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Becker Professional Education Registered to: Dominique DAntonio

Question CPA-01404
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. Both I and II.
b. I only.
c. Neither I nor II.
d. II only.
Explanation
Choice "c" is correct. The requirements that enable a taxpayer to be
classified as a "qualifying widow(er)" are:
1. The taxpayer's spouse died in one of the two previous years and
the taxpayer did not remarry in the current tax year,
2. The taxpayer has a child who can be claimed as a dependent,
3. This child lived in the taxpayer's home for all of the current tax
year,
4. The taxpayer paid over half the cost of keeping up a home for the
child,
5. The taxpayer could have filed a joint return in the year the spouse
died.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-07354
Robert Corp. granted an incentive stock option for 200 shares to
Beverly, an employee, on March 14, Year 12. The option price and FMV
on the date of grant was $150. Beverly exercised the option on August
2, Year 14, when the FMV was $180 per share. She sold the stock on
September 20, Year 15, for $250 per share. How much gross income
did Beverly recognize in Year 12?
a. $0
b. $30,000
c. $150
d. $20,000
Explanation
Choice "a" is correct. Due to the fact that this is a qualified stock option,
there is no recognition of income in the year of grant.
Choice "b" is incorrect. This is the purchase price of the stock upon
exercise of 200 shares at $150 per share. It is not income in the year of
grant as per the above explanation.
Choice "c" is incorrect. This is simply the option price per share on the
date of grant.
Choice "d" is incorrect. This is the gain Beverly will recognize upon the
sale of the stock. The purchase was 200 shares at $150 per share, or
$30,000. The sale was 200 shares at $250 per share, or $50,000. This
gain is not recognized until the sale occurs in Year 15.
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Question CPA-01794
Under a $150,000 insurance policy on her deceased father's life, May
Green is to receive $12,000 per year for 15 years. Of the $12,000
received in the current year, the amount subject to income tax is:
a. $2,000
b. $0
c. $1,000
d. $12,000
Explanation
Choice "a" is correct. $2,000.
Death benefit 150,000
Amount received in the current year 12,000
Less: Return of principal ($150,000 ÷ 15 years) (10,000)
Taxable interest 2,000
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01387
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. The dividend income on shares of stock that the taxpayer received
for services rendered.
c. A $10,000 gift from the taxpayer's grandparents.
d. The fair market value of land that the taxpayer inherited from an
uncle.
Explanation
Choice "b" is correct. An individual receiving common stock for services
rendered must recognize the fair market value as ordinary income. Any
dividends received on that stock would also result in income recognition.
Choice "a" is incorrect. Employer-provided medical insurance is a tax-
free fringe benefit.
Choices "c" and "d" are incorrect. Gifts and inheritances are both tax-
free to the recipient. (Remember, tax is often paid by the person giving
the gift or the estate at death.)
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Question CPA-01409
In Year 1, Smith, a divorced person, provided over one half the support
for his widowed mother, Ruth, and his son, Clay, both of whom are U.S.
citizens. During Year 1, Ruth did not live with Smith. She received
$9,000 in Social Security benefits. Clay, a 25-year-old full-time graduate
student, and his wife lived with Smith. Clay had no income but filed a
joint return for Year 1, owing an additional $500 in taxes on his wife's
income. How many exemptions was Smith entitled to claim on his Year
1 tax return?
a. 2
b. 1
c. 3
d. 4
Explanation
Choice "a" is correct. Smith is entitled to an exemption for himself. He is
also entitled to an exemption for his mother Ruth (qualifying relative).
Ruth has $9,000 in Social Security payments during Year 1, but
because that is her only income, the Social Security is not taxable, and
nontaxable income does not count in calculating whether an exemption
can be taken for a dependent. Clay cannot be taken as a dependent
because he filed a joint return with his wife. Because the joint return was
filed for a purpose other than simply claiming a refund, the joint return
prevents Smith from claiming an exemption for Clay. An exemption
cannot be taken for Clay's wife because she filed a joint return with
Clay. Smith is entitled to two exemptions.
Choice "d" is incorrect. Clay cannot be taken as a dependent because
he filed a joint return with his wife. Because the joint return was filed for
a purpose other than simply claiming a refund, the joint return prevents
Smith from claiming an exemption for Clay. An exemption cannot be
taken for Clay's wife because she filed a joint return with Clay.
Choice "c" is incorrect. Clay cannot be taken as a dependent because
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Question CPA-04765
Parker, whose spouse died during the preceding year, has not
remarried. Parker maintains a home for a dependent child. What is
Parker's most advantageous filing status?
a. Married filing separately.
b. Head of household.
c. Single.
d. Qualifying widow(er) with dependent child.
Explanation
Choice "d" is correct. A qualifying widow(er) is a taxpayer who may use
the joint tax return standard deduction and rates (but not the exemption
for the deceased spouse) for each of two taxable years following the
year of death of his or her spouse, unless he or she remarries. The
surviving spouse must maintain a household that, for the whole entire
taxable year, was the principal place of abode of a son, stepson,
daughter, or stepdaughter (whether by blood or adoption). The surviving
spouse must also be entitled to a dependency exemption for such
individual. Parker may file as a qualifying widow(er) since her spouse
died in the previous tax year, she did not remarry and she maintained a
home for a dependent child. Since qualifying widow(er) is the most
advantageous status and Parker qualifies, Parker would file as a
qualifying widow(er).
Choice "c" is incorrect. Even though Parker would qualify as single,
filing single would give Parker a higher tax liability than the qualifying
widow(er) status and therefore is not most advantageous.
Choice "b" is incorrect. Parker would not qualify as head of household
for the first two years after the death of Parker's spouse because one of
the requirements for Head of Household status is that the taxpayer is
NOT a surviving spouse. (Also, note that the likely reason for this
requirement is that filing as Head of Household status would give the
qualifying surviving spouse taxpayer a higher tax liability than the
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-07355
Robert Corp. granted an incentive stock option for 200 shares to
Beverly, an employee, on March 14, Year 12. The option price and FMV
on the date of grant was $150. Beverly exercised the option on August
2, Year 14, when the FMV was $180 per share. She sold the stock on
September 20, Year 15, for $250 per share. How much gross income
did Beverly recognize in Year 15?
a. $30,000
b. $150
c. $0
d. $20,000
Explanation
Choice "d" is correct. This is the gain Beverly will recognize upon the
sale of the stock. The purchase was 200 shares at $150 per share, or
$30,000. The sale was 200 shares at $250 per share, or $50,000. This
gain is not recognized until the sale occurs in Year 15.
Choice "a" is incorrect. This is simply the purchase price of the stock
upon exercise of 200 shares at $150 per share.
Choice "b" is incorrect. This is simply the option price per share on the
date of grant.
Choice "c" is incorrect. The realized gain on the sale must be
recognized in the year of the sale per the above explanation.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01811
Cobb, an unmarried individual, had an adjusted gross income of
$200,000 in the current year before any IRA deduction, taxable Social
Security benefits, or passive activity losses. Cobb incurred a loss of
$30,000 in the current year from rental real estate in which he actively
participated. What amount of loss attributable to this rental real estate
can be used in the current year as an offset against income from
nonpassive sources?
a. $30,000
b. $12,500
c. $25,000
d. $0
Explanation
Choice "d" is correct. Cobb may not use any of the loss attributable to
his rental real estate as an offset against income from nonpassive
sources in the current year because he does not qualify for the "Mom
and Pop" exception. Under this exception, up to $25,000 of passive
losses and the deduction equivalent of tax credits that are attributable to
rental real estate may be used as an offset against income from
nonpassive sources. This $25,000 allowance is reduced, but not below
zero, by 50% of the amount by which the individual's modified AGI
exceeds $100,000. The $25,000 is therefore completely phased out
when modified AGI reaches $150,000. Because Cobb's AGI was
$200,000, he did not qualify for the exception.
Choices "b", "c", and "a" are incorrect. Rental activities are passive
activities and generally are not allowed to use any of the loss
attributable to the rental activity to offset any income produced from
nonpassive sources. There is a limited exception in the case of losses
from rental real estate in which the taxpayer actively participates, but
Cobb did not qualify for it.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01428
Adams owns a second residence that is used for both personal and
rental purposes. During the current year, Adams used the second
residence for 50 days and rented the residence for 200 days. Which of
the following statements is correct?
a. All mortgage interest and taxes on the property will be deducted to
determine the property's net income or loss.
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. Depreciation may not be deducted on the property under any
circumstances.
Explanation
Choice "c" is correct. Because the second property was personally used
more than 14 days, any net loss from the rental of the property will be
disallowed.
All related expenses must be prorated between the personal use portion
and the rental activity portion. Prorated depreciation is permitted for the
rental activity.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01415
Jim and Kay Ross contributed to the support of their two children, Dale
and Kim, and Jim's widowed parent, Grant. For Year 27, Dale, a 19-
year-old full-time college student, earned $4,500 as a babysitter. Kim, a
23-year-old bank teller, earned $12,000. Grant received $5,000 in
dividend income and $4,000 in nontaxable Social Security benefits.
Grant and Kim are U.S. citizens and were over one-half supported by
Jim and Kay, but neither of the two currently reside with Jim and Kay.
Dale's main place of residence is with Jim and Kay, and he is currently
on a temporary absence to attend school. How many exemptions can
Jim and Kay claim on their Year 27 joint income tax return?
a. Four
b. Five
c. Two
d. Three
Explanation
Choice "d" is correct. Taxpayers are now entitled to an exemption for
each qualifying child and qualifying relative (two tests are "CARES" or
"SUPORT"). For Dale, he does meet the residency requirement
because there is an exception for a temporary absence while attending
school. Therefore, he is a qualifying child under the CARES test. Kim
does not qualify as a qualifying child (CARES test) because, although
she is under age 24, she is not a full-time student. Therefore, the
income limitations of the SUPORT test apply, and she does not qualify
under that test either. Likewise, Grant's taxable income of $5,000
exceeds the minimum. Thus, 3 total exemptions can be claimed (Jim,
Kay, and Dale).
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-05278
In which of the following situations may taxpayers file as married filing
jointly?
a. Taxpayers who were divorced during the year.
b. Taxpayers who were legally separated but lived together for the
entire year.
c. Taxpayers who were married but lived under a legal separation
agreement at the end of the year.
d. Taxpayers who were married but lived apart during the year.
Explanation
RULE: In order to file a joint return, the parties must be MARRIED at
the end of the year. Exception: If the parties are married but are
LEGALLY SEPARATED under the laws of the state in which they reside,
they cannot file a joint return (they will file either under the single or
head of household filing status).
