction to arrive at AGI for the year. Rule: The adjustment for education loan
interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500
(whichever is lower), and all qualified education loan interest is allowed as part of the
adjustment. The adjustment is phased-out for single taxpayers with modified AGI between
$65,000 and $80,000 (2016) and married filing jointly between $130,000 and $160,000
(2016).
Choice "a" is correct. Per the above rule, the $1,000 of qualified education loan interest paid
in the year is reported as a deduction to arrive at AGI for the year.
Choice "d" is incorrect. The adjustment for education loan interest (an above-the-line
deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and
all qualified education loan interest is allowed as part of the adjustment. Therefore, the total
amount paid of $1,000 is an allowable adjustment. (The $500 limit likely refers to an older
education tax law that is no longer in effect.)
Choice "c" is incorrect. Allowable education loan interest paid is deductible as an adjustment,
which is an above-the-line deduction to arrive at AGI. It is not reported as the less-
advantageous itemized deduction.
Choice "b" is incorrect. Allowable education loan interest paid is deductible as an adjustment,
which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this
case there is no disallowed portion) is a nondeductible item of personal interest.
In the current year, Drake, a disabled taxpayer, made the following home improvements:
Cost
Pool installation, which qualified as a medical expense and increased the value of the home
by $25,000
$ 100,000
Widening doorways to accommodate Drake's wheelchair (the improvement did not increase
the value of his home)
10,000
For regular income tax purposes and without regard to the adjusted gross income percentage
threshold limitation, what maximum amount would be allowable as a medical expense
deduction in the current year?
a.
$10,000
b.
$75,000
c.
$85,000
d.
$110,000 Choice "c" is correct. A capital expenditure for the improvement of a home
qualifies as a medical expense if it is directly related to the prescribed medical care.
However, it is deductible to the extent that the expenditure exceeds the increase in value of
the home. Thus, Drake may only deduct $75,000, the difference between the cost of
improvement ($100,000) and the increase in market value ($25,000) of the home. In addition,
the full cost of home-related capital expenditures to enable a physically handicapped
individual to live independently and productively qualifies as a medical expense. The
widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is
deductible.
Choice "d" is incorrect. Although a capital expenditure for the improvement of a home
qualifies as a medical expense, it is only deductible to the extent that the expenditure exceeds
the increase in value of the home. Thus, Drake may only deduct $75,000, the difference
between the cost of improvement ($100,000) and the increase in market value ($25,000) of
the home.
Choice "b" is incorrect. In addition, to the capital improvement expenditure of $75,000, the
full cost of home-related capital expenditures to enable a physically handicapped individual
to live independently and productively qualifies as a medical expense. The widening of
hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible.
Choice "a" is incorrect. Both the capital improvement expenditure of $75,000 and the full
cost of home-related capital expenditures to enable a physically handicapped individual to
live independently and productively ($10,000) qualify as medical expenses.
In the current year, Joan Frazer's residence was totally destroyed by fire. The property had an
adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer
received insurance reimbursement of $120,000 for the destruction of her home. Frazer's
current year adjusted gross income was $70,000. Frazer had no casualty gains during the
year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on
her current year tax return?
a.
$10,000
b.
$8,500
c.
$8,600
d.
$2,900 Choice "d" is correct. The casualty loss is measured by the difference in the property's
value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty
loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by
$100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this
case) is further reduced by 10% of the taxpayer's adjusted gross income for the year. That is
10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer's tax
return is $9,900 - $7,000 = $2,900.
In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages
and was covered by his employer's qualified pension plan. Jane was employed part-time and
received $7,000 in wages. The couple had no other income. Each contributed $5,000 to an
IRA account. The allowable IRA deduction on their current year joint tax return is:
a.
$2,500
b.
$5,000
c.
$0
d.
$10,000 Choice "d" is correct. In 2016, taxpayers can contribute and deduct up to
$5,500 to an IRA. For couples filing a joint return, where at least one spouse is an active
participant in a retirement plan, the deductible portion is phased out. For a spouse who is an
active participant, the phase-out range in 2016 begins at $98,000. For a spouse who is not an
active participant, but is married to someone who is, the phase-out range in 2016 begins at
$184,000. The Smith's income is below both phase-out ranges, so they can each deduct the
full $5,000 contributed, or $10,000 in total.
Choices "c", "b", and "a" are incorrect, per the above explanation.
In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a
tornado. An appraiser valued the decline in market value at $425,000. Later that same year,
Kane received $200,000 from his insurance company for the property loss and did not elect to
deduct the casualty loss in an earlier year. Kane's Year 1 adjusted gross income was $100,000
and he did not have any casualty gains.
What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the
application of the threshold limitations?
a.
$50,000
b.
$40,000
c.
$49,900
d.
$39,900 Choice "d" is correct. The starting point is the lesser of adjusted basis or
decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as
follows:
Smaller Loss $ 250,000
Insurance Recovery (200,000)
Taxpayer's Loss 50,000
Less $100 (100)
Eligible Loss 49,900
10% AGI Limitation (10,000)
Deductible Loss $ 39,900
Choices "b", "c", and "a" are incorrect, per the above explanation.
In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal
property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced
amount under protest and immediately started legal action to recover the overstatement. In
November, Year 11, the matter was resolved in Farb's favor, and he received a $5,000 refund.
Farb itemizes his deductions on his tax returns.
Which of the following statements is correct regarding the deductibility of the property taxes?
a.
Farb should not deduct any amount in his Year 10 income tax return when originally filed,
and should file an amended Year 10 income tax return in Year 11.
b.
Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000
refund as income in his Year 11 income tax return.
c.
Farb should deduct $3,000 in his Year 10 income tax return.
d.
Farb should not deduct any amount in his Year 10 income tax return and should deduct
$3,000 in his Year 11 income tax return. Explanation
Choice "b" is correct. Under the tax benefit rule, Farb should report the $5,000 refund as
income in Year 11 since Farb itemizes deductions and would have received a tax benefit from
deducting the $8,000 paid in Year 10.
Choice "d" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should
deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net
the refund against the amount paid and deduct the net amount in Year 11.
Choice "c" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should
deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net
the refund against the amount paid and deduct the net amount in Year 10.
Choice "a" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should
deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.
Ivan von Hindenberg, CPA and a member of the AICPA, has been preparing federal tax
returns for one of his clients for many years. Two years ago, he took a position on a return
and that position was settled in an appeals conference. He is now considering a different
position on the current return. According to the AICPA's Statements on Standards for Tax
Services, which of the following statements is correct for this situation?
a.
Ivan can take a different position if he files Form 1040 NP within two years of the date of the
previous return or the date the tax was paid, whichever is earlier.
b.
Ivan cannot take a different position on the current return because the IRS is bound to be
consistent in their positions and so is he.
c.
Ivan cannot take a different position on the current return under any circumstances. He is
bound by the earlier determination.
d.
If the determination on the prior return was caused by lack of or insufficiency of supporting
data, Ivan can take a different position on the current return if he has better supporting data
for the new return. Explanation
Choice "d" is correct. If the determination on the prior return was caused by lack of
supporting data, Ivan can take a different position on the current return if he has better
supporting data for the new return.
Choice "a" is incorrect. There is no such thing as a Form 1040 NP and there is no necessity to
file it within a certain timeframe.
Choice "b" is incorrect. Although the IRS is normally consistent with respect to a particular
position, they are not bound to be so. Similarly, a taxpayer (or a preparer acting for the
taxpayer) is not bound to follow the treatment of an item as consented to in a previous
administrative proceeding.
Choice "c" is incorrect. Ivan can take a different position under certain circumstances. He is
not necessarily bound by the earlier determination. There should be sufficient justification for
the different position.
Jackson owns two residences. The second residence, which has never been used for rental
purposes, is the only residence that is subject to a mortgage. The following expenses were
incurred for the second residence in the current year:
Mortgage interest
$5,000
Utilities
$1,200
Hazard insurance
$6,000
For regular income tax purposes, what is the maximum amount allowable as a deduction for
Jackson's second residence in the current year?
a.
$6,200 in determining adjusted gross income.
b.
$11,000 in determining adjusted gross income.
c.
$12,200 as an itemized deduction.
d.
$5,000 as an itemized deduction. Choice "d" is correct. For a personal residence that is
not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the
only deductible amount here is for the mortgage interest. Note that property taxes (not present
in this problem) are deductible. In this problem we are not told whether the interest relates to
acquisition indebtedness or home equity indebtedness. The deduction for interest on home
equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to
be a problem here even if the interest relates solely to home equity indebtedness. This is
because of the amount of interest and the fact that there is no debt associated with Jackson's
other residence. The deduction for personal residence interest is an itemized deduction.
Choice "a" is incorrect. The utilities cost is not deductible; furthermore, the deduction for
personal residence interest is an itemized deduction.
Choice "b" is incorrect. The insurance cost is not deductible; furthermore, the deduction for
personal residence interest is an itemized deduction.
Choice "c" is incorrect. For a personal residence, neither insurance costs nor utilities costs are
deductible.
Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During
the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution
carryover from his prior year church contribution. What was the maximum amount of
properly substantiated charitable contributions that Jeffrey could report as an itemized
deduction for the current year?
a.
24,500
b.
27,500
c.
5,000
d.
19,500 Choice "a" is correct. The contribution limit for a church is 50% of the contribution
base (adjusted gross income in this case). Jeffrey's contribution limit for the current year
would be $55,000 × 50% = $27,500. Against that limit, he would be able to take his
contribution carryover from the prior year ($5,000) and the current year's contributions
($19,500) for a total of $24,500.
Choice "b" is incorrect. This is the maximum allowed; however, Jeffrey cannot deduct more
than he actually contributed.
Choice "d" is incorrect. Jeffrey is able to take his carryover contributions from the prior year
as well.
Choice "c" is incorrect. Jeffrey is not limited to only his carryover contributions.
Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income
was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year,
Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four
months earlier for $1,500. What was the maximum amount of the charitable contribution
allowable as an itemized deduction of Jimet's current year income tax return?
a.
$2,000
b.
$1,500
c.
$0
d.
$5,000 Choice "b" is correct. $1,500.
Deductible amount is lower of:
Stock at cost (short term property)
$1,500*
AGI limit (50% of $30,000)
15,000
*Allowable contribution
Rule: Contributions of long-term property are generally deductible at fair market value at the
date of the gift. Contributions of short-term property are generally deductible at the lower of
cost or fair market value.
The cash gift to the "needy family" is not deductible because charitable contributions need be
made to organizations that are qualified by the IRS to be deductible.
Keen, a calendar-year taxpayer, reported a gross income of $100,000 on his 20X1 income tax
return. Inadvertently omitted from gross income was a $20,000 commission that should have
been included in 20X1. Keen filed his 20X1 return on March 15, 20X2. To collect the tax on
the $20,000 omission, the Internal Revenue Service must assert a notice of deficiency no later
than:
a.
April 15, 20X8.
b.
April 15, 20X5.
c.
March 15, 20X5.
d.
March 15, 20X8. Explanation
Choice "b" is correct. April 15, 20X5.
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The
assessment period begins from the due date of the return if the return is filed prior to the due
date or "filing date" if the return is filed later (e.g., with an extension). The assessment period
is extended to six years for returns that omit more than 25% of the gross income originally
reported. That is not the case here ($20,000 ÷ $100,000 = 20%).
Choice "c" is incorrect. The return was filed prior to its April 15 deadline.
Choice "d" is incorrect. The return was filed prior to its April 15 deadline and the omission of
gross income was not more than 25%.
Choice "a" is incorrect. The omission from gross income was not more than 25%.
Kopel was engaged to prepare Raff's Year 4 federal income tax return. During the tax
preparation interview, Raff told Kopel that he paid $3,000 in property taxes in Year 4.
Actually, Raff's property taxes amounted to only $600. Based on Raff's word, Kopel
deducted the $3,000 on Raff's return, resulting in an understatement of Raff's tax liability.
Kopel had no reason to believe that the information was incorrect. Kopel did not request
underlying documentation and was reasonably satisfied by Raff's representation that Raff had
adequate records to support the deduction. Which of the following statements is correct?
a.
Kopel is not subject to the preparer penalty for willful understatement of tax liability because
the deduction that was claimed was more than 25% of the actual amount that should have
been deducted.
b.
To avoid the preparer penalty for willful understatement of tax liability, Kopel would be
required to obtain Raff's representation in writing.
c.
To avoid the preparer penalty for willful understatement of tax liability, Kopel was obligated
to examine the underlying documentation for the deduction.
d.
Kopel is not subject to the preparer penalty for willful understatement of tax liability because
Kopel was justified in relying on Raff's representation. Choice "d" is correct. In
preparing or signing a return, a CPA may in good faith rely without verification upon
information furnished by the client or by third parties.
Choice "c" is incorrect. A tax preparer need not examine all underlying documents to assure
that the client is properly representing expenses.
Choice "b" is incorrect. A tax preparer need not obtain a client's representation regarding
deductions in writing.
Choice "a" is incorrect. A tax preparer's liability for misrepresentations does not depend on
the percentage difference between actual expenses and claimed expenses, but rather on
whether the preparer willfully misrepresented the deduction.
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income
tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in
federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9,
Krete timely filed an extension request to file her individual tax return and paid $300 of
additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her
return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?
a.
$16,500
b.
$0
c.
$200
d.
$500 Choice "b" is correct. Provided the taxes due after withholdings were not over $1,000,
there is no penalty for underpayment of estimated taxes. Note that there would be a failure to
pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Choice "c" is incorrect. This $200 would be subject to a failure to pay penalty, but if the
balance due after withholdings is not over $1,000, there is no penalty for underpayment of
estimated taxes.
Choice "d" is incorrect. If the balance of tax due after withholdings is not over $1,000, there
is no penalty for underpayment of estimated taxes.
Choice "a" is incorrect. The penalty for underpayment of estimated taxes is not assessed on
the full amount of the income tax liability, only the unpaid amount after withholdings to the
extent it exceeds $1,000.
Lawson, a CPA, discovers material noncompliance with a specific Internal Revenue Code
(IRC) requirement in the prior-year return of a new client. Which of the following actions
should Lawson take?
a.
Contact the prior CPA and discuss the client's exposure.
b.
Wait for the statute of limitations to expire.
c.
Contact the IRS and discuss courses of action.
d.
Discuss the requirements of the IRC with the client and recommend that client amend the
return. Choice "d" is correct. The CPA should notify the client concerning the
noncompliance and recommend the proper course of action.
Choice "b" is incorrect. The CPA is required to notify and discuss the situation with the
client.
Choice "c" is incorrect. The CPA must discuss the situation with the client and is barred from
contacting the IRS without the client's permission.
Choice "a" is incorrect, based on the above explanation.
Martin filed a timely return on April 15. Martin inadvertently omitted income that amounted
to 30% of his gross income stated on the return. The statute of limitations for Martin's return
would end after how many years?
a.
6 years.
b.
Unlimited.
c.
7 years.
d.
3 years. Explanation
Choice "a" is correct. For a 30% understatement of gross income (anything over 25%), the
statute of limitations is 6 years.
Choice "d" is incorrect. For a 25% (or less) understatement of gross income, the statute of
limitations is 3 years.
Choice "c" is incorrect. There is no 7-year statute of limitations for an understatement of

