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Sample Exam 2
True/False Indicate whether the sentence or statement is true or false. ____ 1. A cash basis taxpayer who charges an expense on a bank credit card is allowed to claim a deduction at that point in time whereas a cash basis taxpayer who charges an expense on a department store credit card is not allowed to claim a deduction until payment is made. 2. The cost of legal advice associated with the preparation of an individual’s Federal tax return is not deductible because it is a personal expense. 3. Legal expenses incurred in connection with rental property are deductions from AGI. 4. The ordinary and necessary expenses for operating an illegal gambling operation (excluding such items as fines, bribes to public officials, illegal kickbacks, and other illegal payments) are deductible. 5. Hobby activity expenses are deductible from AGI to the extent of hobby income. Such expenses not in excess of hobby income are not subject to the 2% of AGI floor. 6. Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he cannot deduct them but his daughter can. 7. A bad debt deduction can result from a purchased debt instrument. 8. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is not important. 9. A loss is not allowed for securities that become partially worthless until they are sold.
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____ 10. A loss resulting from an accident to an automobile held for personal use is a casualty loss. ____ 11. The amount of the loss for property that is completely destroyed is always the fair market value of the property prior to the destruction. ____ 12. Depreciation expenses on buildings used in a research activity never qualify as research and experimental expenditures. ____ 13. An election to expense, rather than capitalize, research and experimental expenditures can be made each year. ____ 14. Residential rental real estate placed in service after May 12, 1993, has a cost recovery period of 39 years. ____ 15. The basis of property for cost recovery is reduced by the § 179 amount that is disallowed because of the business income limitation. ____ 16. All listed property is subject to the substantiation requirements of § 274. ____ 17. Section 197 intangibles can be amortized over their actual useful life if that life is less than 15 years. ____ 18. Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was not away from home. ____ 19. A taxpayer lives and works in Providence. He travels to Barcelona for a one-week business seminar. After the seminar, he spends three days touring Spain. All of his air fare is deductible. 1
____ 20. Dominique quit her job with an accounting firm in Akron to set up her own practice in Nashville. Her moving expenses can be deductible even though she changed employment status (i.e., went from employee to self-employed). ____ 21. Mallard Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment. ____ 22. Unlike self-employed taxpayers, the unreimbursed travel expenses of employees are subject to the 2%-of-AGI floor. ____ 23. The § 222 deduction for qualified tuition and related expenses is subject to the 2%-of-AGI floor on employee expenses. ____ 24. Bert resides in a nursing home primarily for medical reasons rather than personal reasons. Costs for meals and lodging can be included in determining his deductible medical expenses. ____ 25. Mindy paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee qualifies as a deductible medical expense. ____ 26. In 2006, Rhonda received an insurance reimbursement for medical expenses incurred in 2005. She is not required to include the reimbursement in gross income in 2006 if she claimed the standard deduction in 2005. ____ 27. Felix sells his personal residence to Julio on July 1, 2005. He had paid $9,000 in real property taxes on March 1, 2005, the due date for property taxes for 2005. Felix may deduct the portion of the taxes he paid for the period the property was owned by Julio. ____ 28. Grace’s sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction. ____ 29. Angie, whose MAGI is $80,000, paid interest on a qualified education loan in 2005. Angie is single. She may deduct the interest as a deduction for AGI. ____ 30. Carolyn mailed a check for $1,000 to a qualified charitable organization on December 31, 2005. The $1,000 contribution is not deductible on Carolyn’s 2005 tax return because the charity does not receive the check until 2006. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 31. Larry, a calendar year cash basis taxpayer, has the following transactions: Salary from job Alimony paid to ex-wife Medical expenses Based on this information, Larry has: a. AGI of $46,500. b. AGI of $51,000. c. AGI of $60,000. d. Medical expense deduction of $0. e. None of the above. 2 $60,000 9,000 4,500
800. ____ 35. What is the amount of the deduction for salary expense? a.000 in 2005 and $20. pays salaries of $175. c. and c. None of the above is correct.000 in 2006. $35. Janice is single.000 200 ID: A Her AGI is: a. Which of the following is correct? a. If Silver uses the cash method. ____ 34. Inc. b. and c.. the first year of operations. If Silver uses the accrual method.500. Alimony. Qualified moving expenses. $32.000. ____ 33. Which of the following are deductions for AGI? a. Some deductions are classified as deductions for AGI and some are classified as deductions from AGI. $21. 3 . b. None of the above is correct. e. employees have earned salaries of $20. Reimbursed employee business expenses. $195. d. All of the above are correct. All deductions are classified as deductions for AGI. $0 in 2005 and $195. $175. e. $175. If Silver uses the cash method.300. d. had gross income of $38.000 in 2006.000 1. d.. $37. All deductions are classified as deductions from AGI.000 4. b.. During 2005. c.800. If Silver uses the accrual method. b. Silver. Only a.000 in 2005 and $0 in 2006. $28. c. e.000. a.000 which are not paid by Silver until early in 2006.Name: ________________________ ____ 32. e. and incurred the following expenses: Charitable contribution Taxes and interest on home Legal fees incurred in a tax dispute Medical expenses Penalty on early withdrawal of savings $2.000 in 2005 and $0 in 2006.500 9. b. d. At the end of the year. c.800.