Choice "d" is correct. Per the above rule, taxpayers who are married but
lived apart during the year are allowed to file a joint return for the year.
The fact that they did not live together during the year has no bearing on
the issue.
Choice "c" is incorrect. Per the above rule, taxpayers who are married
but lived under a legal separation agreement at the end of the year may
not file a joint return. They will generally file either under the single or
head of household filing status.
Choice "a" is incorrect. Per the above rule, taxpayers who were
divorced during the year may not file a joint return together, as they are
not married at the end of the year. [Note, however, that they may
become married again in the year and file a joint return with the new
spouse.]
Choice "b" is incorrect. Per the above rule, taxpayers who were legally
separated but lived together for the entire year may not file a joint
return. They will generally file either under the single or head of
household filing status.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-07356
Wade Inc. granted a nonqualified stock option for 100 shares at $50 per
share to Mary, an employee, on May 1, Year 12. On that date, the option
was selling on an established market for $4 per share. Mary exercised
the option on August 2, Year 13, when the FMV was $80 per share. She
sold the stock on September 2, Year 14, for $100 per share. How much
gross income and what type did Mary recognize in Year 12?
a. $5,000 ordinary income
b. $5,000 capital gain
c. $400 capital gain
d. $400 ordinary income
Explanation
Choice "d" is correct. The employee receiving a nonqualified stock
option must recognize as ordinary income the value of the option if
traded on an established market. Here, that is 100 shares at $4 per
share, or $400.
Choice "c" is incorrect. This is the correct amount, but it is ordinary
income and not a capital gain.
Choices "a" and "b" are incorrect per the above explanation.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01815
Dale received $1,000 in the current year for jury duty. In exchange for
regular compensation from her employer during the period of jury
service, Dale was required to remit the entire $1,000 to her employer in
this year. In Dale's current year income tax return, the $1,000 jury duty
fee should be:
a. Claimed in full as an itemized deduction.
b. Claimed as an itemized deduction to the extent exceeding 2% of
adjusted gross income.
c. Included in taxable income without a corresponding offset against
other income.
d. Deducted from gross income in arriving at adjusted gross income.
Explanation
Choice "d" is correct. The $1,000 jury duty fee that was required to be
remitted to the employer may be deducted from gross income in arriving
at adjusted gross income. This, in effect, washes out the $1,000 income
she will have to report as part of gross income for the jury duty fees paid
to her.
Choices "a" and "b" are incorrect. The amount remitted is allowed as an
adjustment in arriving at AGI, not as an itemized deduction.
Choice "c" is incorrect. A corresponding offset is allowed against other
income as an adjustment in arriving at AGI.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01433
Which of the following conditions must be present in a post-1984
divorce agreement for a payment to qualify as deductible alimony?
I. Payments must be in cash or its equivalent.
II. The payments must end at the recipient's death.
a. Both I and II.
b. II only.
c. I only.
d. Neither I nor II.
Explanation
Choice "a" is correct. Among the requirements for payments to be
classified as alimony are the following:
1. Payment must be in cash or its equivalent.
2. Payments cannot extend beyond the death of the payee-spouse.
3. Payments must be legally required pursuant to a written divorce
(or separation) agreement.
4. Payments cannot be made to members of the same household.
5. Payments must not be designated as anything other than alimony.
6. The spouses may not file a joint tax return.
Note: The requirements for payments to be considered alimony
(income) are the same as for payments to be alimony (deductions).
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-04854
Janet and Ted have two children, Mary (age 10) and Seth (age 12).
Janet's Aunt Martha resides with the family in an apartment over the
garage. Martha's only income is $1,500 a month in Social Security
benefits. Janet and Ted receive no rent payments from Martha and
provide all remaining support for her living arrangements. How many
exemptions are Janet and Ted entitled to in filing their joint tax return?
a. 4
b. 5
c. 3
d. 2
Explanation
Choice "b" is correct. Janet and Ted are entitled to dependency
exemptions for themselves, their two children and Aunt Martha. Aunt
Martha is a "qualified relative." The qualifications to take an exemption
for a qualifying relative are found in the "SUPORT" mnemonic.
Support (over 50%) test
Under a specific amount of (taxable) gross income test
Precludes dependent filing a joint tax return test
Only citizens (residents of US/Canada or Mexico) test
Relative test OR
Taxpayer lives with individual for whole year test
The two children meet the test for a qualifying child. In addition, Aunt
Martha, a relative, qualifies because she does not have any taxable
income (social security is not taxed at this low level of income), is not
filing a joint tax return with another, is a citizen of the US, and is a
qualifying relative. In this instance, note that Martha would not have to
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Becker Professional Education Registered to: Dominique DAntonio
reside with the family. Only nonrelative members of a household must
reside with the taxpayer for the entire year in order for the taxpayer to
be entitled to a dependency exemption for that individual.
Choices "d", "c", and "a" are incorrect per the above explanation.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-05964
A couple filed a joint return in prior tax years. During the current tax
year, one spouse died. The couple has no dependent children. What is
the filing status available to the surviving spouse for the first subsequent
tax year?
a. Single.
b. Surviving spouse.
c. Head of household.
d. Married filing separately.
Explanation
Choice "a" is correct. For the first subsequent tax year (and all other
subsequent tax years) after the death of a spouse with no dependent
children, filing status is single.
Choice "b" is incorrect. Filing status is not "surviving spouse" because
there are no dependent children.
Choice "d" is incorrect. Filing status is not "married filing separately" in
the first subsequent tax year after the death of a spouse since the
couple is no longer married.
Choice "c" is incorrect. Filing status is not "head of household" because
there are no dependent children and no other qualifying dependents.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-07357
Which of the following statements is not correct?
a. Employee Stock Purchase Plans are a type of qualified stock option
plan.
b. For an Incentive Stock Option, once exercised, the stock must be
held at least two years after the grant date and at least one year
after the exercise date.
c. The employer may recognize a deductible expense for a
nonqualified stock option in the same year that the employee will
recognize ordinary income.
d. The recipient of an Incentive Stock Option will generally have to
report compensation income in the year that the option is received.
Explanation
Choice "d" is correct. Generally there is no recognition of compensation
expense with an Incentive Stock Option.
Choices "a", "c", and "b" are incorrect as these are all true statements.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01823
Clark bought Series EE U.S. Savings Bonds after 1989. Redemption
proceeds will be used for payment of college tuition for Clark's
dependent child. One of the conditions that must be met for tax
exemption of accumulated interest on these bonds is that the:
a. Bonds must be bought by a parent (or both parents) and put in the
name of the dependent child.
b. Bonds must be bought by the owner of the bonds before the owner
reaches the age of 24.
c. Purchaser of the bonds must be the sole owner of the bonds (or
joint owner with his or her spouse).
d. Bonds must be transferred to the college for redemption by the
college rather than by the owner of the bonds.
Explanation
Choice "c" is correct. One of the conditions that must be met for tax
exemption of accumulated interest on the bonds is that the purchaser of
the bonds must be the sole owner of the bonds (or joint owner with his
or her spouse). Other conditions include, for post-1989 bonds, the
taxpayer is over age 24 when issued and is used to pay for higher
education, reduced by tax-free scholarships, of the taxpayer, spouse, or
dependents.
Choice "a" is incorrect. The bonds must be bought and put in the name
of the owner or co-owner, not in the name of the dependent child.
Choice "b" is incorrect. The owner must be at least 24 years old before
the bonds issue date.
Choice "d" is incorrect. There is no requirement that the bonds must be
transferred to the college for redemption by the college rather than by
the owner of the bonds.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01438
Which of the following costs is not included in inventory under the
Uniform Capitalization rules for goods manufactured by the taxpayer?
a. Warehousing costs.
b. Quality control.
c. Taxes excluding income taxes.
d. Research.
Explanation
Choice "d" is correct. Uniform Capitalization rules provide guidelines
with respect to capitalizing or expensing certain costs. With regard to
inventory, direct materials, direct labor, and factory overhead should be
capitalized as part of the cost of inventory. Warehousing costs, quality
control and taxes, excluding income taxes, are all considered factory
overhead items. The research should be expensed.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06533
A taxpayer's spouse dies in August of the current year. Which of the
following is the taxpayer's filing status for the current year?
a. Head of household.
b. Qualified widow(er).
c. Single.
d. Married filing jointly.
Explanation
Choice "d" is correct. The joint return rates apply for two years following
the death of a spouse, if the surviving spouse does not remarry and
maintains a household for a dependent child. There is nothing in this
question that says whether or not the surviving spouse maintains a
household for a dependent child. However, since the question is asking
about the current year, the surviving spouse is considered to be married
(and thus able to file as married filing jointly) for the entire current year
even if the spouse dies earlier in the year (in this case in August).
Choice "c" is incorrect. The filing status is not single for the current year.
Choice "b" is incorrect. The filing status is not qualified widow(er) for the
current year.
Choice "a" is incorrect. The filing status is not head of household for the
current year.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-07358
James Corp. issue stock options to employees under an Employee
Stock Purchase Plan. Which of the following statements is correct?
I. The option exercise price must be less than the lesser of 95%
of the FMV of the stock when granted or exercised.
II. The option cannot be exercised more than 27 months after the
grant date.
a. Both.
b. II only.
c. Neither.
d. I only.
Explanation
Choice "b" is correct. I is not correct because the rule states 85%, not
95%. II is a correct statement. This is a requirement of an ESPP.
Choices "d", "a", and "c" are incorrect per the above explanation.
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Question CPA-01831
The rule limiting the allowability of passive activity losses and credits
applies to:
a. Personal service corporations.
b. Widely held C corporations.
c. S corporations.
d. Partnerships.
Explanation
Choice "a" is correct. The rule limiting the allowability of passive activity
losses and credits applies to personal service corporations.
Choice "d" is incorrect. The passive activity limitations apply to the
various partners in the partnership as opposed to the partnership itself.
Choice "c" is incorrect. The passive activity limitations apply to the
various shareholders in the S corporation as opposed to the corporation
itself.
Choice "b" is incorrect. The passive activity rules do not apply to widely
held C corporations.
Becker Professional Education Registered to: Dominique DAntonio
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Question CPA-01442
During Year 9, Ash had the following cash receipts:
Wages 13,000
Interest income from U.S. Treasury bonds 350
Workers' compensation following a job-related injury 8,500
What is the total amount that must be included in gross income on Ash's
Year 9 income tax return?
a. $13,000
b. $21,500
c. $13,350
d. $21,850
Explanation
Choice "c" is correct. The total amount that must be included in gross
income is $13,350 ($13,000 in wages plus $350 in interest income on
U.S. Treasury bonds).