gross income.
Choice "b" is incorrect. The statute of limitations is unlimited for fraud and filing false
returns, but not for understatements of income. There is no fraud in this question because the
omission was inadvertent.
Martinsen, a calendar-year individual, files a year 1 tax return on March 31, Year 2.
Martinsen reports $20,000 of gross income. Martinsen inadvertently omits $500 interest
income. The IRS may assess additional tax up until which of the following dates?
a.
March 31, Year 5.
b.
April 15, Year 8.
c.
March 31, Year 8.
d.
April 15, Year 5. Explanation
Choice "d" is correct. Generally, the statute of limitations on assessments is three years from
the later of the due date of the return or the date the return was filed (including amended
returns). The IRS has up to six years to assess additional tax if the misstatement is an
understatement of 25% or more of gross income originally reported. In this case, the
misstatement is $500 on $20,000 of gross income, or 2.5%. Therefore, the statute of
limitations for Martinsen is the general rule. In this case, the due date of the return was April
15, Year 2. Martinson filed on March 31, Year 2. Under the general rule, the IRS has until
three years from April 15, Year 2 (or, April 15, Year 5) to assess additional tax.
Choice "a" is incorrect. In this case, the statute of limitations on assessments is three years
from the later of the due date of the return or the date the return was filed (including amended
returns). March 31 is the earlier of the two dates.
Choice "c" is incorrect. Please refer to the discussion for the correct choice "d". This answer
choice is incorrect because it uses the earlier of the two dates and the improper number of six
years as the statute of limitations.
Choice "b" is incorrect. Please refer to the discussion for the correct choice "d". This answer
choice is incorrect because it uses the improper number of six years as the statute of
limitations.
Matthews was a cash basis taxpayer whose current year records showed the following:
State and local income taxes withheld
$ 1,500
State estimated income taxes paid December 30 of the current year
400
Federal income taxes withheld
2,500
State and local income taxes paid April 17 of the following year
300
What total amount was Matthews entitled to claim for taxes on her current year Schedule A
of Form 1040?
a.
$1,900
b.
$1,500
c.
$2,200
d.
$4,700 Choice "a" is correct. State and local income taxes withheld from a cash-basis
taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld.
She can also deduct the $400 in estimated tax liability she paid in the current year. The
$2,500 federal income tax withheld is not deductible in calculating federal income tax. The
current year state and local income tax paid in the following year is not deductible until paid
because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is
$1,900.
Choice "d" is incorrect. Federal income tax withheld is not deductible in calculating federal
income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes
paid in the following year are not deductible until paid.
Choice "c" is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local
income taxes paid in the following year are not deductible until paid.
Choice "b" is incorrect. The $400 state estimated income taxes are deductible in the current
year since the amount was paid in the current year.
Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year
she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover
from her prior year church contribution. What was the maximum amount of properly
substantiated charitable contributions that Moore could claim as an itemized deduction for the
current year?
a.
$10,000
b.
$28,000
c.
$18,000
d.
$25,000 Choice "d" is correct. The contribution limit for a church is 50% of the
contribution base (adjusted gross income in this case). Moore's contribution limit for the
current year is 50% × $50,000 = $25,000. Against this limit she can take her current year
contributions ($18,000) plus the prior year carry-over ($10,000) until she reaches the current
year limit. Therefore, she can take all the current year contributions plus $7,000 of the
carryover for a $25,000 total.
Choice "a" is incorrect. Moore is not limited to her prior year charitable contribution
carryover.
Choice "c" is incorrect. Moore may use part of her prior year charitable contribution
carryover.
Choice "b" is incorrect per the explanation above.

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a
child:
Child's medical expenses
$ 5,000
Legal expenses
8,000
Agency fee
3,000
Without regard to the limitation of the credit, what amount of the above expenses are
qualifying expenses for the adoption credit?
a.
$11,000
b.
$16,000
c.
$10,160
d.
$5,000 Explanation
Choice "a" is correct. The adoption fees would be qualifying expenses for the tax credit
(medical expenses do not qualify).
Choice "b" is incorrect. $5,000 of the $16,000 of total expenses are not eligible.
Choice "c" is incorrect. The expenses ($8,000 + $3,000) are eligible.
Choice "d" is incorrect. Medical expenses are not eligible for the credit.
Ms. Marsh filed her 20X0 individual income tax return on February 15, 20X1. All her tax
was paid during the year through withholding. The return was due on April 15, 20X1. During
January 20X2, she discovered that she had not taken a properly substantiated charitable
contribution that would have reduced her total tax by $250 on her 20X0 tax return. By what
date must she file her amended return to claim a refund of the tax paid?
a.
December 31, 20X3.
b.
February 15, 20X4.
c.
December 31, 20X2.
d.
April 15, 20X4. Choice "d" is correct. A taxpayer can file a claim for refund by the
later of three years from the time the return was filed, 3 years from the original due date of
the return, or two years from the time the tax was paid (if not when the return was filed).
Three years from the time the return was filed is February 15, 20X4, 3 years from the original
due date of the return is April 15, 20X4, and two years from the time the tax was paid would
be December 31, 20X2 (all withholding is deemed paid ratably over the year so the last
dollars would be deemed paid December 31, 20X0). The later date is April 15, 20X4.
Choice "b" is incorrect. This date is earlier than three years from the date the 20X0 tax return
was due.
Choice "a" is incorrect. This date is three years from the date the last tax was paid.
Choice "c" is incorrect. This is two years from the date the last tax was paid but the claim
must be filed by the later of this date, three years from the date the return was filed, or 3 years
from the original due date of the return.
On April 15, Year 2, a married couple filed their joint Year 1 calendar-year return showing
gross income of $120,000. Their return had been prepared by a professional tax preparer who
mistakenly omitted $45,000 of income, which the preparer in good faith considered to be
nontaxable. No information with regard to this omitted income was disclosed on the return or
attached statements. By what date must the lnternal Revenue Service assert a notice of
deficiency before the statute of limitations expires?
a.
April 15, Year 5.
b.
April 15, Year 8.
c.
December 31, Year 7.
d.
December 31, Year 4. Explanation
Choice "b" is correct. April 15, Year 8 is the last day for IRS to assert a notice of deficiency
before the statute of limitations expires, six years after due date because gross income was
underreported by more than 25% (45,000 ÷ 120,000).
Rule: Ordinarily, a tax must be assessed within three years after a return is filed. The
assessment period begins from the due date of the return if the return is filed prior to the due
date or "filing date" if the return is filed later, e.g., with an extension. The assessment period
is extended to six years for returns that omit more than 25% of the gross income originally
reported.
Choices "c" and "d" are incorrect. Required IRS assessment is 3 or 6 years after due
date―not end of tax year.
Choice "a" is incorrect. Not 3 years after due date because omission was more than 25% of
gross income reported.
On December 1 of the current year, Krest, a self-employed cash basis taxpayer, borrowed
$200,000 to use in her business. The loan was to be repaid on November 30 of the following
year. Krest paid the entire interest amount of $24,000 on December 1 of the current year.
What amount of interest was deductible on Krest's current year income tax return?
a.
$2,000
b.
$22,000
c.
$24,000
d.
$0 Explanation
Choice "a" is correct. $2,000 of interest is deductible on her current year tax return.
Total interest
$ 24,000
Divide by # of months of the loan
÷ 12
Monthly deduction
$ 2,000
Times: Months in current year
×1
Total current year deduction
$ 2,000
Rule: Prepaid interest must be allocated over the period of the loan, even for a cash basis
taxpayer.
Choices "d", "b", and "c" are incorrect, per the above rule.
On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed
$100,000 to use in her business. The loan was to be repaid on November 30 of the current
year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What
amount of interest was deductible on Michaels' current year income tax return?
a.
$0
b.
$12,000
c.
$11,000
d.
$1,000 Choice "c" is correct. Michaels may deduct $11,000 on her current year return.
Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the
interest is allocable―i.e., as it accrues. This allocation is required even by cash basis
taxpayers.
Term of loan = 12 months (December 1, prior year − November 30, current year)
Interest paid − $12,000 on December 1 of the prior year.
Allocated interest per month = $12,000 ÷ 12 = $1,000/month
Interest deductible in current year = $1,000 × 11 = $11,000

