VII. FILING REQUIREMENTS

A. Form 1040 must generally be filed if gross income at least equals the sum of the taxpayer’s standard deduction plus personal exemptions allowable (e.g., generally $6,100 + $3,900 = $10,000 for single taxpayer for 2013).
1. The $1,500 (or $1,200) additional standard deduction for age is included in determining an individual’s filing requirement; the additional standard deduction for blindness and dependency exemptions are not included.
EXAMPLE
A single individual age 65 and blind who cannot be claimed as a dependency exemption by another taxpayer must file a return for 2013 if the individual’s gross income is at least $6,100 + $3,900 + $1,500 = $11,500
2. An individual who can be claimed as a dependency exemption by another taxpayer must file a return if the individual either has (1) unearned income in excess of the sum of $1,000 plus any additional standard deductions allowed for age and blindness, or (2) total gross income in excess of the individual’s standard deduction (i.e., earned income plus $300 up to the normal amount of the basic standard deduction—$6,100 for single taxpayer—plus additional standard deductions for age and blindness).
EXAMPLE
A single individual age 65 who can be claimed as a dependency exemption by another taxpayer must file a return for 2013 if the individual has unearned income (e.g., interest and dividends) in excess of $1,000 + $1,500 = $2,500.
3. Self-employed individual must file if net earnings from self-employment are $400 or more.
4. A married individual filing separately must file if gross income is $3,900 or more for 2013.
B. Return must be filed by 15th day of 4th calendar month following close of taxable year.
C. An automatic six-month extension of time for filing the return can be obtained by filing Form 4868 by the due date of the return, and paying any estimated tax due.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 204 THROUGH 207

VIII. FARMING INCOME AND EXPENSES

A. A farming business involves the cultivating of land or raising or harvesting of any agricultural or horticultural commodity. It does not include contract harvesting, or the buying or reselling of plants or animals grown or raised by another person.
B. An individual engaged in farming must file Schedule F (Form 1040), Farm Income and Expenses. Additionally, a farmer must also file Schedule SE in order to compute self-employment tax on farm earnings. Completing Schedule F for farming is similar to completing a Schedule C which is used by sole proprietors. Partnerships engaged in farming must file Form 1065, while corporations engaged in farming must file the appropriate Form 1120.
C. The income and expenses from farming are generally treated in the same manner as the income and expenses from any other business. Similarly, the general rules that apply to all cash and accrual taxpayers also apply to farming businesses.
1. A cash-basis farmer who receives insurance proceeds as a result of the destruction or damage to crops may elect to include the proceeds in income for the year after the year of damage if the farmer can show that the income from the crops would normally have been reported in the following year.
2. Income from the sale of a crop is normally reported in the year of sale. However, if the farmer has pledged all of part of the crop production to secure a Commodity Credit Corporation loan, the farmer may elect to report the loan proceeds as income in the year received rather than reporting income in the year the crop is sold. The amount reported as income becomes the farmer’s basis for the crop and is used to determine gain or loss upon the sale of the crop.
3. A farmer may generally deduct soil and water conservation expenditures that are consistent with a conservation plan approved by a federal or state agency. However, the deduction is annually limited to 25% of the farmer’s gross income from farming. Excess expenses can be carried over for an unlimited number of years subject to the 25 % limitation in each carryover year.
a. Expenses related to the draining of wetlands or to land preparation for the installation of center pivot irrigation systems may not be deducted under this provision.
b. Land clearing expenses must be capitalized and added to the farmer’s basis in the land.
EXAMPLE
A farmer had gross income from Farm A of $25,000 and gross income from Farm B of $19,000 for the current year. During the year the farmer spent $16,000 on Farm B for soil and water conservation expenditures under a plan approved by a state agency. For the current year, the farmer’s deduction of the $16,000 of soil and water conservation expenditures would be limited to ($25,000 + $19,000) × 25% =$11,000.
4. Cash-basis farmers can generally deduct prepaid feed costs in the year of payment if the deduction does not materially distort income. However, no deduction is allowed for advance payments for feed, seed, fertilizer, or other supplies to the extent such prepayments exceed 50% of total deductible farming expenses (excluding the prepaid items).
EXAMPLE
During December 2013, a calendar-year farmer purchased a 6-month supply of feed for $6,000 and also purchased $2,000 of seed to be used in the subsequent spring planting season. The farmer’s other farm expenses totaled $9,000. In this case the farmer’s 2013 deduction for prepaid feed and seed would be limited to 50% × $9,000 = $4,500.
5. The cost of most tangible personal property used in a farming business cannot be depreciated under the 200% declining balance method, but instead is generally recovered using the MACRS 150% declining balance method over a 5-year recovery period.
6. An individual engaged in farming can elect to determine current year tax liability by averaging, over the previous three years, all or part of his/her current year income from farming.

IX. TAX PROCEDURES

A. Audit and Appeal Procedures

1. Taxpayer makes determination of tax when return is filed.
2. Examination of questionable returns may be conducted by correspondence, in an IRS office (i.e., office audit), or at taxpayer’s place of business (i.e., field audit).
3. If taxpayer does not agree with the changes proposed by the examiner and the examination was made in an IRS office or by correspondence, the taxpayer may request a meeting with the examiner’s supervisor.
4. If no agreement is reached, or if the examination was conducted in the field, the IRS will send the taxpayer a copy of the examination report and a letter stating the proposed changes (thirty-day letter).
5. A taxpayer has thirty days to (1) accept deficiency, (2) appeal the examiner’s findings, or (3) may disregard the thirty-day letter and wait for a statutory notice of deficiency (ninety-day letter).
6. If taxpayer has appealed and agreement is not reached at appellate level of IRS, a ninety-day letter is sent.
7. Taxpayer has ninety days to file a petition in the Tax Court.
a. Assessment and collection are prohibited so long as the taxpayer can petition the Tax Court. Payment of deficiency is not required before going to Tax Court.
b. If a petition is not filed within ninety days, the tax deficiency is assessed and the amount is subject to collection if not paid within ten days.

B. Choice of Courts

1. A taxpayer may begin tax litigation in any of three courts: the US Tax Court; US district courts; or US Court of Federal Claims.
2. Tax Court is a court of national jurisdiction that hears only tax cases. It is composed of 19 judges who are specialists in the tax area that travel to approximately 100 cities throughout the US to hear tax cases. Although a jury trial is not available, a major advantage of the Tax Court is that the tax does not have to be paid before the taxpayer goes to Court. The Tax Court issues regular and memorandum decisions, both of which can be used as precedent.
a. The IRS has adopted an acquiescence policy for regular Tax Court decision that it loses. Acquiescence indicates that the IRS will follow the decision in future situation, involving similar facts and issues. Non acquiescence indicates that the IRS will not follow the decision and can be expected to litigate in situations involving similar facts and issues.
b. Decisions of the Tax Court are appealed to US Court of Appeals. As a matter of policy known as the Golsen Rule, the Tax Court will follow the law of the circuit to which a case is appealable.
c. A taxpayer may take a case to the Small Tax Case Division if the disputed amount does not exceed $50,000. Procedures are simplified and taxpayers can represent themselves without an attorney. Cases are heard by special commissioners instead of a Tax Court judge, and a possible disadvantage is that a decision is binding and cannot be appealed.
3. Each state has at least one US district court which is independent of other district courts. District courts adjudicate all types of cases, not just tax cases.
a. A district court is the only court in which a jury trial is available, which may be advantageous to the taxpayer if the case involves a sympathetic issue.
b. Unlike a proceeding in the Tax Court, taxpayers must first pay the tax and then file suit in district court for refund.
c. Decisions of a district court are appealed to the US Court of Appeals.
4. US Court of Federal Claims is a court of national jurisdiction. A jury trial is not available and taxpayers must first pay tax and then file suit for refund. Decisions are appealed to US Court of Appeals for the Federal Circuit.
5. There are 11 geographical Circuit Courts of Appeals plus one for the District of Columbia and one for the Federal Circuit. Lower court decisions are generally appealable to the court of appeals for an individual’s place of residence, or in the case of a corporation, its principal place of business. Decisions of the Appellate Courts have more authority than lower court decisions. The losing party may appeal to the US Supreme Court.
6. US Supreme Court normally hears tax cases only if they involve a conflict regarding the treatment of an item between circuits of the Appeals courts. Decisions of the Supreme Court are the law of the land and take precedence over all other court decisions.

C. Assessments

1. The normal period for assessment of a tax deficiency is three years after the due date of the return or three years after the return is filed, whichever is later.
2. The assessment period is extended to six years if gross income omissions exceed 25% of the gross income stated on the return.
3. There is no time limit for assessment if no return is filed, if the return is fraudulent, or if there is a willful attempt to evade taxes.
4. If a taxpayer fails to include any required information on a tax return or statement relating to a listed transaction, the statute of limitations with respect to that listed transaction will not expire until one year after the date the information is provided to the IRS.
5. Assessment period (normally three years) is suspended for 150 days after timely mailing of deficiency notice (90-day letter) to taxpayer.
6. Within sixty days after making the assessment, the IRS is required to provide a notice and demand for payment. If tax is not paid, the tax may be collected by levy or by court proceedings started within ten years of assessment.

D. Collection from Transferees and Fiduciaries

1. Transferee provisions are a method of collecting a predetermined tax that the transferor taxpayer cannot pay.
2. Generally transferor must be insolvent, or no longer in existence (e.g., corporation was dissolved).
3. Generally transferees are liable only to the extent of property received from the transferor taxpayer.

E. Closing Agreement and Compromise

1. A closing agreement is a final determination of tax liability that is binding on both the IRS and taxpayer.
2. A compromise is a writing-down of the tax liability. The IRS has broad authority to compromise in the event that doubt exists as to the existence of actual tax liability or because of the taxpayer’s inability to pay.

F. Claims for Refund

1. An income tax refund claim is made on Form 1040X. Form 843 should be used to file a refund claim for taxes other than income taxes. Form 1045 may be used to file for a tentative adjustment or refund of taxes when an overpayment of taxes for a prior year results from the carryback of a current year’s net operating loss.
2. Period for filing refund claims
a. Refund claim must be filed within three years from date return was filed, or two years from payment of tax, whichever is later. If return filed before due date, the return is treated as filed on due date.
b. Three-year period is extended to seven years for claims resulting from bad debts or worthless securities.
c. If refund claim results from a carryback (e.g., NOL), the three-year period begins with the return for the year in which the carryback arose.
3. Suit for refund
a. Only recourse from IRS’s disallowance of refund claim is to begin suit in court within two years of notice of disallowance.
b. If IRS fails to act on refund claim within six months, the taxpayer may treat it as disallowed.

G. Interest

1. Interest is allowed on overpayments from date of overpayment to thirty days before date of refund check.
a. If an overpayment, amounts of tax withheld and estimated payments are deemed paid on due date of return.
b. No interest is allowed if refund is made within forty-five days of later of (1) return due date or (2) actual filing of return.
2. For underpayments of tax, the interest rate is equal to the three-month Treasury bill rate plus three percentage points. For overpayments, the interest rate is equal to the federal short-term rate plus two percentage points.