Rule: Wages and interest on U.S. Treasury bonds are includible in
gross income and must be reported as part of gross income on a
taxpayer's income tax return.
Rule: Damages for personal injury (i.e., workers' compensation for a
job-related injury) are specifically excluded from gross income.
Choices "a", "b", and "d" are incorrect, per the above rules.
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Question CPA-01834
Hall, a divorced person and custodian of her 12-year-old child, filed her
current year federal income tax return as head of a household. She
submitted the following information to the CPA who prepared her return:
The divorce agreement, executed seven years ago, provides for
Hall to receive $3,000 per month, of which $600 is designated as
child support. After the child reaches 18, the monthly payments
are to be reduced to $2,400 and are to continue until remarriage
or death. However, for the current year, Hall received a total of
only $5,000 from her former husband. Hall paid an attorney
$2,000 in the current year in a suit to collect the alimony owed.
In June of the current year, Hall's mother gifted her 100 shares of
a listed stock. The donor's basis for this stock, which she bought
20 years ago, was $4,000, and market value on the date of the
gift was $3,000. Hall sold this stock in July of the current year for
$3,500. The donor paid no gift tax.
During the year, Hall spent a total of $1,000 for state lottery
tickets, and her lottery winnings totaled $200.
Hall earned a salary of $25,000 in the current year. Hall was not
covered by any type of retirement plan, but contributed $2,000 to
an IRA this year.
During the year, Hall sold an antique that she bought 10 years
ago to display in her home. Hall paid $800 for the antique and
sold it for $1,400, using the proceeds to pay a court-ordered
judgment.
Hall paid the following expenses in the current year pertaining to
the home that she owns: realty taxes, $3,400; mortgage interest,
$7,000; casualty insurance, $490; assessment by city for
construction of a sewer system, $910; interest of $1,000 on a
personal, unsecured bank loan, the proceeds of which were
used for home improvements. Hall does not rent out any portion
of the home.
What amount should be reported in Hall's current year tax return as
alimony income?
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Question CPA-01451
Baum, an unmarried optometrist and sole proprietor of Optics, buys and
maintains a supply of eyeglasses and frames to sell in the ordinary
course of business. In the current year, Optics had $350,000 in gross
business receipts and its year-end inventory was not subject to the
uniform capitalization rules. Baum's current year adjusted gross income
was $90,000 and Baum qualified to itemize deductions. During the year,
Baum recorded the following information:
Business expenses:
Optics cost of goods sold
35,000
Optics rent expense 28,000
Liability insurance premium on Optics 5,250
Other expenditures:
Baum's self-employment tax
29,750
Baum's self-employment health insurance 8,750
Insurance premium on personal residence. In the current
year, Baum's home was
totally destroyed by fire. The furniture had an adjusted
basis of $14,000 and a
fair market value of $11,000. During the year, Baum
collected $3,000 in insurance
reimbursement and had no casualty gains during the year.
2,625
Qualified mortgage interest on a loan to acquire a personal
residence
52,500
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Question CPA-01840
A cash basis taxpayer should report gross income:
a. Only for the year in which income is actually received in cash.
b. For the year in which income is either actually or constructively
received, whether in cash or in property.
c. Only for the year in which income is actually received whether in
cash or in property.
d. For the year in which income is either actually or constructively
received in cash only.
Explanation
Choice "b" is correct. A cash basis taxpayer should report gross income
for the year in which income is either actually or constructively received,
whether in cash or in property.
Choice "a" is incorrect. Income also can be constructively received in
property, not only actually in cash.
Choice "c" is incorrect. Income also can be constructively received, not
only actually.
Choice "d" is incorrect. Income also can be received in property, not
only cash.
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Question CPA-01472
Baker, a sole proprietor CPA, has several clients that do business in
Spain. While on a four-week vacation in Spain, Baker took a five-day
seminar on Spanish business practices that cost $700. Baker's round-
trip airfare to Spain was $600. While in Spain, Baker spent an average
of $100 per day on accommodations, local travel, and other incidental
expenses, for total expenses of $2,800. What amount of total expense
can Baker deduct on Form 1040 Schedule C, "Profit or Loss From
Business," related to this situation?
a. $1,800
b. $700
c. $1,200
d. $4,100
Explanation
Choice "c" is correct. Baker can deduct $1,200 in total expense on Form
1040 Schedule C, calculated as follows:
Direct educational expenses 700 [cost of the course]
Daily expenses for 5-day seminar 500 [$100 per day ! 5]
Total educational expenses 1,200
Rule: If foreign travel is primarily for personal in nature (e.g., a
vacation), none of the travel expenses (e.g., round trip airfare) incurred
will be allowable business deductions, even if the taxpayer was involved
in business activities while in the foreign country.
Note: It does not appear that the examiners are attempting to trick
candidates on the classification of the business expenses as travel or
educational. It appears that the purpose of the question is to test the
candidate's ability to recognize when expenses are deductible and when
they are not deductible business expenses.
Choice "b" is incorrect, as the expenses for the 5-day period Baker
attended the seminar were directly related to being in Spain for the
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Becker Professional Education Registered to: Dominique DAntonio
additional period of time and are allowable business deductions.
Choices "a" and "d" are incorrect, per the above rule.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01884
The uniform capitalization method must be used by:
I. Manufacturers of tangible personal property.
II. Retailers of personal property with $2 million in average annual
gross receipts for the three preceding years.
a. II only.
b. I only.
c. Both I and II.
d. Neither I nor II.
Explanation
Choice "b" is correct. I only.
Rule: The uniform capitalization rules apply to the following:
1. Real or tangible personal property produced by the taxpayer for
use in a trade or business.
2. Real or tangible personal property produced by the taxpayer for
sale to customers.
3. Real or personal property acquired by the taxpayer for resale.
4. However, the uniform capitalization rules do not apply to property
acquired for resale if the taxpayer's annual gross receipts for the
preceding three tax years do not exceed $10,000,000 (not $2
million).
Choices "a", "c", and "d" are incorrect, per the above.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01479
On December 1 of the current taxable year, Krest, a self-employed cash
basis taxpayer, borrowed $200,000 to use in her business. The loan
was to be repaid on November 30 of the following year. Krest paid the
entire interest amount of $24,000 on December 1 of the current year.
What amount of interest was deductible on Krest's current year income
tax return?
a. $2,000
b. $0
c. $24,000
d. $22,000
Explanation
Choice "a" is correct. Cash basis taxpayers deduct interest in the year
paid or the year to which the interest relates, whichever is later. Even
though all of the interest on this loan was paid on December 1, of the
current year, only the interest relating to December of the current year
can be deducted in the current year. The question does not give an
interest rate, but because the loan is to be repaid in a lump sum at
maturity, 1/12 of the interest, or $2,000 applies to each month.
Choice "b" is incorrect. Because $2,000 of the interest relates to the
current year, this amount is deductible in the current year.
Choice "d" is incorrect. This is the amount that cannot be deducted until
the following year, the year to which the interest relates. Be sure to read
questions like this very carefully, because if you had simply misread the
question as seeking the amount deductible in the following year, you
would get the question wrong despite understanding the rule.
Choice "c" is incorrect. Cash basis taxpayers can deduct interest in the
year paid or the year to which the interest relates, whichever is later,
thus 11 months of the interest will not be deductible until next year.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06431
Nicole and Andrew Harris contribute to more than half of the support of
their three children, Travis, Luke, and John. Travis, age 20, worked full
time at the local deli and earned $20,000. Luke, 18, is a part-time
college student who earned $5,000 working as a resident assistant in
the student dormitory where he lived half of the year. John, age 25, is an
aspiring actor who lives at home with Nicole and Andrew. John earned
$2,500 for the three commercials he starred in. How many exemptions
can Nicole and Andrew claim on their Year 1 joint tax return?
a. Four.
b. Three.
c. Five.
d. Two.
Explanation
Choice "a" is correct.
Nicole and Andrew can claim two personal exemptions for themselves.
Travis does not qualify for a dependency exemption. Travis is not a full-
time student, so at age 20 he is not a qualifying child. Although Nicole
and Andrew provide more than half of his support, Travis makes more
than the exemption amount ($3,650), so he is not considered as a
qualifying relative, either.
Luke is a qualifying child of Nicole and Andrew because he is under the
age of 19 and lives at home at least part of the year. There is no gross
income or support test that needs to be satisfied in the case of a
qualifying child.
John is a qualifying relative of Nicole and Andrew because they
supplied over half of his support and his taxable income is less than the
exemption amount.
Choices "d", "b", and "c" are incorrect, based on the above explanation.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01482
Klein, a master's degree candidate at Blair University, was awarded a
$12,000 scholarship from Blair in Year 8. The scholarship was used to
pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein
received $5,000 for teaching two courses at a nearby college. What
amount is includable in Klein's Year 8 gross income?
a. $0
b. $5,000
c. $12,000
d. $17,000
Explanation
Choice "b" is correct. Scholarships are nontaxable for degree seeking
students to the extent that the proceeds are spent on tuition, fees,
books and supplies. The $5,000 for teaching courses is taxable
compensation for services delivered.
Choice "a" is incorrect. The $5,000 for teaching courses is taxable
compensation for services delivered.
Choice "c" is incorrect. The scholarship is not taxable because Klein is a
degree seeking student and used the proceeds for tuition and fees.
Furthermore, the $5,000 for teaching courses is taxable compensation
for services delivered.
Choice "d" is incorrect. The scholarship is not taxable because Klein is a
degree seeking student and used the proceeds for tuition and fees.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06432
John and Theresa are in the process of obtaining a divorce. Although
they are not legally separated, John moved out of the family home in
October of Year 1 and moved into an apartment nearby. John and
Theresa's two children, Jenna and Stella, lived with Theresa in the
family home for more than half of the tax year. What filing status can
Theresa use to file her Year 1 tax return?
a. Single.
b. Surviving spouse (qualifying widow).
c. Head of household.
d. Married filing jointly/separately.
Explanation
Choice "d" is correct. John and Theresa are still married at year-end,
not legally separated, and have not lived apart for the last six months of
the taxable year. Theresa must file as married, but may choose to do so
either jointly with John or separately.
Choice "c" is incorrect. Head of household status is not an option
because the couple is not legally separated at year-end and John did
not live apart from Theresa for the last six months of the taxable year.