a real estate broker.000. $60. b. If the business is acquired. b. she spends $14. ____ 38. the expenses incurred are deductible if the project is abandoned. b. c. $69. Expense $23. Gerald owns an illegal casino.000 5. Angela. 4 .000 500 How much net income must Angela report from this business? a. c.000. During 2005.000 4. None of the above. a calendar year cash basis taxpayer. Capitalize $14. Iris should: a. Which of the following statements is correct in connection with the investigation of a business? a.Name: ________________________ ____ 36. c. and wants to expand to other states.500. Regardless of whether the taxpayer is already engaged in the trade or business. b. Which of the following expenses incurred in connection with this activity are deductible currently? a. the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business. but not the outlets in Georgia. c. had the following income and expenses in her business: Commissions income Expenses: Commissions paid to non-brokers for referrals (illegal under state law and subject to criminal penalties) Commissions paid to other real estate brokers for referrals (not illegal under state law) Travel and transportation Supplies Office and phone Parking tickets $100. That business must be related to the taxpayer’s present business for any expense ever to be deductible.000 and not deduct $9.000 for 2005.000. e. $49. e.500. owns and operates several TV rental outlets in Florida. Illegal kickbacks to officials to stay in business.000 for 2005 and capitalize $14. d. the expenses must be capitalized and amortized. d. Fines.000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations.000. ____ 39. As to these expenses. $48. Capitalize $23.000 to investigate TV rental stores in South Carolina and $9. ____ 37. e. Rent. Expense $9.000.000 ID: A 20.000. Iris. If the taxpayer is not already engaged in the trade or business. $68. None of the above. Purchase of a building. None of the above. d. d. e.000 10.000 12.
000.000. Disallowed loss to Lance of $2. for $24. Harry sold stock (cost of $8. Disallowed loss to James of $2. e.000 short-term capital loss. What is the tax effect of these transactions? a. ____ 42.000. Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1.000 short-term capital loss. During 2005. Lance sold stock with a cost basis of $26. None of the above.000 ordinary loss and $5. d. ____ 41. James sold the same stock through his broker for $27.000 long-term capital loss and $6. Bill also had an $8. Florine sold the same stock to a friend for $8.000. $4. Neither Harry nor Florine has a recognized gain or loss. All of the above. On January 3. c. b. gain to Lance of $1.000 short-term capital loss. ____ 44. d. Expenses paid for medical care of a dependent are deductible by the payor. Five months later. Disallowed loss to Lance of $2.000.000. e. gain to James of $3. James. c. What is the proper treatment in 2005 for these transactions? a. c.000 long-term capital gain. gain to James of $1. a $9.000. Deductible loss to Lance of $2. A taxpayer can deduct interest paid on a dependent’s debt. The relationship of profits earned to losses incurred. $8.000. The time and effort expended. b. 2005. the stock became worthless. e. $4. On February 20. How should Bill treat these items on his 2005 tax return? a. 5 .000 short-term capital loss.000 short-term capital loss.000 to his brother.000. c. Harry has a recognized loss of $1. None of the above. d. Which of the following is correct? a. 2005. d. b. 2004.000 long-term capital loss and $3. Florine has a recognized gain of $1. None of the above. gain to James of $3. the fair market value of the stock on the date of sale.200. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a.200. In January. $8.000 loss on a nonbusiness bad debt.000 long-term capital loss and $9. On May 1.000) to his sister Florine for its fair market value of $7.000 ordinary loss and $3. All of the above are relevant factors.000. The expertise of the taxpayers or their advisers.000. Whether the activity is enjoyed by the taxpayer. and a $5. e. $8.000. c. Florine has a recognized gain of $200. e. b.000. 2005.Name: ________________________ ID: A ____ 40. A taxpayer generally can claim a deduction for payment of an obligation of a dependent. b. On July 30. d. ____ 43.000 loss on § 1244 small business stock purchased two years ago.