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to
purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity
line of credit and used the cash to pay bills and take a vacation. That same year they took out
a $7,000 auto loan.
Mortgage interest on first loan
$19,000
Interest on home equity line of credit
2,500
Auto loan interest
500
For Year 4, how much interest is deductible?
a.
$22,000
b.
$21,500
c.
$19,000
d.
$19,500 Explanation
Choice "b" is correct. Interest on mortgages of up to $1,000,000 to buy, build, or substantially

improve a home (the first loan) are fully deductible. Interest on home equity loans of up to
$100,000 in principal are fully deductible. Note, provided the loan is secured by the home, it
does not matter what the proceeds are used for. Interest on auto loans is not deductible. Note
that if the money borrowed for the auto had been borrowed from a home equity line of credit
and the total principal of that revolving credit line had been less than $100,000, the related
interest for the auto purchase could have qualified for a deduction; however, in this case, the
auto loan was a separate loan. The total deduction is $21,500 ($19,000 + $2,500)
Choices "c", "a", and "d" are incorrect, per the above explanation.
On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to
purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash
to add a new room to their residence. That same year they took out a $5,000 auto loan.
Mortgage interest
$17,000
Interest on room construction loan
1,500
Auto loan interest
500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
a.
$19,000
b.
$18,500
c.
$17,000
d.
$17,500 Choice "b" is correct. Mortgages of up to $1,000,000 to buy, build, or
substantially improve a home allow for the full deduction of interest. Interest on auto loans
(consumer interest) is not deductible.
Choice "c" is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve

a home allow for the full deduction of interest.
Choice "d" is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve

a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is
not deductible.
Choice "a" is incorrect. Interest on auto loans (consumer interest) is not deductible.
On their joint tax return, Sam and Joann, who are both over age 65, had adjusted gross
income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home

Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation)
Based on these deductions, what would be the amount of AMT add-back adjustment in
computing alternative minimum taxable income?
a.
$23,750
b.
$38,750
c.
$35,000
d.
$21,750 Explanation
Choice "b" is correct. Per the mnemonic "PANIC TIMME," for purposes of calculating
alterative minimum taxable income, the taxpayer must add back, among other things, the
following itemized deductions:
•Taxes reduced by taxable refunds,
•Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or
improve the taxpayer's qualified dwelling (house, condominium, apartment, or mobile home
not used on a transient basis),
•Medical expenses not exceeding 10% of AGI, and
•Miscellaneous deductions subject to the 2% of AGI floor.
The "PANIC TIMME" add-back is as follows:
Taxes
$ 18,000
Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor
home is not a qualified dwelling)
15,000
Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI (7.5% AGI is still
used for taxpayers age 65 and over)
3,750
Deductible miscellaneous expenses in excess of 2% of AGI
2,000
Total "PANIC TIMME" add-back
$ 38,750
Choices "d", "a", and "c" are incorrect per the above rule and per the above calculations.
Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the
year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no
insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car's fair
market value was $11,000 and immediately after the hurricane its fair market value was
$6,900. What amount should Pat deduct as a casualty loss for the current year after all
threshold limitations are applied?
a.
$4,100
b.
$100
c.
$0
d.
$4,000 Choice "c" is correct. The calculation starts with the lesser of adjusted basis or
decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and
the $100 per casualty. The result is zero ($4,100 - $4,000 - $100).
Choice "a" is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of
AGI and $100 reductions.
Choice "d" is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of
AGI reduction.
Choice "b" is incorrect. $100 is merely the amount of the reduction per casualty.
Pat's divorce decree requires Pat to make the following transfers to Pat's former spouse
during the current year:
•Alimony payments of $9,000 to be reduced to $7,000 when their child attains the age of 18.
•Property division of stock with a basis of $2,000 and a fair market value of $3,500.
What is the amount of Pat's alimony deduction?
a.
$9,000
b.
$7,000
c.
$1,500
d.
$10,500 Explanation
Choice "b" is correct. Any amount of "alimony" that is dependent on a child reaching the age
of 18, will be considered child support (which is not deductible) for tax purposes.
Accordingly, only the $7,000 is deductible as alimony.
Choice "a" is incorrect as it includes the amount deemed to be child support.
Choices "c" and "d" are incorrect. The property division is considered to be a property
settlement and is not considered to be alimony. Accordingly, neither the basis, fair market
value, nor realized gain has any effect on the alimony deduction.
Poole is 45 years old and unmarried. Assume that he is subject to a 15% tax bracket. He had
adjusted gross income of $20,000. The following information applies to Poole:
Medical expenses
$ 8,000
Standard deduction
4,700
Personal exemption
3,000
Poole wishes to minimize his income tax. What is Poole's total income tax?
a.
$3,000
b.
$1,650
c.
$1,350
d.
$1,845 Choice "b" is correct. Poole's total income tax would be calculated as follows:
Adjusted gross income (AGI)
$ 20,000
Itemized deductions
(6,000)
14,000
Personal exemption
(3,000)
Taxable income
$ 11,000
Tax rate
× 0.15
Total income tax
$ 1,650
* Larger of $4,700 standard deduction or $6,000 itemized deduction ($8,000 medical

expenses less 10% × $20,000 AGI).
Choice "a" is incorrect. Deduct itemized deductions and the personal exemption from
adjusted gross income to arrive at the taxable income.
Choice "d" is incorrect. Deduct $6,000 itemized deductions ($8,000 medical expenses less
10% × $20,000 adjusted gross income) since it is larger than the $4,700 standard deduction.
Choice "c" is incorrect. Deduct $6,000 in itemized deductions, not $8,000. Reduce the $8,000
medical expenses by 10% of the adjusted gross income ($8,000 − $2,000 = $6,000).
Robbe, a cash basis single taxpayer, reported $50,000 of adjusted gross income last year and
claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid
last year. Robbe's itemized deduction amount, which exceeded the standard deduction
available to single taxpayers for last year by $1,150, was fully deductible and it was not
subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax
refund relating to the prior year. What is the proper treatment of the state tax refund?
a.
Include none of the refund in income in the current year.
b.
Amend the prior-year's return and reduce the claimed itemized deductions for that year.
c.
Include $1,150 in income in the current year.
d.
Include $1,500 in income in the current year. Explanation
Rule: IRC Section 111 provides that gross income does not include income attributable to the
recovery during the taxable year of any amount deducted in any prior taxable year to the
extent such amount did not reduce the amount of tax previously imposed (the tax benefit
rule).
Choice "c" is correct. Under the tax benefit rule, an itemized deduction recovered in a
subsequent year is included in income in the year recovered. In this question, only $1,150 of
the state income taxes was actually deducted as an itemized deduction last year. The recovery
is thus limited in the amount actually deducted (and not to the entire amount of the state tax
refund).
Choice "a" is incorrect. The amount deducted, not $0, is included in income in the current
year.
Choice "d" is incorrect. The amount originally deducted, not necessarily the entire amount of
the refund, is included in income in the current year.
Choice "b" is incorrect. The amount deducted is included in income in the current year. It is
not necessary to amend the prior year's return.
Robert had current-year adjusted gross income of $100,000 and potential itemized deductions
as follows:
Medical expenses (before percentage limitations)
$ 12,000
State income taxes

4,000
Real estate taxes
3,500
Qualified housing and residence mortgage interest
10,000
Home equity mortgage interest (used to consolidate personal debts)
4,500
Charitable contributions (cash)
5,000
What are Robert's itemized deductions for alternative minimum tax?
a.
$21,500
b.
$25,500
c.
$19,500
d.
$17,000 Choice "d" is correct. Robert's itemized deductions for alternative minimum
tax purposes are calculated as follows:
Medical expenses (exceeding 10% of AGI)
$ 2,000
State income taxes (not allowed)
−
Real estate taxes (not allowed)
Qualified housing and residence interest
10,000
Home equity mortgage interest (not used to buy, build, or improve the home-not allowed)
Charitable contributions (no difference)
5,000
Alternative Minimum Itemized deductions
$ 17,000
Choices "c", "a", and "b" are incorrect, per the above calculation.
Robinson's personal residence was partially destroyed by fire. Its fair market value (FMV)
before the fire was $500,000, and the FMV after the fire was $300,000. Robinson's adjusted
basis in the home was $350,000. Robinson settled the insurance claim on the fire for
$175,000. If Robinson's adjusted gross income for the year is $120,000, what amount of the
casualty loss may Robinson claim after consideration of threshold limitations?
a.
$24,900
b.
$12,900
c.
$13,000
d.
$25,000 Choice "b" is correct. The computation of the allowable casualty loss is as
follows:
Lesser of:
Decrease in fair market value ($500,000 - $300,000)
$ 200,000
or
Adjusted basis
$ 350,000
$ 200,000
Less: insurance proceeds
(175,000)
Economic loss
25,000
Less: 100 floor (applied to each separate casualty loss)

(100)
Remaining loss after applying 100 floor
$ 24,900
Less: AGI threshold applied to all casualty losses in the aggregate:
10% of AGI of $120,000
(12,000)
Loss after consideration of all threshold limits
$ 12,900
Note: It is very important to remember that the $100 reduction applies to each separate
casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate.
Choice "c" is incorrect. Each casualty loss must be reduced by $100.
Choice "a" is incorrect. All casualty losses in the aggregate must be reduced by 10% of AGI.
Choice "d" is incorrect. Each casualty loss must be reduced by $100 and then all casualty
losses in the aggregate must be reduced by 10% of AGI.
Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For
year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to
avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3
estimated tax payments that Sam can make?
a.
$45,000
b.
$33,000
c.
$50,000
d.
$30,000 Explanation
Choice "b" is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments
beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year's tax ($50,000 x 90%) = $45,000, or
100% of the previous year's tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year,
110% of the prior year's tax liability is used to compute the safe harbor for estimated
payments. (Previous year's tax $30,000 x 110% = $33,000).
Choice "d" is incorrect. $30,000 is 100% of last year's tax. This would be sufficient if the
previous year's income were $150,000 or less.
Choice "a" is incorrect. $45,000 is 90% of this year's tax, which is sufficient, but we are
looking for the minimum amount.
Choice "c" is incorrect. $50,000 is 100% of the current year's tax, which is sufficient, but
more than required.
Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client
Fuller. Fuller is a limited partner in each of the partnerships. The K-1s disclosed small pass-
through losses allocated to Fuller. Fuller had passive income in excess of these losses from
other partnerships.According to the AICPA Statements on Standards for Tax Services,
assuming that no at-risk limitations apply, what is Shore's professional responsibility
regarding the reporting of these partnership losses on Fuller's federal income tax return?
a.
To accept the information without further inquiry unless Shore has reason to believe that the
information is incorrect.
b.
To verify the client's basis by examining client's records from the initial investment to the
present.
c.
To verify the initial investment in each partnership entity unless Shore has reason to believe
that the information is incorrect.
d.
To request the complete partnership returns of the partnership entities unless Shore has
reason to believe that the information is incorrect. Explanation
Choice "a" is correct. Without obtaining verification, a tax preparer may in good faith rely on
information furnished by a taxpayer or third parties when preparing a tax return. The tax
preparer should, however, make reasonable inquiries if the information appears to be
incomplete, incorrect, or inconsistent.
Choices "b", "c", and "d" are incorrect, per the above rule.
Smith paid the following unreimbursed medical expenses:
Dentist and eye doctor fees
$ 5,000
Contact lenses
500
Facial cosmetic surgery to improve Smith's personal appearance (surgery is unrelated to