Choice "b" is incorrect. Surviving spouse (qualifying widow) is not an
option for Theresa, as John is still alive.
Choice "a" is incorrect. Filing as single is not an option, because John
and Theresa are still married and not legally separated at year-end.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01485
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. Neither I nor II.
b. Both I and II.
c. I only.
d. II only.
Explanation
Choice "b" is correct.
I. A payment to a student for a part-time teaching assignment is
taxable income just as a payment for any other campus job
would be. This is not a scholarship or fellowship.
II. There is no exclusion in the tax law for amounts paid to a
degree candidate for participation in university-sponsored
research.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06433
Mort and Mindy met at a New Year's Eve party held December 31, Year
1. They instantly bonded, fell madly in love, and were married at 11:38
p.m. that night. Identify Mort's filing status for Year 1.
a. Single.
b. Head of household.
c. Married filing jointly.
d. Surviving spouse.
Explanation
Choice "c" is correct. Mort and Mindy were married as of midnight on
December 31, Year 1. Therefore, Mort's only options are to file as
married either jointly or separately, and because "joint" is the only option
presented that qualifies, choice "c" is correct.
Choices "a", "b", and "d" are incorrect, based on the above explanation.
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Question CPA-01489
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.
No No
b.
No Yes
c.
Yes No
d.
Yes Yes
Explanation
Choice "b" is correct. Under the uniform capitalization rules, purchasers
of inventory for resale may deduct their marketing costs but must
capitalize their off-site storage costs.
Choices "d", "c", and "a" are incorrect. Marketing costs are deductible,
but off-site storage must be capitalized.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06434
Mort and Mindy met at a New Year's Eve party held December 31, Year
1. They instantly bonded, fell madly in love, and were married at 11:38
p.m. that night. Sadly, Mort passed away November 15, Year 2. What
filing status should Mindy use for Year 2?
a. Married filing jointly.
b. Surviving spouse.
c. Head of household.
d. Single.
Explanation
Choice "a" is correct. Mindy will be able to use the married filing jointly
status for the year Mort passed away (Year 2) even though she was not
married at year-end. Also, note that Mindy will be able to claim Mort as
a personal exemption on the joint return in the year of death.
Choices "d", "c", and "b" are incorrect, based on the above explanation.
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Question CPA-01564
In a tax year where the taxpayer pays qualified education expenses,
interest income on the redemption of qualified U.S. 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. II only.
b. Neither I nor II.
c. I only.
d. Both I and II.
Explanation
Choice "d" is correct. Interest earned on Series EE bonds issued after
1989 may qualify for exclusion. One requirement is that the interest is
used to pay tuition and fees for the taxpayer, spouse, or dependent
enrolled in higher education. The interest exclusion is reduced by
qualified scholarships that are exempt from tax and other nontaxable
payments received for educational expenses (other than gifts and
inheritances).
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06435
Mort and Mindy met at a New Year's Eve party held December 31, Year
1. They instantly bonded, fell madly in love, and were married at 11:38
p.m. that night. Sadly, Mort passed away November 15, Year 2. In
January, Year 3, Mindy gave birth to triplets Mark, Mandy, and Maureen.
Assuming that Mindy has not remarried, what filing status should she
use for Year 4?
a. Head of household.
b. Single.
c. Surviving spouse.
d. Married filing jointly.
Explanation
Choice "c" is correct. Because Mindy does not remarry and she
maintains a principal residence for her dependent children for the entire
year, she may file using the surviving spouse (qualifying widow) status
for the two taxable years following Mort's death (but may not claim Mort
as a personal exemption, because he was not alive for any part of those
taxable years). In Year 4, the second year after Mort's death, Mindy
should file as a qualifying widow.
Choices "b", "d", and "a" are incorrect, based on the above explanation.
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Question CPA-01568
During the year Kay received interest income as follows:
On U.S. Treasury certificates 4,000
On refund of prior year's federal income tax 500
The total amount of interest subject to tax in Kay's current year tax
return is:
a. $4,500
b. $0
c. $500
d. $4,000
Explanation
Choice "a" is correct. Interest income from U.S. obligations is generally
taxable. Interest income on a federal tax refund is taxable, even though
the refund itself is not taxed.
Choice "d" is incorrect. Interest income on a federal tax refund is
taxable, even though the refund itself is not taxed.
Choice "c" is incorrect. Interest income from U.S. obligations is
generally taxable.
Choice "b" is incorrect. Interest income from U.S. obligations is
generally taxable. Interest income on a federal tax refund is taxable,
even though the refund itself is not taxed.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06436
Mort and Mindy met at a New Year's Eve party held December 31, Year
1. They instantly bonded, fell madly in love, and were married at 11:38
p.m. that night. Sadly, Mort passed away November 15, Year 2. In
January, Year 3, Mindy gave birth to triplets Mark, Mandy, and Maureen.
Assuming Mindy has not remarried, what filing status should she use for
Year 5?
a. Surviving spouse.
b. Married filing jointly.
c. Single.
d. Head of household.
Explanation
Choice "d" is correct. Mindy should file using the head of household
status. She has dependent children living with her, and no longer
qualifies as married or as a surviving spouse. Head of household is the
most favorable filing status for which she qualifies.
Choice "c" is incorrect. Mindy qualifies for a more favorable filing status
than single.
Choice "b" is incorrect. Mindy is no longer married and Mort did not die
in Year 5, so she is not eligible for the married filing jointly status.
Choice "a" is incorrect. At Year 5, more than two years have passed
since Mort's death so Mindy no longer qualifies for surviving spouse
(qualifying widow) status.
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Question CPA-01571
With regard to the inclusion of social security benefits in gross income,
for the Year 8 tax year, which of the following statements is correct?
a. The social security benefits in excess of the modified adjusted gross
income over a threshold amount 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. The social security benefits in excess of modified adjusted gross
income are included in gross income.
d. Eighty-five percent of the social security benefits is the maximum
amount of benefits to be included in gross income.
Explanation
Choice "d" is correct. The amount of social security benefits that is
taxed is dependent on whether the combined income (AGI plus interest
on tax-exempt bonds and 50% of the social security benefits) is greater
than a threshold amount. If the combined income is less than the
threshold, the amount taxed is the lesser of 1) 50% of the benefits or 2)
50% of the excess of the combined income over the threshold. If the
combined income is greater than the threshold, the amount taxed is the
lesser of 1) amount calculated above plus 85% of the excess of the
combined income over the threshold or 2) 85% of the benefits. Thus,
85% of the benefits is the maximum amount of benefits that may be
included in gross income.
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Question CPA-06437
In Year 4, after Mindy's three children have grown and moved out of the
house, Mindy (unmarried) moved her mother, Mary, into an assisted
living facility for which Mindy pays 75% of the cost. Mindy had not
previously lived with Mary, and Mary paid for her own living expenses
while she lived in her own home. What filing status should Mindy use for
Year 4, assuming Mary moved into the assisted living facility on January
1, Year 4?
a. Single.
b. Married filing jointly.
c. Head of household.
d. Surviving spouse.
Explanation
Choice "c" is correct. Mindy qualifies for and should use head of
household status in Year 4, because she maintained more than half of
the upkeep on Mary's principal residence for more than half the taxable
year (note that Mindy is not required to live with her mother to qualify for
head of household status). It is the most favorable filing status for which
she qualifies.
Choice "a" is incorrect. Mindy qualifies for a more favorable filing status
than single.
Choice "b" is incorrect. Mindy is not married.
Choice "d" is incorrect. Mindy has not had a spouse die in the past two
years.
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Question CPA-01596
Rich is a cash basis self-employed air-conditioning repairman with
current year 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. $14,100
b. $14,900
c. $13,900
d. $15,100
Explanation
Choice "d" is correct. Deductions to arrive at net self-employed income
include all necessary and ordinary expenses connected with the
business. Estimated federal income tax payments are not an expense.
Charitable contributions by an individual are only deductible as an
itemized deduction on Schedule A. This assumes the contribution was
not made with the "expectation of commensurate financial return."
Receipts 20,000
Parts (2,500)
Listing (2,000)
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Telephone (400)
Net self-employment income 15,100
Choice "b" is incorrect. Charitable contributions are an itemized
deduction unless there is an expectation of commensurate financial
return.
Choice "a" is incorrect. Federal income taxes paid are not a deductible
expense.
Choice "c" is incorrect. Charitable contributions are an itemized
deduction unless there is an expectation of commensurate financial
return. Federal income taxes paid are not a deductible expense.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-06438
In Year 4, after Mindy's three children have grown and moved out of the
house, Mindy (unmarried) moved her mother, Mary, into an assisted
living facility for which Mindy pays 75% of the cost. Mindy had not
previously lived with Mary, and Mary paid for her own living expenses
while she lived in her own home. What filing status should Mindy use for
Year 4, assuming Mary moved into the assisted living facility on August
1, Year 4?
a. Married filing jointly.
b. Head of household.
c. Surviving spouse.
d. Single.
Explanation
Choice "d" is correct. Mindy should file using the single status. She does
not qualify for more favorable filing status.
Choice "a" is incorrect. Mindy is not married.
Choice "b" is incorrect. Mindy does not qualify for head of household
status. Had Mary moved into the assisted living home more than half a
year before the taxable year-end, Mindy would have been eligible for
head of household status. Mindy did not provide more than half of
Mary's support and for Year 4 is ineligible for head of household status.
Choice "c" is incorrect. Mindy has not had a spouse die in the past two
years.
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Question CPA-01603
On December 1, Year 1, Michaels, a self-employed cash basis taxpayer,
borrowed $100,000 to use in her business. The loan was to be repaid
on November 30, Year 2. Michaels paid the entire interest of $12,000 on
December 1, Year 1. What amount of interest was deductible on
Michaels' Year 2 income tax return?
a. $11,000
b. $1,000
c. $12,000
d. $0
Explanation
Choice "a" is correct. Prepaid interest must be prorated over the time for
which payment is made. This is true for both cash and accrual basis
taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2.
Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or
$11,000 is deductible in Year 2.
Choices "c", "b", and "d" are incorrect. Prepaid interest must be prorated
over the time for which payment is made. This is true for both cash and
accrual basis taxpayers.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01609
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. $550
c. $600
d. $200
Explanation
Choice "b" is correct. The $200 cash received plus the $350 fair value of
the bookcase received must be included in income by Perle, for a total
of $550. The income is based on the value in money or fair value of
property received by Perle, not the $600 billed.
Choice "a" is incorrect. Perle must report taxable income as a result of
this transaction.