000.Name: ________________________ ____ 45. $31.000 AGI for the year. Gain of $30. $37.000. $23. Fair Market Value Before After $ 700 $300 2.000.000. who is single. None of the above.000.000. had the following items for the current year: Salary of $90.000 Assuming that Ned and Mary file a joint return. $26.000. d.000 17. d. determine their taxable income for the current year.400.600.000 on the sale of § 1244 stock acquired three years earlier.000 -0900 -0Insurance Recovery $100 500 200 Asset A B C Adjusted Basis $ 500 3. $1. 6 . The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year. a. Loss of $75. $1. e. $600. a. c. None of the above. $38. During the current year. d. Rick had the following insured personal casualty losses (arising from one casualty). e.000 10. $47. $42. ____ 46. c. Worthless stock of $7. ID: A Determine John’s AGI for the current year. John. b. c.000 700 Rick’s casualty loss deduction is: a. Ned and Mary had the following items: Salary Personal use casualty gain Personal use casualty loss (after $100 floor) Other itemized deductions $40.000 on the sale of § 1244 stock acquired two years earlier. Rick also had $18. b. e. $27.600. During the year. ____ 47.800.000 4. None of the above. $400.000. b.
360.760 Cost Recovery Allowable $ 8. a deduction is allowed for the consumption of the cost of timber through: a. ____ 50. e.000 9. e. $3. Tab converted a machine to rental property. Depletion.000.000. $3.750. She did not elect to expense any of the asset under § 179.400. ____ 49. e. d. c.000 to be used in her business.000. d.000. $2. $14. $11. c.800 7.226. Determine the cost recovery deduction for 2008. During the year. b.750.000 12. None of the above. The machine is still encumbered by a $50.000. None of the above. Tara purchased a machine for $40. $9. $90. The fair market value of the barn before the fire was $75. On June 1 of the current year. d.240.Name: ________________________ ID: A ____ 48. at a cost of $100. $14. b.750. Cost recovery. What is the basis of the machine for cost recovery? a. For tax purposes. The barn was insured for 95% of its fair market value. ____ 51.000 (before considering the casualty). $5.600 5. e. b. b. c. $140.480. $120.000 mortgage. None of the above. a. Five years ago Tab purchased the machine for $120.650. Determine the amount of loss she can deduct on her tax return for the current year. All of the above.000. Alma has adjusted gross income for the year of $40. a. b.000. how much gain should she recognize? a. None of the above. None of the above. $3. and Alma recovered this amount under the insurance policy.680 Year 1 Year 2 Year 3 If Tara sells the machine after three years for $15. ____ 52. nor did she elect straight-line cost recovery. The adjusted basis of the barn was $90. 2008. e. $18. one of her barns was completely destroyed by fire. Hazel sold the asset on January 20. Alma is in the business of dairy farming. c.000. $11. d.480. c. 7 . Hazel purchased a new business asset (five-year property) on March 10.000. The cost recovery allowed and allowable for the three years the machine was used are as follows: Cost Recovery Allowed $16. the machine was worth $90.000. Amortization. At the time of the conversion. 2005. d.760. $6. $70.520.