personal injury or congenital deformity)
10,000
Premium on disability insurance policy to pay him if he is injured and unable to work
2,000
What is the total amount of Smith's tax-deductible medical expenses before the adjusted gross
income limitation?
a.
$15,500
b.
$5,500
c.
$7,500
d.
$17,500 Choice "b" is correct. The doctor fees ($5,000) and the contact lenses ($500)
are deductible medical expenses. The surgery is not deductible because elective cosmetic
surgery is not done to improve or maintain health. Premiums on disabilities policies are not
deductible since payments under the policy are made to replace lost income, not to pay for
medical expenses.
Choice "d" is incorrect. The surgery is not deductible because elective cosmetic surgery is not
done to improve or maintain health. Premiums on disabilities policies are not deductible since
payments under the policy are made to replace lost income, not to pay for medical expenses.
Choice "a" is incorrect. The surgery is not deductible because elective cosmetic surgery is not
done to improve or maintain health.
Choice "c" is incorrect. Premiums on disabilities policies are not deductible since payments
under the policy are made to replace lost income, not to pay for medical expenses.
Smith, a single individual, made the following charitable contributions during the current
year. Smith's adjusted gross income is $60,000.
Donation to Smith's church
$5,000
Art work donated to the local art museum

(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for)
3,000
Contribution to a needy family
1,000
What amount should Smith deduct as a charitable contribution?
a.
$8,000
b.
$7,000
c.
$5,000
d.
$9,000 Choice "b" is correct. This question is asking for the actual deduction and requires the
candidate to determine which items are deductible charitable contributions. The $5,000
donation to the church is allowable. The artwork donated to the local art museum is
deductible to its basis, $2,000. Although it is appreciated property, Smith held the property
for only four months, making it short-term capital gain property. Donations of short-term
capital gain property are deductible to the donor to the extent of his/her adjusted basis. The
contribution to a needy family is not a deductible contribution, as it was not made to a
qualifying organization.
Choice "c" is incorrect. This choice excludes the donation of the artwork to the art museum.
Choice "a" is incorrect. This choice erroneously includes the donation of the artwork at the
art's fair market value.
Choice "d" is incorrect. This choice includes all three contributions. It erroneously includes
the artwork at its fair market value as well as including the donation to the needy family,
which is not a deductible donation.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year.
The following additional information is available for the year:
Cash contribution to church
$ 4,000
Purchase of art object at church bazaar (with a fair market value of $800 on the date of
purchase)
1,200
Donation of used clothing to Salvation Army (fair value evidenced by receipt received)
600
What is the maximum amount Spencer can claim as a deduction for charitable contributions
in the current year?
a.
$4,400
b.
$5,000
c.
$5,400
d.
$5,200 Choice "b" is correct. The $4,000 cash contribution to the church is deductible.
Relative to the purchase of the art object at the church bazaar, only the excess paid over fair
market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the
Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000
($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of
adjusted gross income ceiling (50% x $60,000 = $30,000), since $5,000 is less than $30,000.
Choice "c" is incorrect. The art object deduction is not its fair market value of $800, but the
$400 excess paid over its fair market value.
Choice "d" is incorrect. The used clothing donated to the Salvation Army is deductible at its
$600 fair market value. In addition, the art object deduction is only the $400 excess paid over
fair market value, not the $1,200 paid.
Choice "a" is incorrect. The used clothing donated to the Salvation Army is deductible at its
$600 fair market value.
Starr, CPA, prepared and signed Cox's Year 1 federal income tax return. Cox informed Starr
that Cox had paid doctors' bills of $20,000 although Cox actually had paid only $7,000 in
doctors' bills during Year 1. Based on Cox's representations, Starr computed the medical
expense deduction that resulted in an understatement of tax liability. Starr had no reason to
doubt the accuracy of Cox's figures and Starr did not ask Cox to submit documentation of the
expenses claimed. Cox orally assured Starr that sufficient evidence of the expenses existed.
In connection with the preparation of Cox's Year 1 return, Starr is:
a.
Liable to Cox for interest on the underpayment of tax.
b.
Liable to the IRS for negligently preparing the return.
c.
Not liable to the IRS for any penalty or interest.
d.
Not liable to the IRS for any penalty, but is liable to the IRS for interest on the underpayment
of tax. Explanation
Choice "c" is correct. A CPA is entitled to rely on the client's representations that adequate
documentation exists to support the expenses that the client claims. As long as the CPA asks
the client whether the client has documentation, the CPA will not be liable for either a
penalty or interest because of the client's misrepresentation.
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and
qualified to itemize deductions. Stein had no charitable contribution carryovers and only
made one contribution during the year. Stein donated stock, purchased seven years earlier for
$17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it
was contributed. What is the amount of charitable contributions deductible on Stein's current
year income tax return?
a.
$21,000
b.
$17,000
c.
$24,000
d.
$25,000 Choice "c" is correct. Stein may deduct $24,000 on Stein's current year income
tax return.
Rule: For 50%-type charities only (which include tax-exempt educational organizations), the
taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain
appreciated property at the higher fair market value (higher than cost basis) without paying
capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted
gross income (AGI). A 5-year carryforward period applies.
Fair market value of appreciated long-term stock
$ 25,000
Less:
Limitation
AGI
$ 80,000
Times 30%
× 0.30
Deduction limit
(24,000)
Carryforward
$ 1,000
Note: Stein could have elected to deduct the cost of the stock instead of the appreciated
amount, but the deduction would have been limited to 50% of AGI ($40,000) and then further
limited by the cost basis of the stock ($17,000). In this case, this option would have given
Stein a smaller deduction than that allowed under the above rule.
Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse
during the current year:
Alimony payments of $3,000.
Child support of $2,000.
Property division of stock with a basis of $4,000 and a fair market value of $6,500.
What is the amount of Tana's alimony deduction?
a.
$7,000
b.
$3,000
c.
$9,500
d.
$11,500 RULE: Alimony payments to a former spouse are adjustments to arrive at
AGI. Child support payments are NOT alimony and are NOT deductible. Property
settlements are NOT alimony and are NOT deductible.
Choice "b" is correct. Only the amount of alimony ($3,000) is allowed as Tana's alimony
deduction.
Choice "a" is incorrect. The basis of property division of stock ($4,000) is NOT alimony and
is NOT deductible, but the $3,000 in alimony paid is deductible.
Choice "c" is incorrect. The fair market value of property division of stock ($6,500) is NOT
alimony and is NOT deductible, but the $3,000 in alimony paid is deductible.
Choice "d" is incorrect. The fair market value of property division of stock ($6,500) and the
child support ($2,000) are NOT alimony and are NOT deductible, but the $3,000 in alimony
paid is deductible.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year.
During the current year, Taylor donated land to a church and made no other contributions.
Taylor purchased the land 15 years ago as an investment for $14,000. The land's fair market
value was $25,000 on the day of the donation. What is the maximum amount of charitable
contribution that Taylor may deduct as an itemized deduction for the land donation for the
current year?
a.
$0
b.
$14,000
c.
$25,000
d.
$11,000 Choice "c" is correct. Individual taxpayers may deduct the FMV of property
donated to charity. The limit is 30% of the taxpayer's AGI (30% × $90,000 = $27,000). The
FMV of the property is $25,000 and is within the allowable amount.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 13. During
Year 13, Taylor donated land to a church and made no other contributions. Taylor purchased
the land in Year 1 as an investment for $14,000. The land's fair market value was $25,000 on
the day of the donation. What is the maximum amount of charitable contribution that Taylor
may deduct as an itemized deduction for the land donation for Year 13?
a.
$11,000
b.
$14,000
c.
$0
d.
$25,000 Choice "d" is correct. The charitable contribution deduction for contributions
of property is normally the lesser of the property's basis or the fair market value of the
property, on the date of the donation, or the lesser of $14,000 or $25,000 in this question.
However, contributions of appreciated property, as in this question, are deducted at fair
market value, provided the taxpayer held the property for over one year. That deduction
might be limited to 50% of AGI ($45,000) or 30% of AGI for long-term appreciated property
($27,000), but the $25,000 is the maximum deduction in this case. The "lesser of" rule really
applies to depreciated property and keeps a taxpayer from taking a fair market value
deduction for such property.
Choice "b" is incorrect. The $14,000 is the original cost of the asset. The maximum deduction
for appreciated property is the fair market value of the property, not the original cost.
Choice "a" is incorrect. The $11,000 is the difference between the $25,000 fair market value
of the land and the $14,000 original cost. It is thus the appreciation of the land before the date
of donation. The appreciation of appreciated property is not the amount of the charitable
contribution deduction.
Choice "c" is incorrect. Taylor has income in Year 13 of $90,000; therefore, at least a portion
of a deduction for the land can be deducted, even if the fair market value of the land exceeded
the defined limits for the year.
The alternative minimum tax (AMT) is computed as the:
a.
Lesser of the tentative AMT or the regular tax.
b.
Excess of the tentative AMT over the regular tax.
c.
Excess of the regular tax over the tentative AMT.
d.
The tentative AMT plus the regular tax. Explanation
Choice "b" is correct. The alternative minimum tax (AMT) is computed as the excess of
tentative AMT over the regular tax.
Choice "c" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative
AMT over the regular tax, not the other way around.
Choice "d" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative
AMT over the regular tax, not the sum of the tentative AMT plus the regular tax.
Choice "a" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative
AMT over the regular tax, not the lesser of AMT or regular tax.
The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At
the time of the loan, the fair market value of their home was $400,000, and it was
unencumbered by other debt. The interest on the loan qualifies as:
a.
Investment interest expense.
b.
Deductible personal interest.
c.
Deductible qualified residence interest.
d.
Nondeductible interest. Choice "c" is correct. Interest paid on a debt secured by a home
mortgage is classified as deductible qualified residence interest. The Browns would be able to
deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest
since the loan was not to buy, build, or improve the home.
Choice "b" is incorrect. Personal interest is not deductible. It is also called consumer interest.
Choice "d" is incorrect. Interest paid on debt secured by a home mortgage is deductible.
Choice "a" is incorrect. Interest paid on a debt secured by a home mortgage is not classified
as investment interest.
The credit for prior year alternative minimum tax liability may be carried:
a.
Back to the 3 preceding years.
b.
Forward indefinitely.
c.
Forward for a maximum of 5 years.
d.
Back to the 3 preceding years or carried forward for a maximum of 5 years.
Explanation
Choice "b" is correct. Alternative minimum tax (AMT) paid can be claimed as a credit
against other years if the tax was paid on items that increased AMT that year but will reverse
in later years. The concept is the same as deferred taxes for financial accounting purposes.
The credit is carried forward indefinitely.
The deduction by an individual taxpayer for interest on investment indebtedness is:
a.
Limited to the investment interest paid during the year.
b.
Not limited.
c.
Limited to the taxpayer's interest income for the year.
d.
Limited to the taxpayer's net investment income for the year. Choice "d" is correct. The
deduction for interest expense on investment indebtedness is limited to net investment
income (investment income less investment expenses).
The Rites are married, file a joint income tax return, and qualify to itemize their deductions in
the current year. Their adjusted gross income for the year was $55,000, and during the year
they paid the following taxes:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld from paycheck 1,000
What total amount of the expense should the Rites claim as an itemized deduction on their
current-year joint income tax return?
a.
$1,000
b.
$3,500
c.
$2,500
d.
$3,000 Choice "b" is correct. In answering this question, we must assume that the examiners
mean to ask, "What total amount of the tax expense should the Rites claim as an itemized
deduction?" Obviously, the Rites have more deductions than just those tax deductions above,
or they would take advantage of the standard deduction. In any case, for cash-basis taxpayers,
deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes,
and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable
deductions. The total amount of deductions for tax expense is calculated as follows:
Real estate tax on personal residence $ 2,000
Ad valorem tax on personal automobile 500
Current-year state and city income taxes withheld 1,000
Total deduction for taxes $ 3,500
Choice "a" is incorrect. Real estate taxes and personal property taxes are allowable itemized
deductions.
Choice "c" is incorrect. Current-year state and city income taxes withheld from a paycheck
are allowable itemized deductions.
Choice "d" is incorrect. Personal property taxes (e.g., ad valorem taxes paid) are allowable
itemized deductions.
The self-employment tax is:
a.
One-half deductible from gross income in arriving at adjusted gross income.
b.
Not deductible.
c.
Fully deductible as an itemized deduction.
d.
Fully deductible in determining net income from self-employment. Choice "a" is correct.
One-half of the self-employment tax is deductible to arrive at adjusted gross income.
Choice "c" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross
income.
Choice "d" is incorrect. Self-employment tax is not deductible in determining self-
employment income.
Choice "b" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross
income.
Tom and Sally White, married and filing joint income tax returns, derive their entire income
from the operation of their retail stationery shop. Their current year adjusted gross income
was $100,000, and the Whites itemized their deductions on Schedule A. The following
unreimbursed cash expenditures were among those made by the Whites during the year:
$ 600
an institution primarily for the availability of medical care, with meals and lodging furnished
8,000
Without regard to the adjusted gross income percentage threshold, what amount may the
Whites claim in their current year return as qualifying medical expenses?
a.
$0
b.
$600
c.
$8,000
d.
$8,600 Explanation
Choice "d" is correct. Repair and maintenance of medical devices for a disabled dependent
child ($600) are deductible medical expenses. The cost of a special school for a handicapped
person in an institution primarily for the availability of medical care, when the meals and
lodging are merely incident to that care ($8,000) is also a deductible medical expense.
Choice "c" is incorrect. Repair and maintenance of medical devices for a disabled dependent
child are deductible medical expenses.
Choice "b" is incorrect. The cost of a special school for a handicapped person in an institution
primarily for the availability of medical care, when the meals and lodging are merely incident
to that care is a deductible medical expense.
Choice "a" is incorrect. Repair and maintenance of medical devices for a disabled dependent
child are deductible medical expenses. The cost of a special school for a handicapped person
in an institution primarily for the availability of medical care, when the meals and lodging are
merely incident to that care is also a deductible medical expense.
Under the Statements on Standards for Tax Services, what is a CPA's responsibility for
verifying information furnished by the taxpayer or third parties?
a.
A CPA need not consider implications of information furnished if the information comes
directly from a third party.
b.
A CPA may, in good faith, rely on information furnished by the taxpayer or by third parties
without verification.
c.
A CPA should not refer to the taxpayer's previous tax returns unless the returns report
transactions that affect the current tax period.
d.
A CPA need not make additional inquiries if the information furnished appears to be
incorrect, incomplete, or inconsistent with other facts known to the CPA. Explanation
Choice "b" is correct. A CPA may rely on information provided by a client without
verification as long as the information does not appear to be incorrect, incomplete, or
inconsistent.
Choice "d" is incorrect. A CPA should make additional inquiries if the information appears to
be incorrect, incomplete, or inconsistent.
Choice "a" is incorrect. Even though the information comes from a third party, a CPA should
consider the implications of the information.
Choice "c" is incorrect. A CPA should refer to the previous tax returns during the current
engagement.
Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident
$ 3,000
Physical therapy after spinal surgery
2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs
500
In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy
through insurance reimbursement from a group medical policy paid for by her employer.
Disregarding the adjusted gross income percentage threshold, what amount could be claimed
on Wells' current year income tax return for medical expenses?
a.
$500
b.
$4,000
c.
$3,500
d.
$1,000 Choice "d" is correct. Medical expenses include physical therapy (professional
medical services) and insurance premiums providing reimbursement for medical care.
Prescription drugs are considered medical care. Insurance against loss of income is not
payment for medical care and therefore is not deductible. Qualified medical expenses must be
reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).
Choice "b" is incorrect. Insurance against loss of income is not payment for medical care and
therefore is not deductible.
Choice "c" is incorrect. Medical expenses include physical therapy (professional medical
services) and insurance premiums providing reimbursement for medical care.
Choice "a" is incorrect. Medical expenses include physical therapy (professional medical
services) and insurance premiums providing reimbursement for medical care.
When computing alternative minimum tax, the individual taxpayer may take a deduction for
which of the following items?
a.
Casualty losses.
b.
Personal and dependency exemptions.
c.
Miscellaneous itemized deductions in excess of 2% of adjusted gross income floor.
d.
State income taxes. Explanation
Choice "a" is correct. Casualty losses are not added back in the alternative minimum tax
(AMT) calculation. Therefore, they are allowed as a deduction.
Choice "d" is incorrect. State income taxes are added back in the AMT calculation.
Therefore, they are not allowed as a deduction.
Choice "b" is incorrect. Personal and dependency exemptions are added back in the AMT
calculation. Therefore, they are not allowed as a deduction.
Choice "c" is incorrect. Miscellaneous itemized deductions in excess of 2% of AGI are added
back in the AMT calculation. Therefore, they are not allowed as a deduction.
Which allowable deduction can be claimed in arriving at an individual's adjusted gross
income?
a.
Charitable contribution.
b.
Personal casualty loss.
c.
Unreimbursed business expense of an outside salesperson.
d.
Alimony payment. Choice "d" is correct. Alimony payments are deductible to arrive at
adjusted gross income (AGI). Charitable contributions, personal casualty losses, and
unreimbursed business expenses of outside salespersons are all deductible from AGI as
Choice "a" is incorrect. Charitable contributions are deductible from adjusted gross income as
Choice "b" is incorrect. Personal casualty losses are deductible from adjusted gross income as
Choice "c" is incorrect. Unreimbursed business expenses of outside salespersons are