Choice "d" is incorrect. The $350 fair value of the bookcase received is
also income for Perle.
Choice "c" is incorrect. The income is based on the total value received
by Perle, not the $600 billed.
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Question CPA-01610
Charles and Marcia are married cash-basis taxpayers. In Year 8, 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 Year
8 joint income tax return?
a. $2,900
b. $500
c. $1,100
d. $1,900
Explanation
Choice "d" is correct. The $500 interest on federal income tax refund,
the $600 interest on state income tax refund, and the $800 interest on
federal government obligations are taxable, for a total of $1,900. The
$1,000 interest on state government obligations is normally not taxable.
Choice "b" is incorrect. The $600 interest on state income tax refund
and the $800 interest on federal government obligations is also taxable.
Choice "c" is incorrect. The $800 interest on federal government
obligations is also taxable.
Choice "a" is incorrect. The $1,000 interest on state government
obligations is normally not taxable.
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Question CPA-01614
Nare, an accrual-basis taxpayer, owns a building which was rented to
Mott under a ten-year lease expiring August 31, Year 8. On January 2,
Year 2, Mott paid $30,000 as consideration for cancelling the lease. On
November 1, Year 2, Nare leased the building to Pine under a five-year
lease. Pine paid Nare $10,000 rent for the two months of November and
December, and an additional $5,000 for the last month's rent. What
amount of rental income should Nare report in its Year 2 income tax
return?
a. $40,000
b. $10,000
c. $45,000
d. $15,000
Explanation
Choice "c" is correct. Prepaid rent is income when received even for an
accrual-basis taxpayer. The $30,000 received as consideration for
cancelling the lease is in substitution for rental payments and is thus
rental income. The $5,000 prepaid for the last month's rent is also rental
income.
Choice "b" is incorrect. The $30,000 received as consideration for
cancelling the lease is in substitution for rental payments and is thus
rental income. The $5,000 prepaid for the last month's rent is also rental
income.
Choice "d" is incorrect. The $30,000 is in substitution of rental payments
and is thus rental income.
Choice "a" is incorrect. The $5,000 prepaid for the last month's rent
would also be rental income.
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Question CPA-01620
John and Mary were divorced last year. 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 the current year, 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
current year income tax return?
a. $8,000
b. $5,600
c. $8,600
d. $10,000
Explanation
Choice "a" is correct. Alimony would be income to Mary while child
support would not. Funds qualify as child support only if 1) a specific
amount is fixed or is contingent on the child's status (e.g., reaching a
certain age), 2) it is paid solely for the support of minor children, and 3)
it is payable by decree, instrument or agreement. The actual use of the
funds is irrelevant to the issue. In this case, $2,000 (20% ! $10,000)
qualifies as child support. The other $8,000 is alimony, which would be
income to Mary.
Choice "b" is incorrect. Take 80% of the $10,000 paid, not 80% of the
$7,000 received by Mary.
Choice "c" is incorrect. Only $8,000 would be alimony per the divorce
decree (80% ! $10,000).
Choice "d" is incorrect. The 20% reduction when the child turns 18
makes 20% of the $10,000 payment, or $2,000, child support, which is
nontaxable to Mary.
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Question CPA-01636
Clark filed Form 1040EZ for the Year 8 taxable year. In July, Year 9,
Clark received a state income tax refund of $900 plus interest of $10, for
overpayment of Year 8 state income tax. What amount of the state tax
refund and interest is taxable in Clark's Year 9 federal income tax
return?
a. $0
b. $10
c. $910
d. $900
Explanation
Choice "b" is correct. Except for interest from state and local
government bonds, interest income is fully taxable, so the $10 is
included in income. Filing Form 1040EZ means that Clark did not
itemize in the prior year, and therefore, did not deduct any state income
taxes last year. Under the tax benefit rule, the refund is not taxable this
year since Clark did not deduct the tax last year.
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Question CPA-01699
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. $70,000
b. $50,000
c. $20,000
d. $0
Explanation
Choice "b" is correct. Guaranteed payments are reasonable
compensation paid to a partner for services rendered (or use of capital)
without regard to his ratio of income. Earned compensation is subject to
self-employment tax. Payments not guaranteed are merely another way
to distribute partnership profits. The ordinary income reported from an S
corporation is taxable income to the individual or their own individual tax
return but is not subject to self-employment tax. The ordinary income
reported from a partnership may be subject to self-employment tax (if to
a general partner).
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Question CPA-04721
During the current year, Adler had the following cash receipts:
Wages 18,000
Interest income from investments in municipal bonds 400
Unemployment compensation 3,900
What is the total amount that must be included in gross income on
Adler's current year income tax return?
a. $21,900
b. $22,300
c. $18,000
d. $18,400
Explanation
Choice "a" is correct. The wages of $18,000 and unemployment
compensation are both includable in gross income on Adler's current
year income tax return.
Choice "c" is incorrect. The unemployment compensation must be
included in gross income.
Choice "d" is incorrect. Municipal bond interest income is excluded from
gross income, and the unemployment compensation must be included
in gross income.
Choice "b" is incorrect. Municipal bond interest income is excluded from
gross income.
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Question CPA-04756
DAC Foundation awarded Kent $75,000 in recognition of lifelong literary
achievement. Kent was not required to render future services as a
condition to receive the $75,000. What condition(s) must have been met
for the award to be excluded from Kent's gross income?
I. Kent was selected for the award by DAC without any action on
Kent's part.
II. Pursuant to Kent's designation, DAC paid the amount of the
award either to a governmental unit or to a charitable
organization.
a. II only.
b. Neither I nor II.
c. Both I and II.
d. I only.
Explanation
Choice "c" is correct. Generally, the fair market value of prizes and
awards is taxable income. However, an exclusion from income for
certain prizes and awards applies where the winner is selected for the
award without entering into a contest (i.e., without any action on their
part) and then assigns the award directly to a governmental unit or
charitable organization. Therefore, conditions "I" and "II" must be met in
order for Kent to exclude the award from his gross income.
Choice "d" is incorrect. "II" is a necessary condition as well. See
explanation above.
Choice "a" is incorrect. "I" is a necessary condition as well. See
explanation above.
Choice "b" is incorrect. "I" and "II" are both necessary conditions. See
explanation above.
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Question CPA-04760
Mosh, a sole proprietor, uses the cash basis of accounting. At the
beginning of the current year, accounts receivable were $25,000. During
the year, Mosh collected $100,000 from customers. At the end of the
year, accounts receivable were $15,000. What was Mosh's gross
taxable income for the current year?
a. $75,000
b. $110,000
c. $90,000
d. $100,000
Explanation
Choice "d" is correct. The facts state that cash collections from
customers were $100,000 and as a cash basis taxpayer this is the
amount of Mosh's gross taxable income for the year. Note that
according to the formula BASE - we can determine the amount of sales
= $90,000, but that would give us accrual, not cash basis, income.
Beginning A/R 25,000
Add!Sales 90,000 accrual basis taxable
income
115,000
Subtract!Cash
collections
(100,000) cash basis taxable income
Ending A/R 15,000
Choices "a" and "b" are incorrect. See explanation above.
Choice "c" is incorrect. $90,000 is the amount of sales that would be
Mosh's taxable income if Mosh were an accrual basis taxpayer.
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Question CPA-05267
Porter was unemployed for part of the year. Porter received $35,000 of
wages, $6,400 from a state unemployment compensation plan, and
$2,000 from his former employer's company-paid supplemental
unemployment benefit plan. What is the amount of Porter's gross
income?
a. $43,400
b. $37,000
c. $41,400
d. $35,000
Explanation
RULE: Gross income includes all income unless it is specifically
excluded in the tax code.
Choice "a" is correct. Wages and all unemployment compensation are
not excluded from being taxable; therefore, they are included in the
taxpayer's gross income for tax purposes.
Wages received 35,000
State unemployment compensation 6,400
Employer's unemployment compensation plan 2,000
43,400
Choice "d" is incorrect. All forms of unemployment compensation are
included as part of gross income.
Choice "b" is incorrect. The $6,400 of state unemployment
compensation received is included as part of gross income.
Choice "c" is incorrect. The $2,000 of his former employer's company-
paid supplemental unemployment benefit plan is included as part of
gross income.
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Question CPA-05279
Which one of the following will result in an accruable expense for an
accrual-basis taxpayer?
a. A repair completed prior to year end and paid upon completion.
b. A repair completed prior to year end but not invoiced.
c. An invoice dated prior to year end but the repair completed after
year end.
d. A signed contract for repair work to be done and the work is to be
completed at a later date.
Explanation
RULE: An accruable expense is one is which the services have been
received/performed but have not been paid for by the end of the
reporting period.
Choice "b" is correct. The facts indicate that a repair was completed
prior to year end but not yet invoiced. If it has not yet been invoiced, it is
assumed that it has also not yet been paid for. Therefore, this is a
situation in which the repair expense would be accrued at year end.
Services have been performed, but they have not been paid for, as they
have not even been invoiced yet.
Choice "c" is incorrect. If the repair was completed after year end, then
the expense is not accruable, as the benefit of the services hasn't been
received as of year end. The fact that the repair was invoiced prior to
year end does not impact the situation.
Choice "a" is incorrect. If a repair was completed and paid for prior to
year end, no accrual is appropriate. On the accrual basis, the expense
is taken in the year the repair is completed and the benefit is received.
In this case, the account payable was also paid in the same year, but
this has no effect on the expense.
Choice "d" is incorrect. The facts indicate that the work is to be
completed at a date later than year end. Therefore, the expense is not
accruable at year end, as the benefit of the repair hasn't been received
as of year end. It is reasonable that a signed contract for the repair work
exists, but this has no effect on the accrual.
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Question CPA-05538
In the current year Jensen had the following items:
Salary 50,000
Inheritance 25,000
Alimony from ex-spouse 12,000
Child support from ex-spouse 9,000
Capital loss on investment stock sale (6,000)
What is Jensen's AGI for the current year?
a. $59,000
b. $62,000
c. $84,000
d. $44,000
Explanation
Choice "a" is correct. The question asks for AGI, but all of the items in
the list are items of potential gross income. There are no adjustments
included in the list; therefore, in this case, AGI is the same as gross
income. The calculation is as follows:
Salary
50,000
Inheritance 0 [not taxable]
Alimony from ex-spouse 12,000
Child support from ex-spouse 0 [not taxable]
Capital loss on investment stock (3,000) [maximum
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sale deductible]
AGI
59,000
Choices "d", "b", and "c" are incorrect, per the above calculation.