000.360.000. 1988.000.000 on April 20.000. $40. for $1.025. a. $26. $5. On July 10. c. d. e. e. d. 2005. b. $19.500.360. d. $26.000. c. $36.362.500. $158. James places in service a new automobile that cost $21. 8 . e. None of the above. $5. b. Determine the cost recovery deduction for the year of the sale.352. $16.400. d. c. On June 1. Determine Ariff’s maximum deduction for 2005. She sells the factory building on February 2. $4. assuming George does not elect § 179 and the maximum cost recovery deduction is taken for regular income tax purposes. b. a. assuming Ariff’s § 179 business income is $110.212.000. $3. The SUV is used 100% for business. b. 2005.000 and weighed 6. 1993. None of the above. for $5.458. a. None of the above. ____ 55. ____ 56. Diane purchased a factory building on November 15. c. George purchases new office furniture (seven-year class property) at a cost of $50. b.750.400. $35. None of the above.750.Name: ________________________ ID: A ____ 53. ____ 57. $331.) Determine the cost recovery deduction for 2006. c. $32. $2.100. None of the above.500.850. e. e. $3.300 pounds. 2005.355. $45. 2005. The car is used 70% for business and 30% for personal use. $2. a. Carlos purchased an apartment building on November 16. ____ 54. d. $7. Determine George’s cost recovery deduction for 2005 for alternative minimum tax purposes. a.900.844. (Assume this percentage is maintained for the life of the car.660. Determine the cost recovery for 2005. Ariff places in service a new sports utility vehicle that cost $60. $6.
None of the above.800. deductible expenses are: a. Deduction for and deduction from AGI of $0.000. if any. His expenses for the trip were (meals and lodging reflect only the business portion): Air fare Lodging Meals $3. None of the above. During the year. e.000 and deduction from AGI of $600. Disregarding the 2%-of-AGI limitation.Name: ________________________ ID: A ____ 58. c. Which of the following expenses. During 2005. Preceding a five-day business meeting. he spent five days vacationing at a dude ranch. and $200 (transportation to and from campus).600. ____ 60. During the year. c. d. ____ 59. Excluding the dude ranch costs.900 and deduction from AGI of $700. c. Contribution to a Roth IRA.900 (tuition). her yearly AGI approximates $50. Carolyn is single and has a college degree in finance. $3. Taxpayer just graduated from college. Costs involved in maintaining an office in the home by a self-employed insurance adjuster. Job hunting expenses of a fishing guide to become an insurance salesman. $1. Germany.300. deductible expenses are: a.800 600 500 300 Presuming no reimbursement. She is employed as a loan officer at a bank. $300 (books). $2. d. $4. Taxpayer’s wife also uses the office as a meeting place for her bridge club. None of the above.900. Deduction for AGI of $4. e. ____ 61. qualify as deductible? a. 4 days business.000 800 1.100 and deduction from AGI of $500. 9 . $1. on business. d. she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3.200. Deduction for AGI of $4. b.800. His time was spent as follows: 2 days travel.300. Irv travels from Philadelphia to Berlin. Hugh went from Cleveland to Fairbanks on business. his expenses for the trip are: Air fare Lodging Meals Entertainment $1. $3. Cost of moving to first job location. None of the above. b. $200 (other school supplies).050. b. Deduction for AGI of $3. e. c. Carolyn has a: a. and 4 days personal. as to the MBA program.000 Presuming no reimbursement. e. $3. d. b. $3.