deductible from adjusted gross income as itemized deductions.
Which expense, both incurred and paid in the same year, can be claimed as an itemized
deduction subject to the two percent-of-adjusted-gross-income floor?
a.
Employee's unreimbursed moving expense.
b.
Employee's unreimbursed business car expense.
c.
One-half of the self-employment tax.
d.
Self-employed health insurance. Choice "b" is correct. Employee business expenses,
including unreimbursed car expense, are deductible as itemized deductions subject to the 2%
floor.
Choice "c" is incorrect. One-half of the self-employment tax is deductible, but it is a

deduction to arrive at adjusted gross income, not as an itemized deduction.
Choice "a" is incorrect. The employee's unreimbursed moving expense is deductible, but it is
a deduction to arrive at adjusted gross income, not an itemized deduction.
Choice "d" is incorrect. Self-employed health insurance is deductible, but not as an itemized
deduction subject to the 2% floor.
Which itemized deduction is included in the category of unreimbursed expenses that are
deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the
taxpayer's adjusted gross income?
a.
Medical expense.
b.
Interest expense.
c.
Charitable contributions.
d.
Tax return preparation fee. Choice "d" is correct. Tax return preparation fee is a
miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor.
Choice "a" is incorrect. Medical expenses are itemized deductions not subject to the 2%
adjusted gross income (AGI) floor, but instead are subject to a 10% AGI floor.
Choice "c" is incorrect. Charitable contributions are not subject to the 2% AGI floor.
Choice "b" is incorrect. Interest expense on a home mortgage, second home, or on