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Question CPA-05548
Which of the following is subject to the Uniform Capitalization Rules of
Code Sec. 263A?
a. Editorial costs incurred by a freelance writer.
b. Mine development and exploration costs.
c. Research and experimental expenditures.
d. Warehousing costs incurred by a manufacturing company with $12
million in annual gross receipts.
Explanation
Choice "d" is correct. Uniform capitalization rules apply to the following:
(1) real or tangible personal property produced by the taxpayer for use
in his or her trade or business; (2) real or tangible personal property
produced by the taxpayer for sale to his or her customers; and (3) real
or tangible personal property acquired by the taxpayer for resale,
provided the taxpayer's annual average gross receipts for the preceding
three years exceeds $10,000,000. Warehousing costs incurred by a
manufacturing company (making inventory for sale to its customers) are
subject to the Uniform Capitalization Rules. Further, they are the only
item on the list that is real or tangible personal property. In this case, the
inventory is not acquired for resale (it is produced by the taxpayer for
sale to his or her customers), so the fact that the annual sales are
$12,000,000 does not matter in this case. The sales could have been
less than $10,000,000 annually, and the Uniform Capitalization Rules
would still have applied.
Choices "a", "c", and "b" are incorrect, based on the above discussion.
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Question CPA-05552
Under the uniform capitalization rules applicable to taxpayers with
property acquired for resale, which of the following costs should be
capitalized with respect to inventory if no exceptions have been met?
Repackaging
costs
Off-site
storage costs
a.
No No
b.
Yes Yes
c.
No Yes
d.
Yes No
Explanation
Choice "b" is correct. Direct material, direct labor, and factory overhead
(applicable indirect costs) are capitalized with respect to inventory under
the uniform capitalization rules for property acquired for resale.
Applicable indirect costs include depreciation and amortization,
insurance, supervisory wages, utilities, spoilage and scrap, design
expenses, repair and maintenance and rental of equipment and facilities
(including offsite storage), some administrative costs, costs of bonus
and other incentive plans, and indirect supplies and other materials
(including repackaging costs).
Choices "d", "c", and "a" are incorrect, per the above discussion.
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Question CPA-05969
Chris, age 5, has $3,000 of interest income and no earned income this
year. Assume the current applicable standard deduction is $950, how
much of Chris' income will be taxed at Chris' parents' maximum tax
rate?
a. $2,050
b. $0
c. $1,100
d. $3,000
Explanation
Choice "c" is correct. The amount of income for a child under 18 that is
taxable at the parents' maximum tax rate is deemed the "kiddie tax." To
calculate the amount that is taxed at the parents' highest rate, take the
child's total interest income ($3,000 in this question) and reduce it by the
child's standard deduction ($950 in this case). The next $950 is then
taxed at the child's rate, and the balance of $1,100 ($3,000 - $950 -
$950 = $1,100) is taxed at the parents' highest rate.
Choice "b" is incorrect. The $0 indicates that nothing is taxed at the
parents' maximum tax rate. Taxing something at the parent's tax rate is
the whole idea of the "kiddie tax."
Choice "a" is incorrect. The $2,050 uses only the $950 standard
deduction, but the next $950 would be taxed at the child's rate.
Choice "d" is incorrect. The $3,000 indicates that the entire $3,000
interest income is taxed at the parents' maximum tax rate.
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Question CPA-05293
Barkley owns a vacation cabin that was rented to unrelated parties for
10 days during the year for $2,500. The cabin was used personally by
Barkley for three months and left vacant for the rest of the year.
Expenses for the cabin were as follows:
Real estate taxes 1,000
Maintenance and utilities 2,000
How much rental income (loss) is included in Barkley's adjusted gross
income?
a. $500
b. $0
c. $(1,500)
d. $(500)
Explanation
RULE: If a vacation residence is rented for less than 15 days per year, it
is treated as a personal residence. The rental income is excluded from
income, and mortgage interest (first or second home) and real estate
taxes are allowed as itemized deductions. Depreciation, utilities, and
repairs are not deductible.
Choice "b" is correct. Applying the RULE above, if a vacation residence
is rented for less than 15 days per year, it is treated as a personal
residence. The rental income ($2,500 in this case) is excluded from
income. A Schedule E is not filed for this property (i.e., no income is
reported, the taxes are reported as itemized deductions, and the
maintenance and utilities are not deductible), so the effect on AGI is
zero.
Choice "a" is incorrect. This assumes that the property taxes are
reported as itemized deductions but that the rental income ($2,500) less
the maintenance and utilities ($2,000) are reported net on Schedule E.
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Per the above RULE, the rental income is excluded from income, and
the maintenance and utilities are not deductible.
Choice "d" is incorrect. This assumes that all of the items shown are
reported net on the Schedule E-$2,500 - $1,000 - $2,000 = ($500). Per
the above RULE, the rental income is excluded from income, the
maintenance and utilities are not deductible, and the property taxes are
reported on Schedule A as an itemized deduction.
Choice "c" is incorrect, per the above RULE and discussion.
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Question CPA-02141
In a tax year where the taxpayer pays qualified education expenses,
interest income on the redemption of qualified U.S. 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.
Explanation
Choice "c" is correct. Both I and II are true per the following rule.
Rule: Qualified higher education expenses are tuition and fees required
for the enrollment or attendance of the taxpayer, the taxpayer's spouse,
or any dependent for whom the taxpayer is allowed a dependency
exemption, at an eligible educational institution.
The expenses otherwise taken into account must be reduced by the
total amounts received for excludable qualified scholarships, certain
educational assistance allowances, and other tax-exempt payments
(other than gifts, bequests, devises, or inheritances).
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Question CPA-06013
Kant, a cash-basis individual, owns and operates an office building.
Kant received the following payments during the current year:
Current rents 30,000
Advance rents for the next year 10,000
Security deposits held in a segregated account 5,000
Lease cancellation payments 15,000
What amount is included in gross income?
a. $60,000
b. $55,000
c. $30,000
d. $40,000
Explanation
Rule: The basic formula for determination of net rental income or loss
follows:
Gross rental income
Prepaid rental income
Rent cancellation payments
Improvements in lieu of rent
(Rental expenses)
Net rental income (loss)
If security deposits are held separately and not available to be applied
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to last month's rent (as in a segregated account), they are a liability of
the taxpayer and not included in income in the year received.
Choice "b" is correct. The calculation of gross income for the year
follows:
Current rents 30,000
Advance rents for the next year 10,000
Security deposits held in a segregated account !
Lease cancellation payments 15,000
Gross income from the rental activity 55,000
Choice "c" is incorrect. This answer option incorrectly includes only the
current rents as part of gross income, when advance rents and lease
cancellation payments also must be included.
Choice "d" is incorrect. This answer option incorrectly includes only the
current rents and the advance rents as part of gross income, when
lease cancellation payments also must be included.
Choice "a" is incorrect. This answer option incorrectly includes all of the
payments collected for the rental activity in the year, when the security
deposits that are held in a segregated account are excluded from gross
income.
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Question CPA-06018
An individual received $50,000 during the current year pursuant to a
divorce decree. A check for $25,000 was identified as annual alimony,
checks totaling $10,000 as annual child support, and a check for
$15,000 as a property settlement. What amount should be included in
the individual's gross income?
a. $25,000
b. $0
c. $40,000
d. $50,000
Explanation
Rules: Payments for the support of a spouse are income to the spouse
receiving the payments and are deductible to arrive at adjusted gross
income by the contributing spouse. Child support is not taxable.
Property settlements are not taxable.
Choice "a" is correct. Only the $25,000 in alimony is included in the
gross income of the receiving spouse.
Choice "d" is incorrect. This answer option incorrectly includes all of the
payments received in the year. The child support ($10,000) and the
property settlement ($15,000) are NOT included in the gross income of
the receiving spouse.
Choice "c" is incorrect. This answer option incorrectly includes the
payments received in the year for alimony and property settlement for
the year [$25,000 + $15,000 = $40,000]. The property settlement
($15,000) is NOT included in the gross income of the receiving spouse.
Choice "b" is incorrect. The amount received for alimony ($25,000) is
included in the gross income of the receiving spouse.
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Question CPA-01806
Which one of the following statements is correct with regard to an
individual taxpayer who has elected to amortize the premium on a bond
that yields taxable interest?
a. The amortization is not treated as a reduction of taxable income.
b. The bond's basis is increased by the amortization.
c. The amortization is treated as an itemized deduction.
d. The bond's basis is reduced by the amortization.
Explanation
Choice "d" is correct. The bond's basis is reduced by the amortization of
the premium.
Choice "c" is incorrect. For bonds acquired after 12/31/87, the
amortization of the premium is an offset to interest income on the bond
rather than a separate interest deduction.
Choice "a" is incorrect. The amortization of the premium will reduce
taxable income.
Choice "b" is incorrect. The bond's basis will be decreased by the
amortization.
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Question CPA-01859
For a cash basis taxpayer, gain or loss on a year-end sale of listed stock
arises on the:
a. Trade date.
b. Date of delivery of stock certificate.
c. Date of receipt of cash proceeds.
d. Settlement date.
Explanation
Choice "a" is correct. Trade date.
Gain or loss on a year-end sale of listed stock arises on the trade date.
Rule: Whether on the cash or accrual method of accounting taxpayers
who sell stock or securities on an established securities market must
recognize gains and losses on the trade date, rather than on the
settlement date.
Choices "d", "c", and "b" are incorrect, per the above rule.
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Question CPA-06515
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income
from an S Corporation in which Lane does not materially participate,
and a $35,000 passive loss from a real estate rental activity in which
Lane materially participated. Lane's modified adjusted gross income
was $165,000. What amount of the real estate rental activity loss was
deductible?
a. $35,000
b. $15,000
c. $0
d. $25,000
Explanation
Rule: Passive activity is any activity in which the taxpayer does not
materially participate. A net passive activity loss generally may not be
deducted against other types of income (e.g., wages, other ordinary or
active income, portfolio income (interest and dividends), or capital
gains). In other words, passive losses may generally only offset passive
income for a tax year-the remaining net loss is generally "suspended"
and carried forward to a year when it may be used to offset passive
income (or when the final disposition of the property occurs). However,
there is an exception (the "mom and pop exception," as we refer to it in
the textbooks) to this general rule. Taxpayers who own more than 10%
of the rental activity, have modified AGI under $100,000, and have
active participation (managing the property qualifies), may deduct up to
$25,000 annually of net passive losses attributable to real estate. There
is a phase-out provision for modified AGI from $100,000 ! $150,000,
and the deduction is completely phased-out for modified AGI in excess
of $150,000.