H. Taxpayer Penalties

1. Penalties may be imposed for late filing or failure to file, and late payment of tax.
a. Late filing or failure to file penalty is 5% of the net tax due per month (up to 25%).
b. Late payment of tax penalty is 0.5% of the net tax due per month (up to 25%).
(1) For any month to which both of the above apply, the late filing penalty is reduced by the late payment penalty so that the maximum is 5% per month (up to 25%).
(2) For returns not filed within sixty days of due date (including extensions), the IRS may assess a minimum late filing penalty which is the lesser of $100 or the amount of net tax due.
2. An accuracy-related penaltyof 20% of the underpayment applies if the underpayment of tax is attributable to one or more of the following: (1) negligence or disregard of rules and regulations, (2) any substantial understatement of income tax, (3) any substantial valuation overstatement, (4) any substantial overstatement of pension liabilities, or (5) any substantial gift or estate tax valuation understatement.
a. Accuracy-related penalty does not apply if the underpayment is due to reasonable cause, or there is adequate disclosure and the position has a reasonable basis for being sustained.
b. Negligence penalty applies to any careless, reckless, or intentional disregard of rules or regulations, and any failure to make a reasonable attempt to comply with the provisions of the tax law. Penalty is imposed only on the portion of tax liability due to negligence, and can be avoided by adequate disclosure of a position that has a reasonable basis.
c. Substantial understatement of income tax penalty applies if the understatement exceeds the greater of (1) 10% of the tax due, or (2) $5,000 ($10,000 for most corporations). Penalty can be avoided by adequate disclosure of a position that has a reasonable basis, or if there is substantial authority for the position taken.
d. Substantial valuation misstatement penalty may be imposed if the value (or adjusted basis) of property stated on the return is 150% or more of the amount determined to be correct.
(1) Penalty applies to the extent resulting income tax underpayment exceeds $5,000 ($10,000 for most corporations).
(2) Penalty is applied at a 40% rate if gross overvaluation is 200% or more of the amount determined to be correct.
e. Substantial overstatement of pension liabilities penalty applies if the amount of stated pension liabilities is 200% or more of the amount determined to be correct. Penalty is 40% if misstatement is 400% or more, but penalty is not applicable if resulting underpayment is $1,000 or less.
f. Gift or estate tax valuation misstatement penalty applies if the value of property on a gift or estate return is 50% or less of the amount determined to be correct.
(1) Penalty is 40% if valuation used is 25% or less of amount determined to be correct.
(2) No penalty if resulting understatement of tax is $5,000 or less.
3. A separate accuracy-related penalty applies to tax shelter transactions. The penalty is 30% of the tax understatement if the taxpayer fails to disclose a listed transaction or other reportable transaction with a significant tax-avoidance purpose. A lower penalty of 20% of the tax understatement applies if there is disclosure.
a. The penalty may be waived for reasonable cause if the taxpayer made adequate disclosure, the position is (or was) supported by substantial authority, and the taxpayer reasonably believed the position was more-likely-than-not correct.
b. Even if a taxpayer reasonably believed that its position was correct, the penalty cannot be waived if there was no disclosure.
4.Civil fraud penalty is 75% of the portion of underpayment attributable to fraud. The accuracy-related penalty does not apply to the portion of underpayment subject to the fraud penalty.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 208 THROUGH 217

KEY TERMS

Accounting method. The rules used to determine the tax year in which income and expenses are reported for tax purposes. Two major overall methods of accounting are the cash method and the accrual method.

Accounting period. The period of time, usually 12 months, used by a taxpayer for the determination of taxable income. Taxpayers who do not keep records must use a calendar year, while taxpayers who do keep books and records generally may choose between a calendar year and a fiscal year. A fiscal year is a tax year that ends on the last day of a month other than December.

Adjusted gross income (AGI). Unique to individual taxpayers, it generally represents an individual’s gross income less business expenses, expenses attributable to the production of rents and royalty income, the capital loss deduction, and certain personal expenses (deductions for AGI).

Amount realized. The amount received by a taxpayer from the sale or other disposition of property. The amount realized includes the sum of cash and the fair market value of any other property or services received, plus any debt of the taxpayer assumed by the buyer. Determining the amount realized is the starting point for arriving at the taxpayer’s realized gain or loss.

At-risk limitation. Under the at-risk rules, a taxpayer’s deductible loss from an activity is limited to the amount the taxpayer has at risk in the activity at the end of the taxable year. The initial amount at risk is generally the sum of the amount of cash and the adjusted basis of property contributed to the activity, plus amounts borrowed for use in the activity for which the taxpayer is personally liable.

Cash method. A method of accounting under which the taxpayer generally reports income for the taxable year in which payments are actually or constructively received. Expenses are deductible when paid.

Gross income. All income from whatever source derived including (but not limited to) compensation for services, gains from property, interest, rents, royalties, dividends, alimony, and income from discharge of indebtedness.

Material participation. The level of participation by a taxpayer in an activity that determines whether the activity is a passive activity or an active trade or business. Material participation can be achieved by meeting any one of the seven tests provided in Regulations.

Passive loss. A loss generated from a passive activity. Generally, passive losses are not allowed to offset trade or business income or portfolio (investment) income.

Realized gain or loss. The gain or loss determined by taking the amount realized from the sale or exchange of property and subtracting the property’s adjusted basis.

Statute of limitations. The period of time after which a taxpayer’s return is no longer subject to assessment, and the taxpayer can no longer file a claim for refund. The normal stature of limitations is generally three years from the alter of the date the tax return is filed, or its due date.

Stock redemption. The acquisition by a corporation of its own stock from a shareholder in exchange for property. A shareholder’s redemption of stock may be treated as an exchange if it meets specified requirements, or otherwise will be treated as a dividend.

Tax benefit rule. The recovery of an item that was deducted in a prior year (e.g., state income tax refund) must be included in gross income for the year of recovery to the extent that the deduction of the item in the prior year produced a tax benefit by reducing the taxpayer’s tax.

Multiple-Choice Questions (1–217)

I.B.3. Annuities

1. Richard Brown, who retired on May 31, 2012, receives a monthly pension benefit of $700 payable for life. His life expectancy at the date of retirement is ten years. The first pension check was received on June 15, 2012. During his years of employment, Brown contributed $12,000 to the cost of his company’s pension plan. How much of the pension amounts received may Brown exclude from taxable income for the years 2012, 2013, and 2014?

image

I.B.4. Life Insurance Proceeds

2. Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums. Upon the death of the parent, what amount must Decker include in gross income?

a. $0

b. $135,000

c. $160,000

d. $200,000

3. Seymour Thomas named his wife, Penelope, the beneficiary of a $100,000 (face amount) insurance policy on his life. The policy provided that upon his death, the proceeds would be paid to Penelope with interest over her present life expectancy, which was calculated at twenty-five years. Seymour died during 2013, and Penelope received a payment of $5,200 from the insurance company. What amount should she include in her gross income for 2013?

a. $ 200

b. $1,200

c. $4,200

d. $5,200

I.B.5. Employee Benefits

4. Under a “cafeteria plan” maintained by an employer,

a. Participation must be restricted to employees, and their spouses and minor children.

b. At least three years of service are required before an employee can participate in the plan.

c. Participants may select their own menu of benefits.

d. Provision may be made for deferred compensation other than 401(k) plans.

5. David Autrey was covered by an $80,000 group-term life insurance policy of which his wife was the beneficiary. Autrey’s employer paid the entire cost of the policy, for which the uniform annual premium was $8 per $1,000 of coverage. Autrey died during 2013, and his wife was paid the $80,000 proceeds of the insurance policy. What amount of group-term life insurance proceeds must be included in gross income by Autrey’s widow?

a. $0

b. $30,000

c. $50,000

d. $80,000

6. Howard O’Brien, an employee of Ogden Corporation, died on June 30, 2013. During July, Ogden made employee death payments (which do not represent the proceeds of life insurance) of $10,000 to his widow, and $10,000 to his fifteen-year-old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2013?

  Widow Son
a. $ 5,000 $ 5,000
b. $ 5,000 $10,000
c. $ 7,500 $ 7,500
d. $10,000 $10,000

7. John Budd files a joint return with his wife. Budd’s employer pays 100% of the cost of all employees’ group-term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Budd by his employer is

a. $100,000

b. $ 50,000

c. $ 10,000

d. $ 5,000

8. During the current year Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following payments during the year:

Workers’ compensation $2,400
Reimbursement from his employer’s accident and health plan for medical expenses paid by Hal and not deducted by him 1,800
Damages for physical injuries 8,000

The amount to be included in Hal’s gross income for the current year should be

a. $12,200

b. $ 8,000

c. $ 1,800

d. $0

9. James Martin received the following compensation and fringe benefits from his employer during the current year:

Salary $50,000
Year-end bonus 10,000
Medical insurance premiums paid by employer 1,000
Reimbursement of qualified moving expenses 5,000

What amount of the preceding payments should be included in Martin’s current year gross income?

a. $60,000

b. $61,000

c. $65,000

d. $66,000

I.B.8. Gifts and Inheritances

10. On February 1, 2013, Hall learned that he was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for the stock in 2008. Fair market value of the stock on February 1, 2013, the date of his father’s death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, 2013, the date that the executor distributed the stock to him. How much income should Hall include in his 2013 individual income tax return for the inheritance of the 500 shares of stock that he received from his father’s estate?

a. $5,500

b. $4,000

c. $2,500

d. $0

I.B.9. Stock Dividends

11. During the current year, Gail Judd received the following dividends from

Benefit Life Insurance Co., on Gail’s life insurance policy (Total dividends received have not yet exceeded accumulated premiums paid) $100
Safe National Bank, on bank’s common stock 300
Roe Mfg. Corp., a Delaware corporation, on preferred stock 500

What amount of dividend income should Gail report in her current year income tax return?

a. $900

b. $800

c. $500

d. $300

12. Amy Finch had the following cash receipts during 2013:

Dividend from a mutual insurance company on a life insurance policy $500
Dividend on listed corporation stock; payment date by corporation was 12/30/12, but Amy received the dividend in the mail on 1/2/13 875

Total dividends received to date on the life insurance policy do not exceed the aggregated premiums paid by Amy. How much should Amy report for dividend income for 2013?

a. $1,375

b. $ 875

c. $ 500

d. $0

13. Jack and Joan Mitchell, married taxpayers and residents of a separate property state, elect to file a joint return for 2013 during which they received the following dividends:

Received by Jack Received by Joan
Alert Corporation (a qualified, domestic corporation) $400 $50
Canadian Mines, Inc. (a Canadian company) $300
Eternal Life Mutual Insurance Company (dividends on life insurance policy) 200

Total dividends received to date on the life insurance policy do not exceed cumulative premiums paid. For 2013, what amount should the Mitchells report on their joint return as dividend income?

a. $550

b. $600

c. $750

d. $800

14. During 2011, Karen purchased 100 shares of preferred stock of Boling Corp. for $5,500. During 2013, Karen received a stock dividend of ten additional shares of Boling Corp. preferred stock. On the date the preferred stock was distributed, it had a fair market value of $60 per share. What is Karen’s basis in the ten shares of preferred stock that she received as a dividend?

a. $0

b. $500

c. $550

d. $600

I.B.10. Interest Income

15. Micro Corp., a calendar-year accrual-basis corporation, purchased a five-year, 8%, $100,000 taxable corporate bond for $108,530 on July 1, 2013, the date the bond was issued. The bond paid interest semiannually. Micro elected to amortize the bond premium. For Micro’s 2013 tax return, the bond premium amortization for 2013 should be

I. Computed under the constant yield to maturity method.

II. Treated as an offset to the interest income on the bond.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

16. In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified US Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true?

I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.