investments are deductible as an itemized deduction not subject to the 2% adjusted gross
income (AGI) floor.
Which itemized deduction is included in the category of unreimbursed expenses that are
deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the
taxpayer's adjusted gross income?
a.
Subscriptions to professional journals.
b.
Moving expenses.
c.
Medical expenses.
d.
Gambling losses to the extent of winnings. Choice "a" is correct. Subscriptions to
professional journals are miscellaneous itemized deductions subject to the 2% of AGI
limitation.
Choice "d" is incorrect. Gambling losses to the extent of winnings are considered to be
miscellaneous itemized deductions. However, they are not subject to the 2% of AGI
limitation.
Choice "c" is incorrect. Medical expenses are a category of itemized deductions that are
subject to a 10% AGI limitation (or 7.5% if age 65 or older).
Choice "b" is incorrect. Moving expenses are an adjustment and not an itemized deduction.
Which of the following credits can result in a refund even if the individual had no income tax
liability?
a.
Child and dependent care credit.
b.
Earned income credit.
c.
Credit for prior year minimum tax.
d.
Elderly and permanently and totally disabled credit. Choice "b" is correct. The earned income
credit is refundable. Eligible taxpayers can get advance payments from their employers
because the credit is assured.
Which of the following credits can result in a refund even if the individual had no income tax
liability?
a.
Earned Income Credit.
b.
Child and Dependent Care Credit.
c.
Credit for the Elderly or Permanently Disabled.
d.
Adoption Credit. Choice "a" is correct. The Earned Income Credit is refundable. The
other credits listed are not refundable.
Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not
confuse this with the Child and Dependent Care credit, which is not refundable.
Choices "b", "d", and "c" are incorrect, per the above explanation.
Which of the following disqualifies an individual from the earned income credit?
a.
The taxpayer has earned income of $5,000.
b.
The taxpayer has a filing status of married filing separately.
c.
The taxpayer's five-year-old child lived in the taxpayer's home for only eight months.
d.
The taxpayer's qualifying child is a 17-year-old grandchild. Rules: Earned income tax credit
is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with
earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or
two or more qualifying children for this credit. There is a maximum credit available for this
purpose. Further:
•The taxpayer must meet certain earned low-income thresholds.
•The taxpayer must not have more than the specified amount of disqualified income.
•The taxpayer must be over age 25 and less than 65 if there are no qualifying children.
•If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the
married filing separate status disqualifies a taxpayer from claiming the earned income credit).
•A qualifying child can be up to and including age 18 at the end of the tax year, provided the
child shared a residence with the taxpayer for 6 months or more.
•The taxpayer must be related to the qualifying child (or children) through blood, marriage,
or law.
•The child must be either in the same generation or a later generation of the taxpayer.
•A foster child qualifies if officially placed with the taxpayer by an agency.
Choice "b" is correct. Based on the above rules, the filing status of married filing separately
disqualifies a taxpayer from claiming the earned income credit.
Choice "d" is incorrect. If the taxpayer's qualifying child is a 17-year-old grandchild, the
requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC.
Choice "a" is incorrect. The taxpayer earning an income of $5,000 meets the earned low-
income requirements; thus, it does not disqualify him or her from claiming the EIC.
Choice "c" is incorrect. The taxpayer's five year old child lived in the taxpayer's home for
eight months. The above rules indicate that the otherwise qualifying child must live with the
taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from
claiming the EIC.
Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted
gross income floor?
a.
Real estate tax.
b.
Medical expenses.
c.
Gambling losses up to the amount of gambling winnings.
d.
Employee business expenses. Choice "d" is correct. Employee business expenses are a
miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor.
Choice "c" is incorrect. Gambling losses up to the amount of gambling winnings are not a
miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Those
losses may offset gambling winnings up to the amount of the winnings (without a further
reduction of the item). Any additional gambling losses are not deductible at all and do not
carry forward).
Choice "b" is incorrect. Medical expenses are an itemized deduction not subject to the 2% of
adjusted gross income floor (they are subject to a 10% floor).
Choice "a" is incorrect. Real estate taxes are an itemized deduction not subject to the 2% of
adjusted gross income floor.
Which of the following is not a deduction to arrive at adjusted gross income?
a.
Capital losses in excess of capital gains.
b.
Trade or business expenses.
c.
Alimony payments.
d.
Unreimbursed employee business expenses. Choice "d" is correct. Unreimbursed employee
business expenses are not a deduction to arrive at adjusted gross income. They are an
itemized deduction from adjusted gross income.
Choice "c" is incorrect. Alimony payments are an adjustment, which is a deduction to arrive
at adjusted gross income.
Choice "b" is incorrect. Trade or business expenses are deducted on Schedule C. This is
before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at
adjusted gross income.
Choice "a" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000)
on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a
deduction to arrive at adjusted gross income.
Which of the following is not a refundable tax credit?
a.
Earned income credit.
b.
Retirement savings contribution credit.
c.
Child tax credit.
d.
Excess social security paid. Choice "b" is correct. The Retirement savings contribution
credit is a non-refundable credit. The EIC and child tax credit could result in a refunded
amount beyond the actual tax liability, depending upon the taxpayer's income levels. In
addition, if excess social security is paid, the taxpayer can receive a refund of those amounts
regardless of the income tax liability being reduced to zero.
Which of the following is not an adjustment or preference to arrive at alternative minimum
taxable income?
a.
Individual taxpayer net operating losses.
b.
Deductible medical expenses.
c.
Passive activity losses.
d.
Deductible contributions to individual retirement accounts. Choice "d" is correct. Deductible
contributions to individual retirement accounts are not an adjustment or preference in
calculating a taxpayer's alternative minimum taxable income. They are an adjustment in
calculating adjusted gross income for regular (not alternative minimum) tax purposes.
Choices "a", "c", and "b" are incorrect. Adjustments to arrive at AMTI include individual net
operating losses, passive activity losses, and medical expenses (to the extent they do not
exceed 10% of AGI).
Which of the following is not an adjustment to arrive at adjusted gross income?
a.
Qualified mortgage interest paid.
b.
Alimony paid.
c.
Self-employed FICA (50%).
d.
Self-employed health insurance. Choice "a" is correct. Qualified mortgage interest paid
is deductible on Schedule A as an itemized deduction.
Choices "d", "b", and "c" are incorrect. Each of these items is an adjustment to gross income
to arrive at adjusted gross income.
Which of the following items are not allowable as adjustments for moving expenses without
regard to employer provided benefits or other limitations?
a.
Cost of moving household goods.
b.
Cost of hotel during drive to new home.
c.
Expense of breaking lease.
d.
Transportation. Explanation
Choice "c" is correct. The costs associated with breaking an existing lease are not deductible
as moving expenses.
Choices "d", "a", and "b" are all allowable moving expenses. All moving expenses must be
offset with employer reimbursement amounts prior to claiming any deduction. Additional
requirements of length of employment apply and may require adjustment of a previously
claimed adjustment if they are not met.
Which of the following may not be deducted in the computation of alternative minimum
taxable income of an individual?
a.
Traditional IRA account contribution.
b.
One-half of the self-employment tax deduction.
c.
Personal exemptions.
d.
Charitable contributions. Choice "c" is correct. Alternative minimum tax will add back
various deductions to arrive at alternative minimum taxable income. If an item is not added
back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they
are not deducted to arrive at alternative minimum taxable income.
Choice "a" is incorrect. Alternative minimum tax will add back various deductions to arrive
at alternative minimum taxable income. If an item is not added back, then it is allowed to be
deducted. Traditional IRA contributions are not added back. Therefore, they are deducted to
arrive at Alternative minimum taxable income.
Choice "b" is incorrect. Alternative minimum tax will add back various deductions to arrive
deducted. One half of the self-employment tax deduction is not added back. Therefore, it is
deducted to arrive at alternative minimum taxable income.
Choice "d" is incorrect. Alternative minimum tax will add back various deductions to arrive
deducted. Charitable contributions are not added back. Therefore, they are deducted to arrive
at alternative minimum taxable income.
Which of the following requirements must be met in order for a single individual to qualify
for the additional standard deduction?
Must support
dependent child
or aged parent
Must be age 65
or older or blind
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No Choice "b" is correct. In order to qualify for the additional standard deduction, an
individual must be age 65 or older or blind by the end of the tax year. He or she does not have
to support a dependent child or aged parent.
Which of the following statements about the alternative minimum tax (AMT) of an individual
is correct?
a.
It is determined from the tax rate schedules and computed on income that exceeds $100,000.
b.
AMT credits may be carried forward to future tax years.
c.
It is calculated after certain tax preference items that may be used as an alternative to the
regular tax are deducted.
d.
It is computed on an individual's regular taxable income at a rate of 28%. Choice "b" is
correct. AMT credits may be carried forward indefinitely against regular tax.
Choice "a" is incorrect. The AMT of an individual is determined by adjusting the individual's
regular taxable income by certain tax preference items and adjustments, subtracting the AMT
exemption, and applying the applicable AMT rates to the resulting AMT income.
Choice "d" is incorrect. AMT is based on tax rates of both 26% and 28%.
Choice "c" is incorrect. Tax preference items are added back to taxable income in computing
alternative minimum taxable income (AMTI).
Which of the following statements about the child and dependent care credit is correct?
a.
The child must be under the age of 18 years.
b.
The credit is nonrefundable.
c.
The child must be a direct descendant of the taxpayer.
d.
The maximum credit is $600. Choice "b" is correct. The child and dependent care credit is
nonrefundable. The only refundable credits are the child tax credit (which is a different credit
with a similar name), the earned income credit, withholding taxes, portions of the Hope
Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit
is a "personal" tax credit.
Choice "a" is incorrect. The child must be under age 13, not age 18, to be a qualifying child
and for there to be a credit.
Choice "c" is incorrect. The child need not be a direct descendant of the taxpayer for there to
be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.
Choice "d" is incorrect. The maximum child and dependent care credit is 35% of eligible
expenses, with a phase out for AGI over $15,000. There is no pure $600 limit.
Which of the following statements is correct regarding the deductibility of an individual's
medical expenses?
a.
A medical expense deduction is allowed for payments made in the current year for medical
services received in earlier years.
b.
A medical expense paid by credit card is deductible in the year the credit card bill is paid.
c.
A medical expense deduction is not allowed for Medicare insurance premiums.
d.
Medical expenses, net of insurance reimbursements, are disregarded in the alternative
minimum tax calculation. Explanation
Choice "a" is correct. A medical expense deduction is allowed for payments made in the
current year for medical services received in earlier years.
Choice "b" is incorrect. A medical expense paid by credit card is deductible in the year the
amount is charged to credit card (rather than in a subsequent year when the credit card bill is
paid).
Choice "d" is incorrect. Medical expenses, net of insurance reimbursements, are not
disregarded in the alternative minimum tax calculation. However, the allowable amount for
AMT purposes is the net amount in excess of 10% of adjusted gross income (for regular tax
purposes, the allowable amount is the net amount in excess of 10% of adjusted gross income
or 7.5% of adjusted gross income for taxpayers age 65 and older).
Choice "c" is incorrect. A medical expense deduction is allowed for Medicare insurance
premiums.
Which of the following statements is correct regarding the deductibility of donations made to
qualifying charities by a cash-basis individual taxpayer?
a.
A qualified appraisal for real property donations is not required to be attached to the tax
return unless the property value exceeds $10,000.
b.
A contemporaneous written acknowledgement is required for donations of $100.
c.
A charitable contribution deduction is not allowed for the value of services rendered to a
charity.
d.
The charitable contribution deduction for long-term appreciated stock is limited to 50% of
adjusted gross income. Choice "c" is correct. A charitable contribution is not allowed
for the value of services rendered to a charity.
Choice "b" is incorrect. A contemporaneous written acknowledgement is required for
donations of $250 or more.
Choice "a" is incorrect. A qualified appraisal for real property donations is not required to be
attached to the tax return unless the property value exceeds $5,000.
Choice "d" is incorrect. The charitable contribution deduction for long-term appreciated stock
is limited to 30% of adjusted gross income.
Which of the following statements is correct with respect to the AICPA's Statements on
Standards for Tax Services (SSTS)?
a.
SSTS apply only to federal income tax returns and not to state and local tax returns.
b.
SSTS apply only to tax returns that are being prepared for external clients and not to those
that are being prepared for employers.
c.
A tax return position is (1) a position reflected on a tax return on which a preparer has
specifically advised a taxpayer and (2) a position about which a preparer has concluded
whether the position is appropriate.
d.
In general, a preparer should recommend a tax return position only if the preparer has a good
faith belief that the position has a realistic possibility of being sustained on its merits.
Choice "d" is correct. In general, a preparer should recommend a tax return position
only if the preparer has a good faith belief that the position has a realistic possibility of being
sustained administratively or judicially on its merits.
Choice "c" is incorrect. A tax return position is (1) a position reflected on a tax return on
which a preparer has specifically advised a taxpayer or (2) a position about which a preparer
has concluded whether the position is appropriate. A tax return position is either of the two.
Choice "a" is incorrect. SSTS apply to all types of tax returns, not just to federal income tax
returns.
Choice "b" is incorrect. SSTS apply to tax returns that are being prepared for clients,
employer, or any other third party recipient of tax services.
Which of the following transportation expenses incurred by an employee is not deductible?
a.
An employee drives from home to his or her office.
b.
An employee drives from his or her office to the office of a client.
c.
An employee flies from San Francisco to Miami on business.
d.
An employee drives from a first job to second. Choice "a" is correct. This is an example
of a commuting expense and is not deductible.
Choice "c" is incorrect. This is deductible out-of-town travel.
Choice "d" is incorrect. Transportation from one job to another is deductible.
Choice "b" is incorrect. Transportation from a main office to another office or temporary
location is deductible.
Which one of the following expenditures qualifies as a deductible medical expense for tax
purposes?
a.
Mandatory employment taxes for basic coverage under Medicare A.
b.
Health club dues.
c.
Vitamins for general health not prescribed by a physician.
d.
Transportation to physician's office for required medical care. Choice "d" is correct.
Transportation to physician's office for required medical care is a deductible medical expense
for tax purposes.
Choice "c" is incorrect. Vitamins are not deductible.
Choice "b" is incorrect. Health club dues paid on a membership for general health care are
not deductible. In order for the dues to be deductible, the membership would need to be
recommended by a physician for a specific illness.
Choice "a" is incorrect. Premiums paid for insurance that covers the expenses of medical care
are deductible as medical expenses, including Medicare B premium payments and any
voluntary premiums for Medicare A.
While preparing a client's individual federal tax return, the CPA noticed that there was an
error in the previous year's tax return that was prepared by another CPA. The CPA has which
of the following responsibilities to this client?
a.
Notify the IRS if the error could be considered fraudulent or could involve other taxpayers.
b.
Inform the client and recommend corrective action.
c.
Inform the client and the previous CPA in writing, and leave it to their discretion whether a
correction should be made.
d.
Discuss the matter verbally with the former CPA and suggest that corrective action be taken
for the client. Explanation
Choice "b" is correct. When an AICPA member becomes aware of an error in a previously
filed return, he should promptly notify the taxpayer.
Choice "c" is incorrect, per the above explanation.
Choice "d" is incorrect, per the above explanation.
Choice "a" is incorrect. A tax preparer is not required to notify the IRS and may not notify
any taxing authority without the client's permission.
Wilma A. Guess, a CPA and a member of the AICPA, is preparing a federal tax return for her
client, William H. Bates, one of the wealthiest businessmen in the town of Poughkeepsie,
New York. Because of his extremely busy schedule, Bates keeps very few records for his
various business operations. Guess has been preparing Bates' returns for the past 15 years.
According to the AICPA's Statements on Standards for Tax Services, which of the following
statements is correct for this situation?
a.
Guess may use estimates provided by Bates only if the use of the estimates is disclosed on the
return by checking the "Estimates Have Been Used in the Preparation of this Return" box at
the bottom of the return.
b.
Guess may use estimates provided by Bates due to the fact that she has been preparing returns
for Bates for more than 10 years.
c.
Guess may not use estimates provided by Bates in any situation.
d.
Guess may use estimates provided by Bates if it is not practical for Bates to obtain exact data.
Explanation
Choice "d" is correct. Guess may use estimates provided by Bates if it is not practical for
Bates to obtain exact data.
Choice "c" is incorrect. The preparer (Guess) may use estimates provided by the taxpayer
(Bates) if it is not practical for the taxpayer to obtain exact data. However, the preparer must
determine that the estimates are reasonable based on the facts and circumstances.
Choice "a" is incorrect. It is normally not necessary to disclose the use of estimates.
Disclosure of estimates should be made in unusual circumstances, such as when records have
been destroyed. However, there is no "Estimates Have Been Used in the Preparation of this
Return" box.
Choice "b" is incorrect. Guess may use estimates provided by Bates if it is not practical for
Bates to obtain exact data. The number of years that Guess has been preparing Bates' returns
is not relevant.
Wilson, CPA, uses a commercial tax software package to prepare clients' individual income
tax returns. Upon reviewing a client's computer-generated year 1 itemized deductions, Wilson
discovers that the schedule's deductible investment interest expense is less than the amount
paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing
the entire tax return, Wilson determines that the computer-generated investment interest
expense deduction is correct. Why is the computer-generated investment interest expense
deduction correct?
I.
The client's investment interest expense exceeds net investment income.
II.
The client's qualified residence interest expense reduces the deductible amount of investment
interest expense.
a.
II only.
b.
Both I and II.
c.
Neither I nor II.
d.
I only. Choice "d" is correct. The computer-generated investment interest expense deduction
will be limited to the net investment income of the taxpayer. Any excess amount will be
carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment
interest for a year but had investment income of only $3,000. The tax preparer would enter
the $5,000 paid as investment interest, and the computer would then allow only a $3,000
deduction for investment interest in the year. The remaining $2,000 of expense would be
carried forward indefinitely to be applied to investment income in future years. Qualified
residence interest is NOT investment interest and would not affect investment interest income
in any manner.
Choices "a", "b", and "c" are incorrect, per the above discussion.
A cash basis taxpayer should report gross income The uniform capitalization rules apply to
the following for the year in which income is either actually or constructively received,
whether in cash or in property.
A grant to a Ph.D. candidate for his participation in a university-sponsored research project
for the benefit of the university. Is included in a recipient's gross income
There is no exclusion in the tax law for amounts paid to a degree candidate for participation
in university-sponsored research.
A passive activity is (i) any activity in which such taxpayers do not materially participate
and (ii) as a general rule, such taxpayers' rental real estate investments, regardless of the
extent of such taxpayers' involvement with the rental real estate operations. A limited
exception (the "Mom and Pop Exception") regarding rental real estate activities is available to
individuals, but the facts of this question do not provide any information which would entitle
the taxpayer to the benefits of this exception.
A qualifying widow(er) is a taxpayer who may use the joint tax return standard deduction and
rates (but not the exemption for the deceased spouse) for each of two taxable years following
the year of death of his or her spouse, unless he or she remarries. The surviving spouse
must maintain a household that, for the whole entire taxable year, was the principal place of
abode of a son, stepson, daughter, or stepdaughter (whether by blood or adoption). The
surviving spouse must also be entitled to a dependency exemption for such individual. Parker
may file as a qualifying widow(er) since her spouse died in the previous tax year, she did not
remarry and she maintained a home for a dependent child. Since qualifying widow(er) is the
most advantageous status and Parker qualifies, Parker would file as a qualifying widow(er).
A rule of thumb is that personal expenses are not allowed as deductions on the Schedule C.
For instance, personal use of an automobile is considered a personal expense, not a
deductible expense on Schedule C. Schedule C items should be only those related to the
operation of the business itself. Health insurance for himself and his family is actually an
adjustment to arrive at adjusted gross income.
Adams owns a second residence that is used for both personal and rental purposes. During the
current year, Adams used the second residence for 50 days and rented the residence for 200
days. Which of the following statements is correct? Utilities and maintenance on the property
must be divided between personal and rental use.
Because the second property was personally used more than 14 days, any net loss from the
rental of the property will be disallowed.
All related expenses must be prorated between the personal use portion and the rental activity
portion. Prorated depreciation is permitted for the rental activity.
Among the requirements for payments to be classified as alimony are the following: 1.
Payment must be in cash or its equivalent.
2. Payments cannot extend beyond the death of the payee-spouse.
3. Payments must be legally required pursuant to a written divorce (or separation) agreement.
4. Payments cannot be made to members of the same household.
5. Payments must not be designated as anything other than alimony.
6. The spouses may not file a joint tax return.
Note: The requirements for payments to be considered alimony (income) are the same as for
payments to be alimony (deductions).
An individual receiving common stock for services rendered must recognize the fair market
value as ordinary income. Any dividends received on that stock would also result in income
recognition.
Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates,
whichever is later. Even though all of the interest on this loan was paid on December 1, of
the current year, only the interest relating to December of the current year can be deducted in
the current year. The question does not give an interest rate, but because the loan is to be
repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.
Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used
for payment of college tuition for Clark's dependent child. One of the conditions that must be
met for tax exemption of accumulated interest on these bonds is that the purchaser of the
bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Other
conditions include, for post-1989 bonds, the taxpayer is over age 24 when issued and is used
to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or
dependents.
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year
before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb
incurred a loss of $30,000 in the current year from rental real estate in which he actively
participated. What amount of loss attributable to this rental real estate can be used in the
current year as an offset against income from nonpassive sources? $0
Cobb may not use any of the loss attributable to his rental real estate as an offset against
income from nonpassive sources in the current year because he does not qualify for the
"Mom and Pop" exception. Under this exception, up to $25,000 of passive losses and the
deduction equivalent of tax credits that are attributable to rental real estate may be used as an
offset against income from nonpassive sources. This $25,000 allowance is reduced, but not
below zero, by 50% of the amount by which the individual's modified AGI exceeds
$100,000. The $25,000 is therefore completely phased out when modified AGI reaches
$150,000. Because Cobb's AGI was $200,000, he did not qualify for the exception.
Dale received $1,000 in the current year for jury duty. In exchange for regular compensation
from her employer during the period of jury service, Dale was required to remit the entire
$1,000 to her employer in this year. In Dale's current year income tax return, the $1,000 jury
duty fee should be: Deducted from gross income in arriving at adjusted gross income.
The $1,000 jury duty fee that was required to be remitted to the employer may be deducted
from gross income in arriving at adjusted gross income. This, in effect, washes out the $1,000
income she will have to report as part of gross income for the jury duty fees paid to her.
Damages for personal injury (i.e., workers' compensation for a job-related injury) are
specifically excluded from gross income.
Deductions to arrive at net self-employed income include all necessary and ordinary
expenses connected with the business. Estimated federal income tax payments are not an
expense. Charitable contributions by an individual are only deductible as an itemized
deduction on Schedule A. This assumes the contribution was not made with the "expectation
of commensurate financial return."
Direct material, direct labor, and factory overhead (applicable indirect costs) are capitalized
with respect to inventory under the uniform capitalization rules for property acquired for
resale. Applicable indirect costs include depreciation and amortization, insurance,
supervisory wages, utilities, spoilage and scrap, design expenses, repair and maintenance and
rental of equipment and facilities (including offsite storage), some administrative costs, costs
of bonus and other incentive plans, and indirect supplies and other materials (including
repackaging costs).
Employee Stock Purchase Plans are a type of qualified stock option plan.
Except in the year in which an individual, estate, trust, or closely-held C corporation disposes
of an entire interest in a passive activity investment, such taxpayers cannot deduct passive
activity expenses and losses against income and gain attributable to non-passive activities.
Federal income taxes paid are not a deductible expense.
For an Incentive Stock Option once exercised, the stock must be held at least two years
after the grant date and at least one year after the exercise date.
For the current year, there is a net passive loss of $60,000 This should be allocated to the
two activities with passive losses in the ratio of their losses to total losses.
Activity X will receive an allocation of $22,500 of the net loss [$60,000 × ($30,000 /
$80,000)].
Funds qualify as child support only if 1) a specific amount is fixed or is contingent on
the child's status (e.g., reaching a certain age),
2) it is paid solely for the support of minor children, and
3) it is payable by decree, instrument or agreement.
Generally there is no recognition of compensation expense with an Incentive Stock
Option.
Generally, a premature distribution (prior to retirement or other allowable age) from an
individual retirement account is subject to a 10% penalty tax. Certain exceptions to this tax
are available and are contained in the mnemonic "HIM DEAD." -Home buyer (1st time)
$10,000 max if used toward first home
-Insurance (medical)
-Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over)
-Disability
-Education
-And
-Death
Generally, the fair market value of prizes and awards is taxable income. However, an
exclusion from income for certain prizes and awards applies where the winner is selected for
the award without entering into a contest (i.e., without any action on their part) and then
assigns the award directly to a governmental unit or charitable organization.
Gifts and inheritances are both tax-free to the recipient. (Remember, tax is often paid by
the person giving the gift or the estate at death.)
Guaranteed payments are reasonable compensation paid to a partner for services rendered (or
use of capital) without regard to his ratio of income. Earned compensation is subject to self-
employment tax. Payments not guaranteed are merely another way to distribute partnership
profits. The ordinary income reported from an S corporation is taxable income to the
individual or their own individual tax return but is not subject to self-employment tax. The
ordinary income reported from a partnership may be subject to self-employment tax (if to a
general partner).
If a vacation residence is rented for less than 15 days per year it is treated as a personal
residence.
The rental income is excluded from income, and mortgage interest (first or second home) and
real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are
not deductible.
If security deposits are held separately and not available to be applied to last month's rent (as
in a segregated account) they are a liability of the taxpayer and not included in income
in the year received.
Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One
requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or
dependent enrolled in higher education. The interest exclusion is reduced by qualified
scholarships that are exempt from tax and other nontaxable payments received for
educational expenses (other than gifts and inheritances).
James Corp. issue stock options to employees under an Employee Stock Purchase Plan. The
following statements are correct The option exercise price may not be less than the lesser
of 85% of the FMV of the stock when granted or exercised.
The option cannot be exercised more than 27 months after the grant date.
Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's
widowed parent, Grant. For Year 27, Dale, a 19-year-old full-time college student, earned
$4,500 as a babysitter. Kim, a 23-year-old bank teller, earned $12,000. Grant received $5,000
in dividend income and $4,000 in nontaxable Social Security benefits. Grant and Kim are
U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two
currently reside with Jim and Kay. Dale's main place of residence is with Jim and Kay, and
he is currently on a temporary absence to attend school. How many exemptions can Jim and
Kay claim on their Year 27 joint income tax return? Three
Taxpayers are now entitled to an exemption for each qualifying child and qualifying relative
(two tests are "CARES" or "SUPORT"). For Dale, he does meet the residency requirement
because there is an exception for a temporary absence while attending school. Therefore, he
is a qualifying child under the CARES test. Kim does not qualify as a qualifying child
(CARES test) because, although she is under age 24, she is not a full-time student. Therefore,
the income limitations of the SUPORT test apply, and she does not qualify under that test
either. Likewise, Grant's taxable income of $5,000 exceeds the minimum. Thus, 3 total
exemptions can be claimed (Jim, Kay, and Dale).
Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition,
the following two transactions between Logan and Argon occurred in Year 2: Logan received
a bonus of 100 shares of publicly traded stock worth $13,000 with a basis to Argon of $8,000,
and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying
stock option plan for $10 per share when stock was valued at $25 per share. What amount of
compensation should Argon report in Logan's Form W-2 for Year 2? $88,000
The salary of $60,000 is included in the Form W-2. The FMV of the bonus of $13,000 is
included in the Form W-2. Because the stock option was nonqualifying, the bargain element
is included in Form W-2 as well. The stock is worth $25 per share and the option price is $10
per share. That is a bargain element of $15 per share on 1,000 shares. That is $15,000.
$60,000 + $13,000 + $15,000 = $88,000.
Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-
bearing note on business property on January 1 of the current year. The cash flow from Nan's
business enabled Nan to prepay the first three years of interest attributable to the note on
December 31 of the current year. How should Nan treat the prepayment of interest for tax
purposes? Deduct the current year's interest and amortize the balance over the next two
years
Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until
the tax period to which the interest relates. In other words, the interest must be both paid and
incurred in order to be deducted.
Net Earnings from Self Employment only 92.35% of the total amount of self-employment
income is defined as net earnins from self employment.
Passive activity is any activity in which the taxpayer does not materially participate. A
net passive activity loss generally may not be deducted against other types of income (e.g.,
wages, other ordinary or active income, portfolio income (interest and dividends), or capital
gains). In other words, passive losses may generally only offset passive income for a tax
year-the remaining net loss is generally "suspended" and carried forward to a year when it
may be used to offset passive income (or when the final disposition of the property occurs).
However, there is an exception (the "mom and pop exception," as we refer to it in the
textbooks) to this general rule. Taxpayers who own more than 10% of the rental activity,
have modified AGI under $100,000, and have active participation (managing the property
qualifies), may deduct up to $25,000 annually of net passive losses attributable to real estate.
There is a phase-out provision for modified AGI from $100,000 − $150,000, and the
deduction is completely phased-out for modified AGI in excess of $150,000.
Passive activity losses (PALs) can only be deducted up to passive activity income
Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching
is not a requirement toward obtaining the degree. Is included in a recipient's gross income
A payment to a student for a part-time teaching assignment is taxable income just as a