Choice "b" is correct. Per the above rule, unless an exception exists
(and it does not in this case, as Lane's modified adjusted gross income
is in excess of $150,000), passive losses may only offset passive
income for a tax year (i.e., no "net loss" may exist). In this case, Lane
has a $20,000 net loss from passive activity [$15,000 S Corporation
income (passive, in this case because the facts state Lane does not
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materially participate) minus the $35,000 rental real estate loss]. Thus,
only $15,000 of the passive loss from real estate rental activity may be
used to offset the $15,000 income from the S Corporation. The
remaining $20,000 passive activity loss is carried forward to be used in
future years.
Choice "c" is incorrect. Per the above rule, passive losses may
generally only offset passive income for a tax year. Lane has passive
income of $15,000 in the year; thus, passive loss up to $15,000 may be
deducted from passive income.
Choice "d" is incorrect. This answer option is an attempt to confuse the
candidate into using the "mom and pop" exception, which applies when
taxpayers who actively participate, own more than 10% of the rental
activity, and have modified AGI under $100,000 are able to deduct up to
$25,000 annually of net passive losses attributable to real estate. There
is a phase-out provision for modified AGI from $100,000 ! $150,000,
and the deduction is completely phased-out for modified AGI in excess
of $150,000. In this case, the facts state that Lane's modified adjusted
gross income is $165,000; thus, Lane does not qualify to use the
exception.
Choice "a" is incorrect. This answer option assumes that the full amount
of the rental real estate loss is deductible against the passive income
from the S Corporation, and, thus, against Lane's other taxable income.
As indicated in the rule above, unless an exception applies (it does not
in this case), a net passive activity loss may not be deducted against
other types of income (e.g., wages, other ordinary or active income,
portfolio income (interest and dividends), or capital gains). Thus, the full
$35,000 rental real estate loss is not deductible in the year by Lane.
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Question CPA-06008
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA.
The taxpayer has a 33% effective tax rate and a 35% marginal tax rate.
What is the total tax liability associated with the withdrawal?
a. $13,000
b. $10,500
c. $13,500
d. $10,000
Explanation
Rule: Generally, unless an exception applies, retirement money cannot
be withdrawn until the individual reaches the age of 59 !. If retirement
money (without an exception) is withdrawn before the age of 59 !, the
premature distribution is subject to a 10% penalty tax (in addition to the
applicable regular income tax that applies to all distributions of
traditional IRA money).
Choice "c" is correct. The taxpayer is under the age of 59 !, and the
facts do not indicate that an exception applies; therefore, the taxpayer is
subject to the 10% penalty on the IRA distribution in addition to the
regular income tax. The regular income tax that applies is the marginal
rate (the rate for the next dollar of taxable income). The effective tax
rate is simply the total tax divided by the total taxable income. In this
case, the taxpayer would have to pay the regular tax on the distribution
at the 35% marginal rate PLUS the 10% penalty on early distribution
without an exception. The calculation to arrive at the total tax associated
with the withdrawal follows:
Regular Income Tax 30,000
" 35% 10,500
Penalty Tax 30,000
" 10% 3,000
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Choice "d" is incorrect. This answer option assumes the effective
income tax rate (rounded, assuming 33.33%) applied to the $30,000
distribution. It uses the incorrect tax rate (the marginal rate should be
used) and omits the inclusion of the applicable 10% penalty tax.
[$30,000 ! 33.33% = $10,000]
Choice "b" is incorrect. This answer option includes the $30,000
distribution multiplied by the (proper) marginal tax rate, but it omits the
inclusion of the applicable 10% penalty tax. [$30,000 ! 35% = $10,500]
Choice "a" is incorrect. This answer option assumes the effective
income tax rate (rounded, assuming 33.33%) applied to the $30,000
distribution plus the applicable 10% penalty tax [($30,000 ! 33.33%) +
($30,000 ! 10%) = $13,000]. It uses the incorrect tax rate (the marginal
rate should be used).
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Question CPA-06531
Which of the following should be included when determining adjusted
gross income?
a. Compensation for injuries or sickness.
b. Rental value of parsonages.
c. Alimony received.
d. Tuition scholarship.
Explanation
Rule: IRC Sections 71, 62, and 215 control the taxation of alimony.
Payments for the support of a spouse (alimony) are income to the
spouse receiving the payments and are deductible to arrive at adjusted
gross income (AGI) by the spouse making the payments. To be alimony:
1. Payments must be legally required pursuant to a written divorce
or separation agreement,
2. Payments must be in cash or its equivalent.
3. Payments cannot extend beyond the death of the payee-spouse,
4. Payments cannot be made to members of the same household.
5. Payments must not be designated as anything other than alimony,
and
6. The spouses may not file a joint tax return.
Choice "c" is correct. Alimony received is definitely considered part of
income and of adjusted gross income.
Choice "a" is incorrect. Compensation for injuries or sickness is
excluded from income and thus adjusted gross income.
Choice "b" is incorrect. The rental value of parsonages (furnished by
churches or synagogues) is excluded from the income of a minister and
thus that minister's adjusted gross income.
Choice "d" is incorrect. A scholarship for tuition is excluded from income
and thus adjusted gross income. There are certainly limits or restrictions
such as the student has to be a degree-seeking student and amounts
must actually be spent on tuition, fees, books, and supplies, but, as a
general statement, the amount is excluded.
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Question CPA-06888
In the current year, a taxpayer reports the following items:
Salary
50,000
Income from partnership A, in which the taxpayer
materially participates
20,000
Passive activity loss from partnership B (40,000)
During the year, the taxpayer disposed of the interest in partnership B,
which had a suspended loss carryover of $10,000 from prior years.
What is the taxpayer's adjusted gross income for the current year?
a. $20,000
b. $60,000
c. $70,000
d. $30,000
Explanation
Choice "a" is correct. The $50,000 salary and income from partnership
activity of $20,000 are taxable. Typically, passive activity losses,
whether in the current or prior years, may only be used to offset passive
activity income. The exception to this is in the year the passive activity is
disposed of (sold), if still unused, passive activity losses are fully
deductible in the year of disposal:
Salary 50,000
+ Income from partnership A 20,000
- PAL from partnership B (40,000)
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- Loss carryover from partnership B (10,000)
Adjusted gross income 20,000
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Question CPA-06904
Which of the following costs are subject to the Uniform Capitalization
Rules of Code Sec. 263A for manufactured tangible personal property?
a. Marketing.
b. Off-site storage.
c. Advertising.
d. Research.
Explanation
Choice "b" is correct. Costs required to be capitalized under the uniform
capitalization rules include direct materials, direct labor, and applicable
indirect costs. Applicable indirect costs include utilities, warehousing
costs, repairs, maintenance, indirect labor, rents, storage, depreciation
and amortization, insurance, pension contributions, engineering and
design, repackaging, spoilage and scrap, and administrative supplies.
Choice "c" is incorrect. Costs not required to be capitalized include
selling, advertising, and marketing expenses, certain general and
administrative expenses, research, and officer compensation not
attributed to production services.
Choice "d" is incorrect. Costs not required to be capitalized include
selling, advertising, and marketing expenses, certain general and
administrative expenses, research, and officer compensation not
attributed to production services.
Choice "a" is incorrect. Costs not required to be capitalized include
selling, advertising, and marketing expenses, certain general and
administrative expenses, research, and officer compensation not
attributed to production services.
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Question CPA-04861
Seth Silver had the following items of income during the taxable year:
Interest income from a checking account
1,000
Interest income from a money market account 2,050
Interest income from a municipal bond he purchased during
the current year
250
Interest income from federal bonds he purchased 2 years
ago
750
On his current year tax return, what amount is taxable income?
a. $3,800
b. $3,050
c. $4,050
d. $3,300
Explanation
Choice "a" is correct. Taxable interest includes amounts received from
general investment accounts as well as interest on federal obligations.
Interest received from state and municipal bonds is not taxable.
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Question CPA-04859
Tom and Sharlene had the following items of income and expense
during the taxable year:
Self-Employment Activity
Gross income $35,000
Business license fees 500
Marketing Expenses 2,000
Salary paid to Sharlene 10,000
Tom's wages from his Job 67,000
Interest from money market 1,500
Gain from sale of securities owned for 3 months 15,000
What is Tom & Sharlene's gross income before adjustments?
a. $116,000
b. $106,000
c. $128,500
d. $131,500
Explanation
Choice "a" is correct. Tom & Sharlene's gross income is calculated as
follows:
Net self-employment income 32,500
Tom's wages 67,000
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Interest 1,500
Gain from sale 15,000
Total gross Income 116,000
Note: Sharlene's salary is not included as income as 100% of the net
self-employment activity is taxable to her. Her salary is considered a
draw and is not an allowable business deduction against the gross
income of the self-employment activity.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-04855
Ben Flood, attorney at law, is a sole proprietor and files Schedule C with
his federal Form 1040. Which of the following is not a deductible
expense on Schedule C?
a. $30 business tax payable to the city in which he practices.
b. Salaries paid to the paralegal who works for him.
c. Depreciation on the computer used by his assistant.
d. Health insurance for him and his family.
Explanation
Choice "d" is correct. A rule of thumb is that personal expenses are not
allowed as deductions on the Schedule C. For instance, personal use of
an automobile is considered a personal expense, not a deductible
expense on Schedule C. Schedule C items should be only those related
to the operation of the business itself. Health insurance for himself and
his family is actually an adjustment to arrive at adjusted gross income.
Choice "a" is incorrect. Business tax items are deductible expenses
which should be reported on Schedule C.
Choice "b" is incorrect. Salaries and commissions paid to others as part
of the business are expenses allowed on Schedule C.
Choice "c" is incorrect. Depreciation on business assets is an allowable
deduction.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-04856
Merrill and Joe divorced in June of the current year. As part of the
settlement, Joe received the following:
Alimony $3,000 /per
month
Child support 1,000 /per
month
Lump-sum payment as the property
settlement
125,000
Payments began in July; however, Merrill only paid a total of $15,000
during the year. For the current year, what amount must Joe include in
income on his Form 1040?
a. $140,000
b. $134,000
c. $15,000
d. $9,000
Explanation
Choice "d" is correct. Alimony is an item of gross income; child support
is not. Joe was to receive $3,000 per month in alimony for the remaining
six months of the year (July - December), for a total of $18,000. Child
support is non-taxable as are lump-sum property settlements made
pursuant to a divorce. When total payments received do not equal the
total due, the amounts are first allocated to child support. Thus, of the
$15,000 paid by Merrill, $6,000 is first allocated to child support. The
remaining $9,000 would constitute alimony and would be taxable.