II. “Otherwise qualified higher education expenses” must be reduced by qualified scholarships not includible in gross income.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

17. During 2013 Kay received interest income as follows:

On US Treasury certifi cates $4,000
On refund of 2011 federal income tax 500

The total amount of interest subject to tax in Kay’s 2013 tax return is

a. $4,500

b. $4,000

c. $ 500

d. $0

18. Charles and Marcia are married cash-basis taxpayers. In 2013, they had interest income as follows:

  • $500 interest on federal income tax refund.
  • $600 interest on state income tax refund.
  • $800 interest on federal government obligations.
  • $1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia’s 2013 joint income tax return?

a. $ 500

b. $1,100

c. $1,900

d. $2,900

19. Clark bought Series EE US Savings Bonds in 2013. 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

a. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

b. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

c. Bonds must be bought by the owner of the bonds before the owner reaches the age of twenty-four.

d. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

20. Daniel Kelly received interest income from the following sources in 2013:

New York Port Authority bonds $1000
Puerto Rico Commonwealth bonds 1,800

What portion of such interest is tax exempt?

a. $0

b. $1,000

c. $1,800

d. $2,800

21. In 2013 Uriah Stone received the following interest payments:

  • Interest of $400 on refund of federal income tax for 2011.
  • Interest of $300 on award for personal injuries sustained in an automobile accident during 2010.
  • Interest of $1,500 on municipal bonds.
  • Interest of $1,000 on United States savings bonds (Series HH).

What amount, if any, should Stone report as interest income on his 2013 tax return?

a. $0

b. $ 700

c. $1,700

d. $3,200

22. For the year ended December 31, 2012, Don Raff earned $1,000 interest at Ridge Savings Bank on a certificate of deposit scheduled to mature in 2013. In January 2013, before filing his 2012 income tax return, Raff incurred a forfeiture penalty of $500 for premature withdrawal of the funds. Raff should treat this $500 forfeiture penalty as a

a. Reduction of interest earned in 2012, so that only $500 of such interest is taxable on Raff’s 2012 return.

b. Deduction from 2013 adjusted gross income, deductible only if Raff itemizes his deductions for 2013.

c. Penalty not deductible for tax purposes.

d. Deduction from gross income in arriving at 2013 adjusted gross income.

I.B.12. Scholarships and Fellowships

23. Which payment(s) is (are) included in a recipient’s gross income?

I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

24. Majors, a candidate for a graduate degree, received the following scholarship awards from the university in 2013:

  • $10,000 for tuition, fees, books, and supplies required for courses.
  • $2,000 stipend for research services required by the scholarship.

What amount of the scholarship awards should Majors include as taxable income in 2013?

a. $12,000

b. $10,000

c. $ 2,000

d. $0

I.B.16. Lease Improvements

25. In July 1998, Dan Farley leased a building to Robert Shelter for a period of fifteen years at a monthly rental of $1,000 with no option to renew. At that time the building had a remaining estimated useful life of twenty years.

Prior to taking possession of the building, Shelter made improvements at a cost of $18,000. These improvements had an estimated useful life of twenty years at the commencement of the lease period. The lease expired on June 30, 2013, at which point the improvements had a fair market value of $2,000. The amount that Farley, the landlord, should include in his gross income for 2013 is

a. $ 6,000

b. $ 8,000

c. $10,000

d. $18,500

I.C. Items to Be Included in Gross Income

26. Bob and Sue Stewart were divorced in 2011. Under the terms of their divorce decree, Bob paid alimony to Sue at the rate of $50,000 in 2011, $20,000 in 2012, and nothing in 2013. What amount of alimony recapture must be included in Bob’s gross income for 2013?

a. $0

b. $23,283

c. $30,000

d. $32,500

27. Which of the following conditions must be present in a divorce agreement for a payment to qualify as deductible alimony?

I. Payments must be in cash.

II. The payment must end at the recipient’s death

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

28. Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?

a. Employer-provided medical insurance coverage under a health plan.

b. A $10,000 gift from the taxpayer’s grandparents.

c. The fair market value of land that the taxpayer inherited from an uncle.

d. The dividend income on shares of stock that the taxpayer received for services rendered.

29. With regard to the inclusion of social security benefits in gross income for the 2013 tax year, which of the following statements is correct?

a. The social security benefits in excess of modified adjusted gross income are included in gross income.

b. The social security benefits in excess of one half the modified adjusted gross income are included in gross income.

c. Eighty-five percent of the social security benefits is the maximum amount of benefits to be included in gross income.

d. The social security benefits in excess of the modified adjusted gross income over $32,000 are included in gross income.

30. Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?

a. $0

b. $200

c. $550

d. $600

31. John and Mary were divorced in 2012. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s 18th birthday. During 2013, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary’s tuition. What amount of these payments should be reported as income in Mary’s 2013 income tax return?

a. $ 5,600

b. $ 8,000

c. $ 8,600

d. $10,000

32. Clark filed Form 1040EZ for the 2012 taxable year. In July 2013, Clark received a state income tax refund of $900, plus interest of $10, for overpayment of 2012 state income tax. What amount of the state tax refund and interest is taxable in Clark’s 2013 federal income tax return?

a. $0

b. $10

c. $900

d. $910

33. Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2013 return:

The divorce agreement, executed in 2010, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches age eighteen, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 2013, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2013 in a suit to collect the alimony owed.

What amount should be reported in Hall’s 2013 return as alimony income?

a. $28,800

b. $ 5,000

c. $ 3,000

d. $0

34. Lee, an attorney, uses the cash receipts and disbursements method of reporting. In 2013, a client gave Lee 500 shares of a listed corporation’s stock in full satisfaction of a $10,000 legal fee the client owed to Lee. This stock had a fair market value of $8,000 on the date it was given to Lee. The client’s basis for this stock was $6,000. Lee sold the stock for cash in January 2014. In Lee’s 2013 income tax return, what amount of income should be reported in connection with the receipt of the stock?

a. $10,000

b. $ 8,000

c. $ 6,000

d. $0

35. In 2009, Ross was granted an incentive stock option (ISO) by her employer as part of an executive compensation package. Ross exercised the ISO in 2011 and sold the stock in 2013 at a gain. Ross was subject to regular tax for the year in which the

a. ISO was granted.

b. ISO was exercised.

c. Stock was sold.

d. Employer claimed a compensation deduction for the ISO.

36. Ed and Ann Ross were divorced in January 2013. In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2013. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had twenty more years to run. Monthly mortgage payments amount to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining twenty-year term of the indebtedness, regardless of how long Ann lives. Ed made twelve mortgage payments in 2013. What amount is taxable as alimony in Ann’s 2013 return?

a. $0

b. $ 12,000

c. $100,000

d. $112,000

37. Income in respect of a cash-basis decedent

a. Covers income earned and collected after a decedent’s death.

b. Receives a stepped-up basis in the decedent’s estate.

c. Includes a bonus earned before the taxpayer’s death but not collected until after death.

d. Must be included in the decedent’s final income tax return.

38. The following information is available for Ann Drury for the current year:

Salary $36,000
Premiums paid by employer on group-term life insurance in excess of $50,000 500
Proceeds from state lottery 5,000

How much should Drury report as gross income on her current year tax return?

a. $36,000

b. $36,500

c. $41,000

d. $41,500

39. Mr. and Mrs. Alvin Charak took a foster child, Robert, into their home in 2013. A state welfare agency paid the Charaks $3,900 during the year for related expenses. Actual expenses incurred by the Charaks during 2013 in caring for Robert amounted to $3,000. The remaining $900 was spent by the Charaks in 2013 towards their own personal expenses. How much of the foster child payments is taxable income to the Charaks in 2013?

a. $0

b. $ 900

c. $2,900

d. $3,900

40. Pierre, a headwaiter, received tips totaling $2,000 in December 2013. On January 5, 2014, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre’s gross income?

a. $2,000 in 2013.

b. $2,000 in 2014.

c. $1,000 in 2013, and $1,000 in 2014.

d. $ 167 in 2013, and $1,833 in 2014.

41. With regard to the alimony deduction in connection with a divorce, which one of the following statements is correct?

a. Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple’s children.

b. The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife.

c. Alimony payments must terminate on the death of the payee spouse.

d. Alimony may be paid either in cash or in property.

42. In 2013, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her 2013 adjusted gross income in connection with this award?

a. $0

b. $ 4,000

c. $ 5,000

d. $10,000

43. In 2013, Emil Gow won $5,000 in a state lottery. Also in 2013, Emil spent $400 for the purchase of lottery tickets. Emil elected the standard deduction on his 2013 income tax return. The amount of lottery winnings that should be included in Emil’s 2013 taxable income is

a. $0

b. $2,000

c. $4,600

d. $5,000

I.C.5. Rents and Royalties

44. Lake Corp., an accrual-basis calendar-year corporation, had the following 2013 receipts:

Advanced rental payments where the lease ends in 2015 $125,000
Lease cancellation payment from a five-year lease tenant 50,000

Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2013 tax return?

a. $0

b. $ 50,000

c. $125,000

d. $175,000

45. Paul Bristol, a cash-basis taxpayer, owns an apartment building. The following information was available for 2013:

  • An analysis of the 2013 bank deposit slips showed recurring monthly rents received totaling $50,000.
  • On March 1, 2013, the tenant in apartment 2B paid Bristol $2,000 to cancel the lease expiring on December 31, 2013.
  • The lease of the tenant in apartment 3A expired on December 31, 2013, and the tenant left improvements valued at $1,000. The improvements were not in lieu of any rent required to have been paid.

In computing net income from that apartment building for 2013, Bristol should report gross income of

a. $50,000

b. $51,000

c. $52,000

d. $53,000

46. Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2013, the rental apartment was fully occupied and Gow received $7,200 in rent. During the year ended December 31, 2013, Gow paid the following:

Real estate taxes $6,400
Painting of rental apartment 800
Annual fire insurance premium 600

In 2013, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2013?

a. $2,900

b. $ 800

c. $ 400

d. $ 100

47. Amy Finch had the following cash receipts during 2013:

Net rent on vacant lot used by a car dealer (lessee pays all taxes, insurance, and other expenses on the lot) $6,000
Advance rent from lessee of above vacant lot, such advance to be applied against rent for the last two months of the five-year lease in 2017 1,000

How much should Amy include in her 2013 taxable income for rent?

a. $7,000

b. $6,800

c. $6,200

d. $6,000

48. Royce Rentals, Inc., an accrual-basis taxpayer, reported rent receivable of $25,000 and $35,000 in its 2013 and 2012 balance sheets, respectively. During 2013, Royce received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Royce’s 2013 corporate income tax return, what amount should Royce include as rent revenue?

a. $45,000

b. $50,000

c. $55,000

d. $65,000

I.C.19. Unemployment Compensation

49. John Budd is single, with no dependents. During 2013, John received wages of $11,000 and state unemployment compensation benefits of $2,000. He had no other source of income. The amount of state unemployment compensation benefits that should be included in John’s 2013 adjusted gross income is

a. $2,000

b. $1,000

c. $ 500

d. $0

I.D. Tax Accounting Methods

50. A cash-basis taxpayer should report gross income

a. Only for the year in which income is actually received in cash.

b. Only for the year in which income is actually received whether in cash or in property.

c. For the year in which income is either actually or constructively received in cash only.

d. For the year in which income is either actually or constructively received, whether in cash or in property.