payment for any other campus job would be. This is not a scholarship or fellowship.
Property Settlements If a divorce settlement provides for a lump-sum payment or property
settlement by a spouse, that spouse gets no deduction for payments made, and the payments
are not includable in the gross income of the spouse receiving the payment.
qualified stock option there is no recognition of income in the year of grant.
Return on Annuity - treat like depreciation Under a $150,000 insurance policy on her
deceased father's life, May Green is to receive $12,000 per year for 15 years. Of the $12,000
received in the current year, the amount subject to income tax is:
Death benefit
$ 150,000
Amount received in the current year
$ 12,000
Less: Return of principal ($150,000 ÷ 15 years)
(10,000)
Taxable interest
$ 2,000
Rule on Child Support and Alimony In the event of payments consisting of both child
support and alimony, child support obligations will be satisfied first.
RULE: An accruable expenseis one is which the services have been received/performed but
have not been paid for by the end of the reporting period.
Rule: Generally, unless an exception applies, retirement money cannot be withdrawn until the
individual reaches the age of 59 ½. If retirement money (without an exception) is
withdrawn before the age of 59 ½, the premature distribution is subject to a 10% penalty tax
(in addition to the applicable regular income tax that applies to all distributions of traditional
IRA money).
Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or
securities on an established securities marketmust recognize gains and losses on the trade
date, rather than on the settlement date.
Scholarships are nontaxable for degree seeking students to the extent that the proceeds
are spent on tuition, fees, books and supplies. The $5,000 for teaching courses is taxable
compensation for services delivered.
Self-employment tax and self-employment health insurance expenses are adjustments from
total gross income. They are not deducted from self-employment earnings (i.e., not
reported net on line 12 of the Form 1040).
Solvency is based on the FMV of all assets less the value of all liabilities.
SUPORT Support (over 50%) test
Under a specific amount of (taxable) gross income test
Precludes dependent filing a joint tax return test
Only citizens (residents of US/Canada or Mexico) test
Relative test OR
Taxpayer lives with individual for whole year test
The amount of income for a child under 18 that is taxable at the parents' maximum tax rate is
deemed the "kiddie tax." To calculate the amount that is taxed at the parents' highest
rate, take the child's total interest income ($3,000 in this question) and reduce it by the child's
standard deduction ($950 in this case). The next $950 is then taxed at the child's rate, and the
balance of $1,100 ($3,000 - $950 - $950 = $1,100) is taxed at the parents' highest rate. (Note
that although $950 is not the current standard deduction for a dependent, the question tells us
to use it.)
The amount of social security benefits that is taxed is dependent on whether the combined
income (AGI plus interest on tax-exempt bonds and 50% of the social security benefits) is
greater than a threshold amount. If the combined income is less than the threshold, the
amount taxed is the lesser of 1) 50% of the benefits or 2) 50% of the excess of the combined
income over the threshold. If the combined income is greater than the threshold, the amount
taxed is the lesser of 1) amount calculated above plus 85% of the excess of the combined
income over the threshold or 2) 85% of the benefits. Thus, 85% of the benefits is the
maximum amount of benefits that may be included in gross income.
The basic formula for determination of net rental income or loss follows: +Gross rental
income
+Prepaid rental income
+Rent cancellation payments
+Improvements in lieu of rent
+(Rental expenses)
=Net rental income (loss)