Choice "c" is incorrect. The $15,000 must first be allocated between the
types of payments received. Any amounts are first used to satisfy any
child support requirement, and the remainder would be classified as
alimony.
Choice "b" is incorrect. This answer includes both the $9,000 (discussed
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above) and the property settlement (which is non-taxable).
Choice "a" is incorrect. This answer includes the total amount received,
$15,000 payments (child support and alimony) and the property
settlement. Lump-sum property settlements are not taxable to the
recipient in a divorce.
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Becker Professional Education Registered to: Dominique DAntonio
Question CPA-04857
Mr. and Mrs. Williams decided during the tax year to purchase their first
new home. The fair market value of the home was $275,000, and a 20%
down payment was required to secure a mortgage in the amount of
$220,000 at 5% for 30 years. The Williams' decided to utilize $10,000
that was kept in an Individual Retirement Account owned by Mrs.
Williams. This amount was withdrawn on June 12 and used to fund the
down payment on July 1. These amounts had been previously deducted
as an adjustment by her on an individual tax return in the year of
contribution. The remaining $12,000 for the down payment was drawn
from a savings account. How much of the distribution from the Individual
Retirement Account is subject to the premature distribution penalty tax,
and how much must be included in the Williams' joint tax return in the
year of distribution as gross income?
Penalty Tax Gross Income
a.
$10,000 $0
b.
$10,000 $10,000
c.
$0 $0
d.
$0 $10,000
Explanation
Choice "d" is correct. Generally, a premature distribution (prior to
retirement or other allowable age) from an individual retirement account
is subject to a 10% penalty tax. Certain exceptions to this tax are
available and are contained in the mnemonic "HIM DEAD."
Home buyer (1st time) $10,000 max if used toward first home
Insurance (medical)
Medical expenses in excess of 10% of AGI (or 7.5% if 65 or over)
Disability
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Education
And
Death
The amount removed from the IRA qualifies under the "H" exception
above. However, the question states that these amounts had been
previously deducted on Mrs. Williams' individual tax return, thus this is a
distribution from a traditional, deductible IRA. When distributed, funds
held in a traditional, previously deducted IRA are taxable to the recipient
as ordinary income and thus would be included as gross income on the
Williams' joint tax return in the year of distribution.
Choice "c" is incorrect. The distribution would be included in the
Williams' gross income.
Choice "a" is incorrect. The amount qualifies for an exception to the
penalty tax and would be included in the Williams' gross income.
Choice "b" is incorrect. The amount qualifies for an exception to the
premature distribution penalty tax.
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Question CPA-07173
An individual taxpayer reports the following items for the current year:
Ordinary income from partnership A, operating a movie
theater in which the taxpayer materially participates 70,000
Net loss from partnership B, operating an equipment rental
business in which the taxpayer does not materially
participate
(9,000)
Rental income from building rented to a third party 7,000
Short-term capital gain from sale of stock 4,000
What is the taxpayer's adjusted gross income for the year?
a. $72,000
b. $77,000
c. $74,000
d. $70,000
Explanation
Choice "c" is correct. Except in the year in which an individual, estate,
trust, or closely-held C corporation disposes of an entire interest in a
passive activity investment, such taxpayers cannot deduct passive
activity expenses and losses against income and gain attributable to
non-passive activities. A passive activity is (i) any activity in which such
taxpayers do not materially participate and (ii) as a general rule, such
taxpayers' rental real estate investments, regardless of the extent of
such taxpayers' involvement with the rental real estate operations. A
limited exception (the "Mom and Pop Exception") regarding rental real
estate activities is available to individuals, but the facts of this question
do not provide any information which would entitle the taxpayer to the
benefits of this exception.
Hence, the taxpayer can deduct, against the profit from the taxpayer's
$7,000 passive activity rental income from the building rented to a third
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party, only $7,000 of the $9,000 net loss from partnership B which is
operating an equipment rental business in which the taxpayer does not
materially participate.
Computation of adjusted gross income for the year:
Ordinary income from partnership A, operating a movie
theater in which the taxpayer materially participates 70,000
Rental income from building rented to a third party (a
passive activity)
7,000
Net loss from partnership B, operating an equipment rental
business in which the taxpayer does not materially
participate
(per the above rule the taxpayer can deduct only $7,000 of
the $9,000 passive activity loss) (7,000)
Short-term capital gain from sale of stock (fully taxable) 4,000
Adjusted gross income for the year
74,000
Choices "d", "a", and "b" are incorrect per the above rule and per the
above computations.
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Question CPA-07174
The Uniform Capitalization Rules of Code Sec. 263A apply to retailers
whose average gross receipts for the preceding three years exceed
what amount?
a. $1,000,000
b. $10,000,000
c. $2,500,000
d. $5,000,000
Explanation
Choice "b" is correct. The uniform capitalization rules do not apply to
inventory acquired for resale if the taxpayer's average gross receipts for
the preceding three tax years do not exceed $10,000,000.
Choices "a", "c", and "d" are incorrect per the above rule.
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Question CPA-08191
Randolph is a single individual who always claims the standard
deduction. Randolph received the following in the current year:
Wages 22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
A state tax refund from the previous year 425
What is Randolph’s gross income?
a. $32,425
b. $28,425
c. $32,000
d. $22,000
Explanation
Choice "c" is correct. Each item listed here is included in gross income
except for the state tax refund from a prior year. The taxpayer always
claims the standard deduction. This means that the state tax was not
deducted in the year it was paid. Under the tax benefit rule, the refund
of that tax is not taxable.
Wages 22,000
Unemployment compensation 6,000
Pension distribution (100% taxable) 4,000
Total 32,000
Choices "d", "b", and "a" are incorrect per the above rule and per the
above computation.
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Question CPA-08192
Johnson worked for ABC Co. and earned a salary of $100,000. Johnson
also received, as a fringe benefit, group term-life insurance at twice
Johnson's salary. The annual IRS-established uniform cost of insurance
is $2.76 per $1,000. What amount must Johnson include in gross
income?
a. $100,414
b. $100,276
c. $100,000
d. $100,552
Explanation
Choice "a" is correct. The first $50,000 of group term life insurance is a
nontaxable fringe benefit. Amounts exceeding this are taxable based on
IRS tables. The total group term life insurance here is $200,000 (twice
the salary of $100,000). The amount exceeding $50,000 is $150,000.
The cost given here is $2.76 per $1,000 of insurance. 150 ! $2.76 =
$414. So the total amount included in gross income is $100,414
($100,000 + $414).
Choice "c" is incorrect. $100,000 does not include any of the taxable
amount of group term life insurance.
Choice "b" is incorrect. $100,276 only includes $100,000 of the group
term life insurance instead of $150,000.
Choice "d" is incorrect. $100,552 includes the entire $200,000 of the
group term life insurance instead of only $150,000.
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Question CPA-08203
Which of the following statements regarding an individual's suspended
passive activity losses is correct?
a. Suspended losses can be carried forward, but not back, until
utilized.
b. Suspended losses must be carried back three years and forward
seven years.
c. A maximum of 50% of the suspended losses can be used each year
when an election is made to forgo the carry-back period.
d. $3,000 of suspended losses can be utilized each year against
portfolio income.
Explanation
Choice "a" is correct. Tax rules allow suspended passive losses to be
carried forward, but not back, until utilized.
Choice "d" is incorrect. This is the rule for capital losses. It does not
apply to passive losses.
Choice "b" is incorrect. This rule is not correct. There is no carryback
allowed for suspended passive losses.
Choice "c" is incorrect. This rule is not correct. There is no carryback
allowed for suspended passive losses.
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Question CPA-08213
Smith has an adjusted gross income (AGI) of $120,000 without taking
into consideration $40,000 of losses from rental real estate activities.
Smith actively participates in the rental real estate activities. What
amount of the rental losses may Smith deduct in determining taxable
income?
a. $0
b. $20,000
c. $15,000
d. $40,000
Explanation
Choice "c" is correct. Generally, none of the passive losses from real
estate are deductible against nonpassive income. However, Smith
actively participates, which means that the "mom and pop" exception of
up to $25,000 will apply. This exception is phased out over AGI of
$100,000 through $150,000. That is 50 cents on the dollar. Smith's AGI
is $120,000. That is $20,000 into the phaseout range. So $10,000 of the
$25,000 is phased out and Smith may deduct $15,000 of the $40,000
passive loss.
Choices "a", "b", and "d" are incorrect per the above explanation.
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Question CPA-08217
A review of Bearing's Year 2 records disclosed the following tax
information:
Wages 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited
partner in the partnership. Bearing had sufficient amounts at risk for the
rental property and the partnership. What is Bearing's Year 2 adjusted
gross income?
a. $54,000
b. $14,000
c. $29,000
d. $19,000
Explanation
Choice "c" is correct. Passive activity losses (PALs) can only be
deducted up to passive activity income. There is no passive activity
income indicated. Therefore, the passive loss from the partnership is not
deductible. $25,000 of the $35,000 rental real estate loss is deductible
under the "mom and pop" exception because Bearing actively
participates in the rental property and the AGI is below the phaseout
amounts. The AGI is calculated as follows:
Wages 18,000
Taxable interest and qualifying dividends 4,000
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Schedule C trucking business net income 32,000
Rental loss from residential property (25,000)
Adjusted gross income (AGI) 29,000
Choices "b", "d", and "a" are incorrect per the above rule and per the
above computation.
Becker Professional Education Registered to: Dominique DAntonio
Question CPA-01421
Joe and Barb are married, but Barb refuses to sign a Year 12 joint
return. On Joe's separate Year 12 return, an exemption may be claimed
for Barb if:
a. Barb was under the age of 19.
b. Barb had no gross income and was not claimed as another person's
dependent in Year 12.
c. Barb was a full-time student for the entire Year 12 school year.
d. Barb attaches a written statement to Joe's income tax return,
agreeing to be claimed as an exemption by Joe for Year 12.
Explanation
Choice "b" is correct. If a married individual files a separate return, a
personal exemption may be claimed for his or her spouse if the spouse
has no gross income and is not claimed as a dependent of another
taxpayer.
Choice "c" is incorrect. The spouse does not have to be a full-time
student.
Choice "d" is incorrect. The wife does not have to attach a written
statement agreeing to be claimed by her husband.
Choice "a" is incorrect. The spouse does not have to be under the age
of 19.