51. Which of the following taxpayers may use the cash method of accounting?

a. A tax shelter.

b. A qualified personal service corporation.

c. A C corporation with annual gross receipts of $50,000,000.

d. A manufacturer with annual gross receipts of $3,000,000.

52. In 2012, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2013, after filing its 2012 federal income tax return, Stewart determined that the exact amount was $6,000. Which of the following statements is correct?

a. No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.

b. The $1,000 difference is includible in Stewart’s 2013 income tax return.

c. Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item.

d. Stewart is required to file an amended return to report the additional $1,000 of income.

53. Axis Corp. is an accrual-basis calendar-year corporation. On December 13, 2012, the Board of Directors declared a 2% of profits bonus to all employees for services rendered during 2012 and notified them in writing. None of the employees own stock in Axis. The amount represents reasonable compensation for services rendered and was paid on March 13, 2013. Axis’ bonus expense may

a. Not be deducted on Axis’ 2012 tax return because the per share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.

b. Be deducted on Axis’ 2012 tax return.

c. Be deducted on Axis’ 2013 tax return.

d. Not be deducted on Axis’ tax return because payment is a disguised dividend.

54. On December 1, 2012, Michaels, a self-employed cash-basis calendar-year taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2013. Michaels paid the entire interest of $12,000 on December 1, 2012. What amount of interest is deductible on Michaels’ 2013 income tax return?

a. $12,000

b. $11,000

c. $ 1,000

d. $0

55. Blair, CPA, uses the cash receipts and disbursements method of reporting. In 2013, a client gave Blair 100 shares of a listed corporation’s stock in full satisfaction of a $5,000 accounting fee the client owed Blair. This stock had a fair market value of $4,000 on the date it was given to Blair. The client’s basis for this stock was $3,000. Blair sold the stock for cash in January 2014. In Blair’s 2013 return, what amount of income should be reported in connection with the receipt of the stock?

a. $0

b. $3,000

c. $4,000

d. $5,000

56. Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is generally mandatory for a sole proprietor when there are

Accounts receivable for services rendered Year-end merchandise inventories
a. Yes Yes
b. Yes No
c. No No
d. No Yes

57. Alex Burg, a cash-basis taxpayer, earned an annual salary of $80,000 at Ace Corp. in 2013, but elected to take only $50,000. Ace, which was financially able to pay Burg’s full salary, credited the unpaid balance of $30,000 to Burg’s account on the corporate books in 2013, and actually paid this $30,000 to Burg on January 30, 2014. How much of the salary is taxable to Burg in 2013?

a. $50,000

b. $60,000

c. $65,000

d. $80,000

58. Dr. Berger, a physician, reports on the cash basis. The following items pertain to Dr. Berger’s medical practice in 2013:

Cash received from patients in 2013 $200,000
Cash received in 2013 from third-party reimbursers for services provided by Dr. Berger in 2012 30,000
Salaries paid to employees in 2013 20,000
Year-end 2013 bonuses paid to employees in 2014 1,000
Other expenses paid in 2013 24,000

What is Dr. Berger’s net income for 2013 from his medical practice?

a. $155,000

b. $156,000

c. $185,000

d. $186,000

59. Which of the following taxpayers may use the cash method of accounting for tax purposes?

a. Partnership that is designated as a tax shelter.

b. Retail store with $2 million inventory, and $9 million average annual gross receipts.

c. An international accounting firm.

d. C corporation manufacturing exercise equipment with average annual gross receipts of $8 million.

I.E. Business Income and Deductions

60. The uniform capitalization method must be used by

I. Manufacturers of tangible personal property.

II. Retailers of personal property with $2 million dollars in average annual gross receipts for the three preceding years.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

61. Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?

I. Cost of merchandise.

II. Business expenses other than the cost of merchandise.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

62. Banks Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. For 2013, what percentage of the meal expense may Banks deduct?

a. 0%

b. 50%

c. 80%

d. 100%

63. Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?

a. Research.

b. Warehousing costs.

c. Quality control.

d. Taxes excluding income taxes.

64. Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?

Marketing costs Off-site storage costs
a. Yes Yes
b. Yes No
c. No No
d. No Yes

65. In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts?

a. Either the reserve method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year.

b. On approval from the IRS, a corporation may change its method from direct charge-off to reserve.

c. If the reserve method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the reserve for bad debts.

d. A corporation is required to use the direct charge-off method rather than the reserve method.

66. Ram Corp.’s operating income for the year ended December 31, 2013, amounted to $100,000. Included in Ram’s 2013 operating expenses is a $6,000 insurance premium on a policy insuring the life of Ram’s president. Ram is beneficiary of this policy. In Ram’s 2013 tax return, what amount should be deducted for the $6,000 life insurance premium?

a. $6,000

b. $5,000

c. $1,000

d. $0

67. Jason Budd, CPA, reports on the cash basis. In April 2012, Budd billed a client $3,500 for the following professional services:

Personal estate planning $2,000
Personal tax return preparation 1,000
Compilation of business financial statements 500

No part of the $3,500 was ever paid. In April 2013, the client declared bankruptcy, and the $3,500 obligation became totally uncollectible. What loss can Budd deduct on his 2013 tax return for this bad debt?

a. $0

b. $ 500

c. $1,500

d. $3,500

68. Earl Cook, who worked as a machinist for Precision Corp., loaned Precision $1,000 in 2010. Cook did not own any of Precision’s stock, and the loan was not a condition of Cook’s employment by Precision. In 2013, Precision declared bankruptcy, and Cook’s note receivable from Precision became worthless. What loss can Cook claim on his 2013 income tax return?

a. $0

b. $ 500 long-term capital loss.

c. $1,000 short-term capital loss.

d. $1,000 business bad debt.

69. During the 2013 holiday season, Palo Corp. gave business gifts to seventeen customers. These gifts, which were not of an advertising nature, had the following fair market values:

4 at $ 10
4 at 25
4 at 50
5 at 100

How much of these gifts was deductible as a business expense for 2013?

a. $840

b. $365

c. $140

d. $0

I.E.3. Net Operating Loss (NOL)

70. Jennifer, who is single, has the following items of income and deduction for 2013:

Salary $30,000
Itemized deductions (all attributable to a personal casualty loss when a hurricane destroyed her residence) 45,000
Personal exemption 3,900

What is the amount of Jennifer’s net operating loss for 2013?

a. $0

b. $15,000

c. $18,900

d. $45,000

71. Robin Moore, a self-employed taxpayer, reported the following information for 2013:

Income: Dividends from investments $500
Net short-term capital gain on sale of investment 1,000
Deductions: Net loss from business (6,000)
Personal exemption (3,900)
Standard deduction (6,100)

What is the amount of Moore’s net operating loss for 2013?

a. $ 4,500

b. $ 5,000

c. $ 6,000

d. $10,600

72. Destry, a single taxpayer, reported the following on his US Individual Income Tax Return Form 1040:

Income Income
Wages $ 5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions
Personal exemption $ 3,900
Standard deduction 6,100
Net business loss 16,000
Net short-term capital loss 2,000

What is Destry’s net operating loss that is available for carryback or carryforward?

a. $ 7,000

b. $ 9,000

c. $13,000

d. $16,000

I.E.6. Losses and Credits from Passive Activities

73. Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2013 before any IRA deduction, taxable social security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 2013 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 2013 as an offset against income from non passive sources?

a. $0

b. $12,500

c. $25,000

d. $30,000

74. The rule limiting the deductibility of passive activity losses and credits applies to

a. Partnerships.

b. S corporations.

c. Personal service corporations.

d. Widely held C corporations.

75. Don Wolf became a general partner in Gata Associates on January 1, 2013, with a 5% interest in Gata’s profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2013, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf’s passive loss for 2013 is

a. $0

b. $4,000

c. $5,000

d. $6,000

76. With regard to the passive loss rules involving rental real estate activities, which one of the following statements is correct?

a. The term “passive activity” includes any rental activity without regard as to whether or not the taxpayer materially participates in the activity.

b. Gross investment income from interest and dividends not derived in the ordinary course of a trade or business is treated as passive activity income that can be offset by passive rental activity losses when the “active participation” requirement is not met.

c. Passive rental activity losses may be deducted only against passive income, but passive rental activity credits may be used against tax attributable to non passive activities.

d. The passive activity rules do not apply to taxpayers whose adjusted gross income is $300,000 or less.

77. If an individual taxpayer’s passive losses relating to rental real estate activities cannot be used in the current year, then they may be carried

a. Back two years, but they cannot be carried forward.

b. Forward up to a maximum period of twenty years, but they cannot be carried back.

c. Back two years or forward up to twenty years, at the taxpayer’s election.

d. Forward indefinitely or until the property is disposed of in a taxable transaction.

I.F. Depreciation, Depletion, and Amortization

78. Aviation Corp. manufactures model airplanes for children. During 2013, Aviation purchased $570,000 of production machinery to be used in its business. For 2013, Aviation’s taxable income before any Sec. 179 expense deduction was $405,000. What is the maximum amount of Sec. 179 expense election Aviation will be allowed to deduct for 2013 and the maximum amount of Sec. 179 expense election that can carryover to 2014?

Expense Carryover
a. $405,000 $0
b. $405,000 $95,000
c. $500,000 $0
d. $507,000 $0

79. Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the cost of new or used tangible depreciable personal property?

I. The property must be purchased for use in the taxpayer’s active trade or business.

II. The property must be purchased from an unrelated party.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

80. Krol Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on November 1, 2013. The furniture and fixtures cost $56,000 and represented Krol’s only acquisition of depreciable property during the year. Krol did not elect to expense any part of the cost of the property under Sec. 179. What is the amount of Krol Corp.’s depreciation deduction for the furniture and fixtures under the Modified Accelerated Cost Recovery System (MACRS) for 2013?

a. $ 2,000

b. $ 2,667

c. $ 8,000

d. $16,000

81. On June 29, 2013, Sullivan purchased and placed into service an apartment building costing $360,000 including $30,000 for the land. What was Sullivan’s MACRS deduction for the apartment building in 2013?

a. $7,091

b. $6,500

c. $6,000

d. $4,583

82. Data Corp., a calendar-year corporation, purchased and placed into service used office equipment during October 2013. No other equipment was placed into service during 2013. Under the general MACRS depreciation system, what convention must Data use?

a. Full-year.

b. Half-year.

c. Mid-quarter.

d. Mid-month.

83. Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,

a. Used tangible depreciable property is excluded from the computation.

b. Salvage value is ignored for purposes of computing the MACRS deduction.

c. No type of straight-line depreciation is allowable.

d. The recovery period for depreciable realty must be at least 27.5 years.

84. With regard to depreciation computations made under the general MACRS method, the half-year convention provides that

a. One-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of.

b. The deduction will be based on the number of months the property was in service, so that one-half month’s depreciation is allowed for the month in which the property is placed in service and for the month in which it is disposed of.

c. Depreciation will be allowed in the first year of acquisition of the property only if the property is placed in service no later than June 30 for calendar-year corporations.

d. Depreciation will be allowed in the last year of the property’s economic life only if the property is disposed of after June 30 of the year of disposition for calendar-year corporations.