The employee receiving a nonqualified stock option must recognize as ordinary income the
value of the option if traded on an established market. Here, that is 100 shares at $4 per share,
or $400.
The employer may recognize a deductible expense for a nonqualified stock option in the
same year that the employee will recognize ordinary income.
The exception to this is in the year the passive activity is disposed of (sold) if still
unused, passive activity losses are fully deductible in the year of disposal:
The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts
exceeding this are taxable based on IRS tables.
The requirements that enable a taxpayer to be classified as a "qualifying widow(er)" are: 1
The taxpayer's spouse died in one of the two previous years and the taxpayer did not remarry
in the current tax year,
2 The taxpayer has a child who can be claimed as a dependent,
3 This child lived in the taxpayer's home for all of the current tax year,
4 The taxpayer paid over half the cost of keeping up a home for the child,
5 The taxpayer could have filed a joint return in the year the spouse died.
The rule limiting the allowability of passive activity losses and credits applies to personal
service corporations.
The uniform capitalization method must be used by:Real or tangible personal property
produced by the taxpayer for use in a trade or business.
Real or tangible personal property produced by the taxpayer for sale to customers.
Real or personal property acquired by the taxpayer for resale.
However, the uniform capitalization rules do not apply to property acquired for resale if the
taxpayer's annual gross receipts for the preceding three tax years do not exceed $10,000,000
(not $2 million).
Uniform capitalization rules apply to the following: (1) real or tangible personal property
produced by the taxpayer for use in his or her trade or business;
(2) real or tangible personal property produced by the taxpayer for sale to his or her
customers; and
(3) real or tangible personal property acquired by the taxpayer for resale, provided the
taxpayer's annual average gross receipts for the preceding three years exceeds $10,000,000.
Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing
certain costs. With regard to inventory, direct materials, direct labor, and factory overhead
should be capitalized as part of the cost of inventory. Warehousing costs, quality control and
taxes, excluding income taxes, are all considered factory overhead items. The research should
be expensed
Wages and interest on U.S. Treasury bonds are includible in gross income and must be
reported as part of gross income on a taxpayer's income tax return.
Which of the following statements regarding an individual's suspended passive activity losses
is correct Suspended losses can be carried forward, but not back, until utilized.
Which one of the following statements is correct with regard to an individual taxpayer who
has elected to amortize the premium on a bond that yields taxable interest? The bond's basis is
reduced by the amortization

REG Questions

Uploaded by

Copyright:

Available Formats

REG Questions

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

REG Questions

Uploaded by

Copyright:

Available Formats

A CPA's adjusted gross income (AGI) for the preceding 12- month tax year exceeds

I. the annualization method

II. the seasonal method I only

charitable contributions of appreciated capital gain property = no

Doctor bills resulting from a serious fall $5,000

Cosmetic surgery that was necessary to correct a congenital deformity $15,000

claim credit = yes

Mortgage interest on first loan $19,000

Interest on home equity line of credit $2,500

Auto loan interest $500

For Year 4, how much interest is deductible?$19,000

for year 4, how much interest is deductible? $18,500

what amount should smith deduct as a charitable contribution? $7,000

refundable portion = $2,800

I. The client's investment interest expense exceeds net investment income.

Choices "c", "a", and "b" are incorrect.

The annualization method.

The seasonal method.

The specific or general nature of the taxpayer's inquiry

The time available for development and submission of the advice

The technical complexity involved

The existence of authorities and precedents

The tax sophistication of the taxpayer

The need to seek other professional advice

The type of transaction and whether it is subject to heightened reporting or disclosure

Whether any potential applicable penalties can be avoided through disclosure

State income tax

Four tickets to a theatre party sponsored by a qualified charitable organization; not

Security deposit placed on apartment at new location

Payment to qualified charity $ 160

Fair value of 4 tickets at $25 (100)

State income tax

Security deposit placed on apartment at new location

State income tax

Four tickets to a theatre party sponsored by a qualified charitable organization; not

Security deposit placed on apartment at new location

Wheelchair repair $ 300

School for handicapped 4,000

State income tax

Four tickets to a theatre party sponsored by a qualified charitable organization; not

Security deposit placed on apartment at new location

Less: Related investment expenses other than investment interest expenses

Net investment income

U.S. Treasury bond income

Municipal bond income

Investment interest expense

$12,600 + $1,250 + $1,250 = $15,100

Doctor bills resulting from a serious fall

Cosmetic surgery that was necessary to correct a congenital deformity

AGI Limitation ($100,000 × 10%)

Total Miscellaneous Deductions:

Allowable Misc. Deductions

Alimony paid to a former spouse

Inheritance from a grandparent

Proceeds of a lawsuit for physical injuries

What is the amount of Cassidy's adjusted gross income?

Proceeds from physical injury lawsuit

Adjusted gross income