85. During August 2013, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $600,000. What portion of the cost may Roe elect to treat as a Sec. 179 expense deduction rather than as a capital expenditure?

a. $99,000

b. $139,000

c. $500,000

d. $600,000

II. “Above the Line” Deductions

86. 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 8,000 at a rate of 56.5 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $280 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

a. $0

b. $ 280

c. $4,520

d. $4,800

87. Adams owns a second residence that is used for both personal and rental purposes. During 2013, Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?

a. Depreciation may not be deducted on the property under any circumstances.

b. A rental loss may be deducted if rental-related expenses exceed rental income.

c. Utilities and maintenance on the property must be divided between personal and rental use.

d. All mortgage interest and taxes on the property will be deducted to determine the property’s net income or loss

88. Charles Gilbert, a corporate executive, incurred business-related unreimbursed expenses for the current year as follows:

Entertainment $900
Travel 700
Education 400

Assuming that Gilbert does not itemize deductions, how much of these expenses should he deduct on his current year tax return?

a. $0

b. $ 700

c. $1,300

d. $1,600

II.E. Moving Expenses

89. James, a calendar-year taxpayer, was employed and resided in Boston. On February 4, 2013, James was permanently transferred to Florida by his employer. James worked full-time for the entire year. In 2013, James incurred and paid the following unreimbursed expenses in relocating.

Lodging and travel expenses while moving $1,000
Meals while in route to Florida 300
Cost of insuring household goods and personal effects during move 200
Cost of shipping household pets to new home 100
Costs of moving household furnishings and personal effects 3,000

What amount was deductible as moving expenses on James’ 2013 tax return?

a. $4,600

b. $4,500

c. $4,300

d. $4,000

90. Martin Dawson, who resided in Detroit, was unemployed for the last six months of 2012. In January 2013, he moved to Houston to seek employment, and obtained a full-time job there in February. He kept this job for the balance of the year. Martin paid the following expenses in 2013 in connection with his move:

Rental of truck to move his personal belongings to Houston $800
Penalty for breaking the lease on his Detroit apartment 300
Total $1,100

How much can Martin deduct in 2013 for moving expenses?

a. $0

b. $ 300

c. $ 800

d. $1,100

91. Richard Putney, who lived in Idaho for five years, moved to Texas in 2013 to accept a new position. His employer reimbursed him in full for all direct moving costs, but did not pay for any part of the following indirect moving expenses incurred by Putney:

Househunting trips to Texas $800
Temporary housing in Texas 900

How much of the indirect expenses can be deducted by Putney as moving expenses?

a. $0

b. $ 900

c. $1,500

d. $1,700

II.F. Contributions to Certain Retirement Plans

92. Which one of the following statements concerning Roth IRAs is not correct?

a. The maximum annual contribution to a Roth IRA is reduced if adjusted gross income exceeds certain thresholds.

b. Contributions to a Roth IRA are not deductible.

c. An individual is allowed to make contributions to a Roth IRA even after age 701/2.

d. A contribution to a Roth IRA must be made by the due date for filing the individual’s tax return for the year (including extensions).

93. What is the maximum amount of adjusted gross income that a taxpayer may have for 2013 and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA?

a. $ 50,000

b. $ 80,000

c. $100,000

d. There is no maximum AGI limitation.

94. Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is not correct?

a. Contributions to an education IRA are not deductible.

b. A taxpayer may contribute up to $2,000 in 2013 to an education IRA to pay the costs of the designated beneficiary’s higher education.

c. Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels.

d. Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age twenty-one.

95. For 2013, Val and Pat White (both age 40) filed a joint return. Val earned $55,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $4,000 in alimony payments for the first four months of the year before remarrying. The couple had no other income. Each contributed $5,500 to an IRA account. The allowable IRA deduction on their 2013 joint tax return is

a. $11,000

b. $10,000

c. $ 9,000

d. $ 5,500

96. Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 15% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the

a. Deductible Keogh contribution.

b. Self-employment tax.

c. Self-employment tax and one-half of the deductible Keogh contribution.

d. Deductible Keogh contribution and one-half of the self-employment tax.

97. Ronald Birch, who is single and age 28, earned a salary of $70,000 in 2013 as a plumber employed by Lupo Company. Birch was covered for the entire year 2013 under Lupo’s qualified pension plan for employees. In addition, Birch had a net income of $15,000 from self-employment in 2013. What is the maximum amount that Birch can deduct in 2013 for contributions to an individual retirement account (IRA)?

a. $5,000

b. $4,000

c. $3,000

d. $0

98. Sol and Julia Crane (both age 43) are married and will file a joint return for 2013. Sol earned a salary of $140,000 in 2013 from his job at Troy Corp., where Sol is covered by his employer’s pension plan. In addition, Sol and Julia earned interest of $3,000 in 2013 on their joint savings account. Julia is not employed, and the couple had no other income. On July 15, 2013, Sol contributed $5,500 to an IRA for himself, and $5,500 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2013 joint return is

a. $0

b. $ 3,000

c. $ 5,500

d. $11,000

99. Paul and Lois Lee, both age fifty-three, are married and will file a joint return for 2013. Their 2013 adjusted gross income is expected to be $85,000, including Paul’s $75,000 salary. Lois has no income of her own. Neither spouse is covered by an employer-sponsored pension plan. What amount can the Lees contribute to IRAs for 2013 to take advantage of their maximum allowable IRA deduction in their 2013 return?

a. $ 5,000

b. $11,000

c. $12,000

d. $13,000

100. In 2013, contributions to a defined contribution qualified retirement plan on behalf of a self-employed individual whose income from self-employment is $55,000 are limited to

a. $ 5,500

b. $50,000

c. $51,000

d. $55,000

101. Which allowable deduction can be claimed in arriving at an individual’s 2013 adjusted gross income?

a. Charitable contribution.

b. Foreign income taxes.

c. Tax return preparation fees.

d. Self-employed health insurance deduction.

II.G. Deduction for Interest on Education Loan

102. Which one of the following statements concerning the deduction for interest on qualified education loans is not correct?

a. The deduction is available even if the taxpayer does not itemize deductions.

b. The deduction only applies to the first sixty months of interest payments.

c. Qualified education expenses include tuition fees, room, and board.

d. The educational expenses must relate to a period when the student was enrolled on at least a half-time basis.

103. Dale received $1,000 in 2013 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 2013. In Dale’s 2013 income tax return, the $1,000 jury duty fee should be

a. Claimed in full as an itemized deduction.

b. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.

c. Deducted from gross income in arriving at adjusted gross income.

d. Included in taxable income without a corresponding offset against other income.

III. Itemized Deductions from Adjusted Gross Income

104. During 2013, George (age nine and claimed as a dependency exemption by his parents) received dividend income of $3,700, and had wages from an after-school job of $1,700. What is the amount that will be reported as George’s taxable income for 2013?

a. $ 250

b. $3,350

c. $3,450

d. $5,400

105. Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction?

Must be age 65 or older or blind Must support dependent child or aged parent
a. Yes Yes
b. No No
c. Yes No
d. No Yes

III.A. Medical and Dental Expenses

106. Carroll, an unmarried taxpayer age 41 with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for 2013:

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. $10,000

c. $12,500

d. $20,000

107. Charlene and Gene Blair, age 51, are married and filed a joint return for 2013. Their medical related expenditures for 2013 included the following:

Medical insurance premiums $1,550
Medicines prescribed by doctors 450
Aspirin and over-the-counter cold capsules 80
Unreimbursed doctor fees 1,000
Transportation to and from doctors 150
Emergency room fee 500

The emergency room fee related to an injury incurred by the Blairs’ adult son, Eric, during a visit to their home. The Blairs graciously paid the bill; however, they provided no other support for Eric during the year. For 2013, Eric earned $18,000 as a self-employed house painter. Assuming the Blairs’ adjusted gross income was $30,000, what amount of medical expenses can the Blairs deduct as an itemized deduction for 2013?

a. $0

b. $ 150

c. $ 650

d. $1,750

108. Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2013 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2013. The following unreimbursed cash expenditures were among those made by the Whites during 2013:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child $600
Tuition, meals, lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 8,000

Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their 2013 return as qualifying medical expenses?

a. $8,600

b. $8,000

c. $ 600

d. $0

109. In 2013, Wells paid the following expenses:

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 2013, 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’ 2013 income tax return for medical expenses?

a. $4,000

b. $3,500

c. $1,000

d. $ 500

110. Mr. and Mrs. Sloan incurred the following expenses on December 15, 2013, when they adopted a child:

Child’s medical expenses $5,000
Legal expenses 9,000
Agency fee 4,000

Before consideration of any “floor” or other limitation on deductibility, what amount of the above expenses may the Sloans deduct on their 2013 joint income tax return?

a. $18,000

b. $14,000

c. $13,000

d. $ 5,000

111. Ruth and Mark Cline are married and plan to file a joint 2013 income tax return. Among their expenditures during 2013 were the following discretionary costs that they incurred for the sole purpose of improving their physical appearance and self-esteem:

Face-lift for Ruth, performed by a licensed surgeon $5,000
Hair transplant for Mark, performed by a licensed surgeon 3,600

Disregarding the adjusted gross income percentage threshold, what total amount of the aforementioned doctors’ bills may be claimed by the Clines in their 2013 return as qualifying medical expenses?

a. $0

b. $3,600

c. $5,000

d. $8,600

112. During 2013, 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 2014. However, in 2013, Scott paid a physician $2,800 for the medical expenses of his wife, who died in 2012. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his 2013 income tax return for medical expenses?

a. $0

b. $2,800

c. $4,000

d. $6,800

113. Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?

a. Diaper service.

b. Funeral expenses.

c. Nursing care for a healthy baby.

d. Premiums paid for Medicare B supplemental medical insurance.

114. Jon Stenger, a cash-method taxpayer, age 32, had adjusted gross income of $35,000 in 2013. During the year he incurred and paid the following medical expenses:

Drugs and medicines prescribed by doctors $300
Health insurance premiums 1,750
Doctors’ fees 2,550
Eyeglasses 75
$4,675

Stenger received $900 in 2013 as reimbursement for a portion of the doctors’ fees. If Stenger were to itemize his deductions, what would be his allowable net medical expense deduction?

a. $0

b. $ 275

c. $1,050

d. $2,475

115. During 2013, Mr. and Mrs. Benson provided substantially all the support, in their own home, for their son John, age twenty-six, and for Mrs. Benson’s cousin Nancy, age seventeen. John had $4,100 of income for 2013, and Nancy’s income was $2,500. The Bensons paid the following medical expenses during the year:

Medicines and drugs:
For themselves $400
For John 500
For Nancy 100
Doctors:
For themselves 600
For John 900
For Nancy 200

What is the total amount of medical expenses (before application of any limitation rules), that would enter into the calculation of itemized deductions on the Bensons’ 2013 tax return?

a. $1,000

b. $1,300

c. $2,400

d. $2,700

III.B. Taxes

116. All of the following taxes are deductible as itemized deductions by a self-employed taxpayer except

a. Foreign real estate taxes.

b. Foreign income taxes.

c. Personal property taxes.

d. One-half of self-employment taxes.

117. Matthews was a cash-basis taxpayer whose records showed the following:

2013 state and local income taxes withheld $1,500
2013 state estimated income taxes paid December 30, 2013 400
2013 federal income taxes withheld 2,500
2013 state and local income taxes paid April 17, 2014 300

What total amount was Matthews entitled to claim for taxes on her 2013 Schedule A of Form 1040?

a. $4,700

b. $2,200

c. $1,900

d. $1,500

118. In 2012, 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 June 2013, 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 deduct $8,000 in his 2012 income tax return and should report the $5,000 refund as income in his 2013 income tax return.

b. Farb should not deduct any amount in his 2012 income tax return and should deduct $3,000 in his 2013 income tax return.

c. Farb should deduct $3,000 in his 2012 income tax return.

d. Farb should not deduct any amount in his 2012 income tax return when originally filed, and should file an amended 2012 income tax return in 2013.

119. In 2013, Burg paid $8,000 to the tax collector of Sun City for realty taxes on a two-family house owned in joint tenancy between Burg and his mother. Of this amount, $3,800 covered back taxes for 2012, and $4,200 covered 2013 taxes. Burg resides on the second floor of the house, and his mother resides on the first floor. In Burg’s itemized deductions on his 2013 return, what amount was Burg entitled to claim for realty taxes?

a. $0

b. $4,000

c. $4,200

d. $8,000

120. Sara Harding is a cash-basis taxpayer who itemized her deductions. The following information pertains to Sara’s state income taxes for the taxable year 2013:

Withheld by employer in 2013 $2,000
Payments on 2013 estimate:
4/15/13 $300
6/15/13 300
9/15/13 300
1/15/14 300 1,200
Total paid and withheld $3,200
Actual tax, per state return 3,000
Overpayment $200

There was no balance of tax or refund due on Sara’s 2012 state tax return. How much is deductible for state income taxes on Sara’s 2013 federal income tax return?

a. $2,800

b. $2,900

c. $3,000

d. $3,200

121. During 2013, Jack and Mary Bronson paid the following taxes:

Taxes on residence (for period January 1 to December 31, 2013) $2,700
State motor vehicle tax on value of the car 360

The Bronsons sold their house on June 30, 2013, under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for 2013?

a. $1,350

b. $1,692

c. $2,160

d. $3,060

122. George Granger sold a plot of land to Albert King on July 1, 2013. Granger had not paid any realty taxes on the land since 2011. Delinquent 2012 taxes amounted to $600, and 2013 taxes amounted to $700. King paid the 2012 and 2013 taxes in full in 2013, when he bought the land. What portion of the $1,300 is deductible by King in 2013?

a. $ 353

b. $ 700

c. $ 952

d. $1,300

123. During 2013 Mr. and Mrs. West paid the following taxes:

Property taxes on residence $1,800
Special assessment for installation of a sewer system in their town 1,000
State personal property tax on their automobile 600
Property taxes on land held for long-term appreciation 300

What amount can the Wests deduct as property taxes in calculating itemized deductions for 2013?

a. $2,100

b. $2,700

c. $3,100

d. $3,700

124. Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2013 adjusted gross income was $54,142. The Burgs itemized their deductions on Schedule A for 2013. The following unreimbursed cash expenditures were among those made by the Burgs during 2013:

State income tax $1,200
Self-employment tax 7,650

What amount should the Burgs deduct for taxes in their itemized deductions on Schedule A for 2013?

a. $1,200

b. $3,825

c. $5,025

d. $7,650

III.C. Interest Expense

125. The 2013 deduction by an individual taxpayer for interest on investment indebtedness is

a. Limited to the investment interest paid in 2013.

b. Limited to the taxpayer’s 2013 interest income.

c. Limited to the taxpayer’s 2013 net investment income.

d. Not limited.

126. The Browns borrowed $20,000, secured by their home, to purchase a new automobile. 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. Deductible personal interest.

b. Deductible qualified residence interest.

c. Nondeductible interest.

d. Investment interest expense.

127. On January 2, 2009, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2013 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 2013:

Mortgage interest $17,000
Interest on room construction loan 1,500
Auto loan interest 500

For 2013, how much interest is deductible, prior to any itemized deduction limitations?

a. $17,000

b. $17,500

c. $18,500

d. $19,000

128. 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 2013:

Mortgage interest $5,000
Utilities 1,200
Insurance 6,000

For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson’s second residence in 2013?

a. $6,200 in determining adjusted gross income.

b. $11,000 in determining adjusted gross income.

c. $5,000 as an itemized deduction.

d. $12,200 as an itemized deduction.

129. Robert and Judy Parker made the following payments during 2013:

Interest on a life insurance policy loan (the loan proceeds were used for personal use) $1,200
Interest on home mortgage for period January 1 to October 4, 2013 3,600
Penalty payment for prepayment of home mortgage on October 4, 2013 900

How much can the Parkers utilize as interest expense in calculating itemized deductions for 2013?

a. $5,700

b. $4,620

c. $4,500

d. $3,600

130. Charles Wolfe purchased the following long-term investments at par during 2013:

  • $20,000 general obligation bonds of Burlington County (wholly tax-exempt)
  • $10,000 debentures of Arrow Corporation

Wolfe financed these purchases by obtaining a $30,000 loan from the Union National Bank. For the year 2013, Wolfe made the following interest payments:

Union National Bank $3,600
Interest on home mortgage 3,000
Interest on credit card charges (items purchased for personal use) 500

What amount can Wolfe utilize as interest expense in calculating itemized deductions for 2013?

a. $3,000

b. $4,200

c. $5,400

d. $7,100

131. During 2013, William Clark was assessed a deficiency on his 2011 federal income tax return. As a result of this assessment he was required to pay $1,120 determined as follows:

Additional tax $900
Late filing penalty 60
Negligence penalty 90
Interest 70

What portion of the $1,120 would qualify as itemized deductions for 2013?

a. $0

b. $ 14

c. $150

d. $220

III.D. Charitable Contributions

132. 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
Artwork donated to the local art museum. Smith purchased it for $2,000 four months ago. 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. $5,000

b. $7,000

c. $8,000

d. $9,000

133. 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. $17,000

b. $21,000

c. $24,000

d. $25,000

134. Moore, a single taxpayer, had $50,000 in adjusted gross income for 2013. During 2013 she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her 2012 church contributions. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2013?

a. $10,000

b. $18,000

c. $25,000

d. $28,000

135. Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2013. The following additional information is available for 2013:

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 2013?

a. $5,400

b. $5,200

c. $5,000

d. $4,400

136. Ruth Lewis has adjusted gross income of $100,000 for 2013 and itemizes her deductions. On September 1, 2013, she made a contribution to her church of stock held for investment for two years that cost $10,000 and had a fair market value of $70,000. The church sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2013 and made no special election in regard to this contribution on her 2013 tax return. How much should Lewis claim as a charitable contribution deduction for 2013?

a. $50,000

b. $30,000

c. $20,000

d. $10,000

137. On December 15, 2013, Donald Calder made a contribution of $500 to a qualified charitable organization, by charging the contribution on his bank credit card. Calder paid the $500 on January 20, 2014, upon receipt of the bill from the bank. In addition, Calder issued and delivered a promissory note for $1,000 to another qualified charitable organization on November 1, 2013, which he paid upon maturity four months later. If Calder itemizes his deductions, what portion of these contributions is deductible in 2013?

a. $0

b. $ 500

c. $1,000

d. $1,500

138. Under a written agreement between Mrs. Norma Lowe and an approved religious exempt organization, a ten-year-old girl from Vietnam came to live in Mrs. Lowe’s home on August 1, 2013, in order to be able to start school in the US on September 3, 2013. Mrs. Lowe actually spent $500 for food, clothing, and school supplies for the student during 2013, without receiving any compensation or reimbursement of costs. What portion of the $500 may Mrs. Lowe deduct on her 2013 income tax return as a charitable contribution?

a. $0

b. $200

c. $250

d. $500

139. During 2013, Vincent Tally gave to the municipal art museum title to his private collection of rare books that was assessed and valued at $60,000. However, he reserved the right to the collection’s use and possession during his lifetime. For 2013, he reported an adjusted gross income of $100,000. Assuming that this was his only contribution during the year, and that there were no carryovers from prior years, what amount can he deduct as contributions for 2013?

a. $0

b. $30,000

c. $50,000

d. $60,000

140. Jimet, an unmarried taxpayer, qualified to itemize 2013 deductions. Jimet’s 2013 adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. In 2013, 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 on Jimet’s 2013 income tax return?

a. $0

b. $1,500

c. $2,000

d. $5,000

141. Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for 2013. During 2013, Taylor donated land to a church and made no other contributions. Taylor purchased the land in 2000 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 2013?

a. $25,000

b. $14,000

c. $11,000

d. $0

III.E. Personal Casualty and Theft Gains and Losses

142. In 2013, 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 2013, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer’s 2013 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 2013 tax return?

a. $ 2,900

b. $ 8,500

c. $ 8,600

d. $10,000

143. Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2013 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2013. The following unreimbursed cash expenditures were among those made by the Burgs during 2013:

Repair of glass vase accidentally broken in home by dog; vase cost $500 in 2009; fair value $600 before accident and $200 after accident $90

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 2013?

a. $0

b. $ 90

c. $300

d. $400

144. Hall, a divorced person and custodian of her twelve-year-old child, filed her 2013 federal income tax return as head of a household. During 2013 Hall paid a $490 casualty insurance premium on her personal residence. Hall does not rent out any portion of the home, nor use it for business.

The casualty insurance premium of $490 is

a. Allowed as an itemized deduction subject to the $100 floor and the 10% of adjusted gross income floor.

b. Allowed as an itemized deduction subject to the 2% of adjusted gross income floor.

c. Deductible in arriving at adjusted gross income.

d. Not deductible in 2013.

Items 145 and 146 are based on the following selected 2013 information pertaining to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2013. The Hoyts had adjusted gross income of $34,000 and itemized their deductions for 2013. Among the Hoyts’ cash expenditures during 2013 were the following:

  • $2,500 repairs in connection with 2013 fire damage to the Hoyt residence. This property has a basis of $50,000. Fair market value was $60,000 before the fire and $55,000 after the fire. Insurance on the property had lapsed in 2012 for nonpayment of premium.
  • $800 appraisal fee to determine amount of fire loss.

145. What amount of fire loss were the Hoyts entitled to deduct as an itemized deduction on their 2013 return?

a. $5,000

b. $2,500

c. $1,600

d. $1,500

146. The appraisal fee to determine the amount of the Hoyts’ fire loss was

a. Deductible from gross income in arriving at adjusted gross income.

b. Subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions.

c. Deductible after reducing the amount by $100.

d. Not deductible.

III.F. Miscellaneous Deductions

147. Which of the following is not a miscellaneous itemized deduction?

a. Legal fee for tax advice related to a divorce.

b. IRA trustee’s fees that are separately billed and paid.

c. Appraisal fee for a charitable contribution.

d. Check-writing fees for a personal checking account.

148. Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2013 return:

The divorce agreement, executed in 2010, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches eighteen, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the year 2013, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 2013 in a suit to collect the alimony owed.

The $2,000 legal fee that Hall paid to collect alimony should be treated as

a. A deduction in arriving at adjusted gross income.

b. An itemized deduction subject to the 2% of adjusted gross income floor.

c. An itemized deduction not subject to the 2% of adjusted gross income floor.

d. A nondeductible personal expense.

149. Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2013 return:

During 2013, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 2013 totaled $200.

Hall’s lottery transactions should be reported as follows:

image

150. Joel Rich is an outside salesman, deriving his income solely from commissions, and personally bearing all expenses without reimbursement of any kind. During 2013, Joel paid the following expenses pertaining directly to his activities as an outside salesman:

Travel $10,000
Secretarial 7,000
Telephone 1,000

How should these expenses be deducted in Joel’s 2013 return?

From gross income, in arriving at adjusted gross income As itemized deductions
a. $18,000 $0
b. $11,000 $ 7,000
c. $10,000 $8,000
d. $0 $18,000

151. Magda Micale, a public school teacher with adjusted gross income of $10,000, paid the following items in 2013 for which she received no reimbursement:

Initiation fee for membership in teachers’ union $100
Dues to teachers’ union 180
Voluntary unemployment benefit fund contributions to union-established fund 72

How much can Magda claim in 2013 as allowable miscellaneous deductions on Schedule A of Form 1040?

a. $ 80

b. $280

c. $252

d. $352

152. Harold Brodsky is an electrician employed by a contracting firm. His adjusted gross income is $25,000. During the current year he incurred and paid the following expenses:

Use of personal auto for company business (reimbursed under an accountable plan by employer for $200) $300
Specialized work clothes 550
Union dues 600
Cost of income tax preparation 150
Preparation of will 100

If Brodsky were to itemize his personal deductions, what amount should he claim as miscellaneous deductible expenses?

a. $ 800

b. $ 900

c. $1,500

d. $1,700

IV. Exemptions

153. Which one of the following is not included in determining the total support of a dependent?

a. Fair rental value of dependent’s lodging.

b. Medical insurance premiums paid on behalf of the dependent.

c. Birthday presents given to the dependent.

d. Nontaxable scholarship received by the dependent.

154. In 2013, Smith, a divorced person, provided over one-half the support for his widowed mother, Ruth, and his son, Clay, both of whom are US citizens. During 2013, Ruth did not live with Smith. She received $9,000 in social security benefits. Clay, a full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for 2013, owing an additional $500 in taxes on his wife’s income. How many exemptions was Smith entitled to claim on his 2013 tax return?

a. 4

b. 3

c. 2

d. 1

155. Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim’s widowed parent, Grant. For 2013, Dale, a twenty-year-old full-time college student, earned $4,500 from a part-time job. Kim, a twenty-three-year-old bank teller, earned $18,000. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits. Grant, Dale, and Kim are US citizens and were over one-half supported by Jim and Kay. How many exemptions can Jim and Kay claim on their 2013 joint income tax return?

a. Two

b. Three

c. Four

d. Five

156. Joe and Barb are married, but Barb refuses to sign a 2013 joint return. On Joe’s separate 2013 return, an exemption may be claimed for Barb if

a. Barb was a full-time student for the entire 2013 school year.

b. Barb attaches a written statement to Joe’s income tax return, agreeing to be claimed as an exemption by Joe for 2013.

c. Barb was under the age of nineteen.

d. Barb had no gross income and was not claimed as another person’s dependent in 2013.

157. Al and Mary Lew are married and filed a joint 2013 income tax return in which they validly claimed the $3,900 personal exemption for their dependent seventeen-year-old daughter, Doris. Since Doris earned $5,400 in 2013 from a part-time job at the college she attended full-time, Doris was also required to file a 2013 income tax return. What amount was Doris entitled to claim as a personal exemption in her 2013 individual income tax return?

a. $0

b. $1,000

c. $3,900

d. $5,400

158. During 2013 Robert Moore, who is fifty years old and unmarried, maintained his home in which he and his widower father, age seventy-five, resided. His father had $4,700 interest income from a savings account and also received $2,400 from social security during 2013. Robert provided 60% of his father’s total support for 2013. What is Robert’s filing status for 2013, and how many exemptions should he claim on his tax return?

a. Head of household and two exemptions.

b. Single and two exemptions.

c. Head of household and one exemption.

d. Single and one exemption.

159. John and Mary Arnold are a childless married couple who lived apart (alone in homes maintained by each) the entire year 2013. On December 31, 2013, they were legally separated under a decree of separate maintenance. Which of the following is the only filing status choice available to them when filing for 2013?

a. Single.

b. Head of household.

c. Married filing separate return.

d. Married filing joint return.

160. Albert and Lois Stoner, age sixty-six and sixty-four, respectively, filed a joint tax return for 2013. They provided all of the support for their blind nineteen-year-old son, who has no gross income. Their twenty-three-year-old daughter, a full-time student until her graduation on June 14, 2013, earned $4,900, which was 40% of her total support during 2013. Her parents provided the remaining support. The Stoners also provided the total support of Lois’ father, who is a citizen and lifelong resident of Peru. How many exemptions can the Stoners claim on their 2013 income tax return?

a. 4

b. 5

c. 6

d. 7

161. Jim Planter, who reached age sixty-five on January 1, 2013, filed a joint return for 2013 with his wife Rita, age fifty. Mary, their twenty-one-year-old daughter, was a full-time student at a college until her graduation on June 2, 2013. The daughter had $6,500 of income and provided 25% of her own support during 2013. In addition, during 2013 the Planters were the sole support for Rita’s niece, age 27, who had no income. How many exemptions should the Planters claim on their 2013 tax return?

a. 2

b. 3

c. 4

d. 5

162. In 2013, Sam Dunn provided more than half the support for his wife, his father’s brother, and his cousin. Sam’s wife was the only relative who was a member of Sam’s household. None of the relatives had any income, nor did any of them file an individual or a joint return. All of these relatives are US citizens. Which of these relatives should be claimed as a dependent or dependents on Sam’s 2013 return?

a. Only his wife.

b. Only his father’s brother.

c. Only his cousin.

d. His wife, his father’s brother, and his cousin.

163. In 2013, Alan Kott provided more than half the support for his following relatives, none of whom qualified as a member of Alan’s household:

  • Cousin
  • Niece
  • Foster parent

None of these relatives had any income, nor did any of these relatives file an individual or joint return. All of these relatives are US citizens. Which of these relatives could be claimed as a dependent on Alan’s 2013 return?

a. No one.

b. Niece.

c. Cousin.

d. Foster parent.

164. Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons:

$500 Amount of support Percent of total
Alma (an unrelated friend) $2,400 48
Alma (an unrelated friend) 2,150 43
Carl (Sara’s son) 450 9
$5,000 100

Under a multiple support agreement, Sara’s dependency exemption can be claimed by

a. No one.

b. Alma.

c. Ben.

d. Carl.

165. Mr. and Mrs. Vonce, both age sixty-two, filed a joint return for 2013. They provided all the support for their daughter, who is nineteen, legally blind, and who has no income. Their son, age twenty-one and a full-time student at a university, had $6,200 of income and provided 70% of his own support during 2013. How many exemptions should Mr. and Mrs. Vonce have claimed on their 2013 joint income tax return?

a. 2

b. 3

c. 4

d. 5

V.C. Filing Status

166. Which of the following is(are) among the requirements to enable a taxpayer to be classified as a “qualifying widow(er)”?

I. A dependent has lived with the taxpayer for six months.

II. The taxpayer has maintained the cost of the principal residence for six months.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

167. For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?

Insurance on the home Rental value of home
a. Yes Yes
b. No Yes
c. Yes No
d. No Yes

168. A husband and wife can file a joint return even if

a. The spouses have different tax years, provided that both spouses are alive at the end of the year.

b. The spouses have different accounting methods.

c. Either spouse was a nonresident alien at any time during the tax year, provided that at least one spouse makes the proper election.

d. They were divorced before the end of the tax year.

169. Emil Gow’s wife died in 2011. Emil did not remarry, and he continued to maintain a home for himself and his dependent infant child during 2012 and 2013, providing full support for himself and his child during these years. For 2011, Emil properly filed a joint return. For 2013, Emil’s filing status is

a. Single.

b. Head of household.

c. Qualifying widower with dependent child.

d. Married filing joint return.

170. Nell Brown’s husband died in 2010. Nell did not remarry, and continued to maintain a home for herself and her dependent infant child during 2011, 2012, and 2013, providing full support for herself and her child during these three years. For 2010, Nell properly filed a joint return. For 2013, Nell’s filing status is

a. Single.

b. Married filing joint return.

c. Head of household.

d. Qualifying widow with dependent child.

171. Mrs. Irma Felton, by herself, maintains her home in which she and her unmarried twenty-six-year-old son reside. Her son, however, does not qualify as her dependent. Mrs. Felton’s husband died in 2012. What is Mrs. Felton’s filing status for 2013?

a. Single.

b. Qualifying widow with dependent child.

c. Head of household.

d. Married filing jointly.

172. Poole, forty-five years old and unmarried, is in the 15% tax bracket. He had 2013 adjusted gross income of $20,000. The following information applies to Poole:

Medical expenses $7,500
Standard deduction 6,100
Personal exemption 3,900

Poole wishes to minimize his income tax. What is Poole’s 2013 total income tax?

a. $3,000

b. $1,733

c. $1,500

d. $1,455

V.D. Alternative Minimum Tax (AMT)

173. Which of the following itemized deductions are deductible when computing the alternative minimum tax for individuals?

a. State income taxes.

b. Home equity mortgage interest when the loan proceeds were used to purchase an auto.

c. Unreimbursed employee expenses in excess of 2% of adjusted gross income.

d. Gambling losses.

174. Randy Lowe reported the following items in computing his regular federal income tax for 2013:

Personal exemption $3900
Itemized deduction for state taxes 1,500
Cash charitable contributions 1,250
Net long-term capital gain 700
Tax-exempt interest from private activity bonds issued in 2008 1,000

What are the amounts of tax preference items and adjustments that must be added to or subtracted from regular taxable income in order to compute Lowe’s alternative minimum taxable income for 2013?

Preferences Adjustments
a. $1,000 $5,400
b. $1,000 $5,850
c. $1,700 $6,150
d. $2,250 $5,400

175. In 2012, Karen Miller had an alternative minimum tax liability of $20,000. This was the first year that she paid an alternative minimum tax. When she recomputed her 2012 alternative minimum tax using only exclusion preferences and adjustments, her alternative minimum tax was $9,000. For 2013, Karen had a regular tax liability of $50,000 and a tentative minimum tax of $45,000. What is the amount of Karen’s unused minimum tax credit from 2013 that will carry over to 2014?

a. $0

b. $4,000

c. $5,000

d. $6,000

176. In 2013, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. 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. $77,000

d. $83,000

177. An individual’s alternative minimum tax adjustments include

Net long-term capital gain in excess of net short-term capital loss Home equity interest expense where loan proceeds not used to buy, build, or improve home
a. Yes Yes
b. Yes No
b. No Yes
c. No Yes
d. No No

178. The credit for prior year alternative minimum tax liability may be carried

a. Forward for a maximum of five years.

b. Back to the three preceding years or carried forward for a maximum of five years.

c. Back to the three preceding years.

d. Forward indefinitely.

179. The alternative minimum tax (AMT) is computed as the

a. Excess of the regular tax over the tentative AMT.

b. Excess of the tentative AMT over the regular tax.

c. The tentative AMT plus the regular tax.

d. Lesser of the tentative AMT or the regular tax.

V.E. Other Taxes

180. The following information pertains to Joe Diamond, a cash-method sole proprietor for 2013:

Gross receipts from business $150,000
Interest income from personal investments 10,000
Cost of goods sold 80,000
Other business operating expenses 40,000

What amount of net earnings from self-employment would be multiplied by the applicable self-employment tax rate to compute Diamond’s self-employment tax for 2013?

a. $25,410

b. $27,705

c. $30,000

d. $40,000

181. Freeman, a single individual, reported the following income in the current year:

Guaranteed payment from services rendered to a partnership $50,000
Ordinary income from an S corporation 20,000

What amount of Freeman’s income is subject to self-employment tax?

a. $0

b. $20,000

c. $50,000

d. $70,000

182. Rich is a cash-basis self-employed air-conditioning repairman with 2013 gross business receipts of $20,000. Rich’s cash disbursements were as follows:

Air conditioning parts $2,500
Yellow Pages listing 2,000
Estimated federal income taxes on self-employment income 1,000
Business long-distance telephone calls 400
Charitable contributions 200

What amount should Rich report as net self-employment income?

a. $15,100

b. $14,900

c. $14,100

d. $13,900

183. The self-employment tax is

a. Fully deductible as an itemized deduction.

b. Fully deductible in determining net income from self-employment.

c. Partially deductible from gross income in arriving at adjusted gross income.

d. Not deductible.

184. 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 resulted from correct withholding by two or more employers.

d. The excess as a credit against income tax, if that excess was withheld by one employer.

185. Alex Berger, a retired building contractor, earned the following income during the current year:

Director’s fee received from Keith Realty Corp. $600
Executor’s fee received from the estate of his deceased sister 7,000

Berger’s gross income from self-employment for the current year is

a. $0

b. $ 600

c. $7,000

d. $7,600

186. Smith, a retired corporate executive, earned consulting fees of $8,000 and director’s fees of $2,000 in 2013. Smith’s gross income from self-employment for 2013 is

a. $0

b. $ 2,000

c. $ 8,000

d. $10,000

VI.A. General Business Credit

187. Which one of the following credits is not a component of the general business credit?

a. Disabled access credit.

b. Employer social security credit.

c. Foreign tax credit.

d. Work opportunity credit.

188. Which of the following credits is a combination of several tax credits to provide uniform rules for the current and carryback-carryover years?

a. General business credit.

b. Foreign tax credit.

c. Minimum tax credit.

d. Enhanced oil recovery credit.

VI.K. Credit for the Elderly and the Disabled

189. Melvin Crane is sixty-six years old, and his wife, Matilda, is sixty-five. They filed a joint income tax return for 2013, reporting an adjusted gross income of $22,200, on which they owed a tax of $61. They received $3,000 from social security benefits in 2013. How much can they claim on Form 1040 in 2013, as a credit for the elderly?

a. $0

b. $ 61

c. $255

d. $675

VI.L. Child and Dependent Care Credit

190. Nora Hayes, a widow, maintains a home for herself and her two dependent preschool children. In 2013, Nora’s earned income and adjusted gross income was $44,000. During 2013, Nora paid work-related expenses of $6,000 for a housekeeper to care for her children. How much can Nora claim for child care credit in 2013?

a. $0

b. $ 960

c. $1,200

d. $2,100

191. Robert and Mary Jason, filing a joint tax return for 2013, had a tax liability of $9,000 based on their tax table income and three exemptions. Robert and Mary had earned income of $30,000 and $22,000, respectively, during 2013. In order for Mary to be gainfully employed, the Jasons incurred the following employment-related expenses for their four-year-old son John in 2013:

Payee Amount
Union Day Care Center $2,500
Acme Home Cleaning Service 500
Wilma Jason, babysitter (Robert Jason’s mother) 1,000

Assuming that the Jasons do not claim any other credits against their tax, what is the amount of the child care tax credit they should report on their tax return for 2013?

a. $ 500

b. $ 600

c. $ 700

d. $1,050

192. To qualify for the child care credit on a joint return, at least one spouse must

Have an adjusted gross income of $10,000 or less Be gainfully employed when related expenses are incurred
a. Yes Yes
b. No No
c. Yes No
d. No Yes

VI.M. Foreign Tax Credit

193. Sunex Co., an accrual-basis, calendar-year domestic C corporation, is taxed on its worldwide income. In the current year, Sunex’s US tax liability on its domestic and foreign-source income is $60,000 and no prior year foreign income taxes have been carried forward. Which factor(s) may affect the amount of Sunex’s foreign tax credit available in its current year corporate income tax return?

Income source The foreign tax rate
a. Yes Yes
b. Yes No
c. No Yes
d. No No

194. The following information pertains to Wald Corp.’s operations for 2013:

Worldwide taxable income $300,00
US source taxable income 180,000
US income tax before foreign tax credit 96,000
Foreign nonbusiness-related interest earned 30,000
Foreign income taxes paid on nonbusiness-related interest earned 12,000
Other foreign source taxable income 90,000
Foreign income taxes paid on other foreign source taxable income 27,000

What amount of foreign tax credit may Wald claim for 2013?

a. $28,800

b. $36,600

c. $38,400

d. $39,000

195. Foreign income taxes paid by a corporation

a. May be claimed either as a deduction or as a credit, at the option of the corporation.

b. May be claimed only as a deduction.

c. May be claimed only as a credit.

d. Do not qualify either as a deduction or as a credit.

VI.N. Earned Income Credit

196. Which of the following credits can result in a refund even if the individual had no income tax liability?

a. Lifetime learning credit.

b. Credit for the elderly or the disabled.

c. Earned income credit.

d. Child and dependent care credit.

197. Kent qualified for the earned income credit. This credit could result in a

a. Refund even if Kent had no tax withheld from wages.

b. Refund only if Kent had tax withheld from wages.

c. Carryback or carry forward for any unused portion.

d. Subtraction from adjusted gross income to arrive at taxable income.

198. Which one of the following statements is correct with regard to the earned income credit?

a. The credit is available only to those individuals whose earned income is equal to adjusted gross income.

b. For purposes of the earned income test, “earned income” includes workers’ compensation benefits.

c. The credit can result in a refund even if the individual had no tax withheld from wages.

d. The credit is available on a tax return that covers less than twelve months.

199. Which of the following tax credits cannot be claimed by a corporation?

a. Foreign tax credit.

b. Earned income credit.

c. Alternative fuel production credit.

d. General business credit.

VI.O. Credit for Adoption Expenses

200. Which one of the following statements is correct regarding the credit for adoption expenses?

a. The credit for adoption expenses is a nonrefundable credit for 2013.

b. The maximum credit is $5,000 for the adoption of a child with special needs.

c. Qualified adoption expenses are always taken into account in the year that the adoption becomes final.

d. An eligible child is an individual who has not attained the age of twenty-one as of the time of adoption.

VI.P. Child Tax Credit

201. Which one of the following statements is not correct with regard to the child tax credit?

a. The credit is $1,000 per qualifying child for tax years beginning in 2013.

b. The amount of credit is reduced if modified adjusted gross income exceeds certain thresholds.

c. To qualify for the credit, a dependent child must be less than sixteen years old.

d. A qualifying child must be a US citizen or resident.

VI.Q. American Opportunity Credit

202. Which one of the following statements concerning the 2013 American Opportunity credit is not correct?

a. The credit is available for the first four years of postsecondary education program.

b. The credit is available on a per student basis.

c. To be eligible for the credit, the student must be enrolled full-time for at least one academic period during the year.

d. If a parent claims a child as a dependent, any qualified expenses paid by the child are deemed to be paid by the parent.

VI.R. Lifetime Learning Credit

203. Which one of the following statements concerning the lifetime learning credit is not correct?

a. The credit is 20% of the first $10,000 of qualified tuition and related expenses for 2013.

b. Qualifying expenses include the cost of tuition for graduate courses at an eligible educational institution.

c. The credit may be claimed for an unlimited number of years.

d. The credit is available on a per student basis.

VI.S. Estimated Tax Payments

204. Chris Baker’s adjusted gross income on her 2013 tax return was $160,000. The amount covered a twelve-month period. For the 2014 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. 100% of prior year’s tax liability, paid in four equal installments.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

205. Krete, an unmarried taxpayer, had income exclusively from wages. By December 31, 2012, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, 2013, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s 2012 income tax liability was $16,500 when she timely filed her return on April 30, 2013, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes?

a. $0

b. $ 200

c. $ 500

d. $16,500

VII. Filing Requirements

206. John Smith is the executor of his father’s estate. His father, a calendar-year taxpayer, died on July 15, 2013. As executor of his father’s estate, John is required to file a final income tax return Form 1040 for his father’s 2013 tax year. What is the due date of his father’s 2013 federal income tax return assuming John does not file for an extension?

a. November 1, 2013.

b. November 15, 2013.

c. March 15, 2014.

d. April 15, 2014.

207. Ray Birch, age sixty, is single with no dependents. Birch’s only income is from his occupation as a self-employed plumber. Birch must file a return for 2013 if his net earnings from self-employment are at least

a. $ 400

b. $ 950

c. $3,900

d. $6,100

VIII.B. Assessments

208. Jackson Corp., a calendar-year corporation, mailed its 2012 tax return to the Internal Revenue Service by certified mail on Friday, March 8, 2013. The return, postmarked March 8, 2013, was delivered to the Internal Revenue Service on March 12, 2013. The statute of limitations on Jackson’s corporate tax return begins on

a. December 31, 2012.

b. March 12, 2013.

c. March 16, 2013.

d. March 17, 2013.

209. A calendar-year taxpayer files an individual tax return for 2012 on March 20, 2013. 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, 2016.

b. March 20, 2015.

c. April 15, 2016.

d. April 15, 2017.

210. Harold Thompson, a self-employed individual, had income transactions for 2012 (duly reported on his return filed in April 2013) as follows:

Gross receipts $400,000
Less cost of goods sold and deductions 320,000
Capital gains $ 36,000
Gross income $ 116,000

In November 2013, Thompson discovers that he had inadvertently omitted some income on his 2012 return and retains Mann, CPA, to determine his position under the statute of limitations. Mann should advise Thompson that the six-year statute of limitations would apply to his 2012 return only if he omitted from gross income an amount in excess of

a. $ 20,000

b. $ 29,000

c. $100,000

d. $109,000

211. If a taxpayer omits from his or her income tax return an amount that exceeds 25% of the gross income reported on the return, the Internal Revenue Service can issue a notice of deficiency within a maximum period of

a. Three years from the date the return was filed, if filed before the due date.

b. Three years from the date the return was due, if filed by the due date.

c. Six years from the date the return was filed, if filed before the due date.

d. Six years from the date the return was due, if filed by the due date.

VIII.E. Claims for Refund

212. 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. 1139

b. 1045

c. 1040X

d. 843

213. If an individual paid income tax in 2013 but did not file a 2013 return because his income was insufficient to require the filing of a return, the deadline for filing a refund claim is

a. Two 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 the tax was paid.

d. Three years from the date a return would have been due.

214. A married couple filed their joint 2012 calendar-year return on March 15, 2013, and attached a check for the balance of tax due as shown on the return. On June 15, 2014, the couple discovered that they had failed to include $2,000 of home mortgage interest in their itemized deductions. In order for the couple to recover the tax that they would have saved by using the $2,000 deduction, they must file an amended return no later than

a. December 31, 2015.

b. March 15, 2016.

c. April 15, 2016.

d. June 15, 2016.

215. Richard Baker filed his 2012 individual income tax return on April 15, 2013. On December 31, 2013, he learned that 100 shares of stock that he owned had become worthless in 2012. Since he did not deduct this loss on his 2012 return, Baker intends to file a claim for refund. This refund claim must be filed not later than April 15,

a. 2014

b. 2016

c. 2019

d. 2020

VIII.G. Taxpayer Penalties

216. A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000. On what amount would the penalties for late filing and late payment be computed?

a. $0

b. $ 5,000

c. $45,000

d. $50,000

217. An accuracy-related penalty applies to the portion of tax underpayment attributable to

I. Any substantial gift or estate tax valuation understatement

II. Any substantial income tax valuation overstatement.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.116.86.60