____ 63. Charles’s medical insurance policy does not cover them.000. b. $7. d. The increase in the value of the residence as a result of the room addition was determined to be $12. b. What is Charles’s maximum allowable medical expense deduction for 2005? a.100. a.290. $10. Larry and Beth are married and together have AGI of $80.000. and $1. b.000 to construct an entrance ramp to his home and $7. $15.750 200 740 John and Carol would qualify as Charles’s dependents except that they file a joint return. None of the above.100.590.000 and paid the following medical expenses: Medical insurance premiums Doctor and dentist bills for John and Carol (Charles’s parents) Doctor and dentist bills for Charles Prescribed medicines for Charles Nonprescribed insulin for Charles $3.000.100 for hospitalization.790.600 7. they paid the following amounts for medical care: $7. c.700 for prescribed medicine and drugs.000 for a high deductible health insurance policy and they contribute $2. None of the above. How much of these expenditures can Lonnie deduct as a medical expense? a. Lonnie’s AGI for the year was $80.Name: ________________________ ID: A ____ 62.000. $10. $10. d. $4.500 7.100. Lonnie developed severe arthritis and was unable to climb the stairs to reach his second-floor bedroom.300 of his own expenses with his insurance company in November 2005 and received the reimbursement in January 2006. Charles filed a claim for $4. During the year. d. he had AGI of $125. $22.000. For calendar year 2005. $16. They expect to receive an additional reimbursement of $1. $12.000.000.000 to widen the hallways to accommodate his wheelchair. c. They pay $3. e. $19. 10 . His physician advised him to add a first-floor bedroom to his home. In November 2005. They have two dependents and file a joint return. Lonnie paid the contractor $5.500 in doctor and dentist bills and hospital expenses.100.000 in January 2006. e. None of the above. $6. The cost of constructing the room was $28. Charles is employed as a consultant. In addition. Determine the maximum deduction allowable for medical expenses in 2005. $40. e.415. they received an insurance reimbursement of $2.400 to a qualified Health Savings Account.000 in 2005. c. ____ 64.
$5.200. $5. d. Sam. $7. he files his state return for 2005 claiming a refund of $900. who uses the cash method of accounting. e. During 2005. $4.550. Scotty did not itemize deductions in 2004. b.100. a self-employed individual.600.400 900 1. his withholdings for state income tax purposes amount to $4.880.900 1.950. b.450. ____ 68. c. On April 14. 2005) State motor vehicle tax (based on the value of the personal use automobile) $5. he files his state return for 2004.Name: ________________________ ID: A ____ 65. d. paying an additional $800 in state income taxes. Dirk receives the refund on August 3. 11 . paid the following amounts: Real estate tax on residence State income tax Real estate taxes on land in Canada (held as an investment) State sales taxes State occupational license fee Personal property tax on value of his automobile What amount can Sam claim as taxes in itemizing deductions from AGI? a. $6. c. $3. c.600. lives in a state that imposes an income tax (including withholding from wages). None of the above. d. under an agreement in which the real estate taxes were not prorated between the buyer and the seller. During the current year. $6. d. Scotty itemized deductions in 2005. c. b. $8. Your friend Scotty informs you that he received a “tax-free” reimbursement in 2005 of some medical expenses he paid in 2004. e.250. how much may Dirk claim as a deduction for state income taxes on his Federal income tax return for calendar year 2005 (filed in April 2006)? a. None of the above.888 220 $3. $4. 2005. Dirk. If he itemizes deductions. Scotty did not itemize deductions in 2005. ____ 67.950 250 200 Tara sold her personal residence on May 30. $6. ____ 66. e. On April 13. $6. Scotty itemized deductions in 2005 but not in 2004. Scotty itemized deductions in 2004. b.888. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income? a.350. 2005.108.550. 2006. What amount qualifies as a deduction from AGI for 2005 for Tara? a. $2. e. None of the above. During 2005. 2006. Tara paid the following taxes: Taxes on residence (for the period from March 1 through August 31.
None of the above. volunteered to travel to New Mexico in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). What is the amount that she must include in taxable income from her operation? Income Expenses: Rent Utilities Bribes to police Medical expense Legal fees Depreciation Illegal kickbacks $200. $200. she incurred the following costs in connection with the trip: $400 for transportation.000 Cash donation to Ohio State University Unimproved land to the city of Columbus.300.405.000. e.000 if the reduced deduction election is made. c. What is Jennifer’s deduction associated with this charitable activity? a. and $210 for meals. Kitty runs a brothel (illegal under state law) and has the following items of income and expense.000 15.000 14. a calendar year taxpayer. the city of Columbus sold the land for $240.500 as a charitable contribution. d. Jennifer’s AGI is $400.000 10.000 20. $1.000 Fair Market Value $ 40. $84. b. She was in New Mexico for three weeks. d. ____ 70. e. Problem 71. $3. $400. Jennifer.000 80. In addition.000 if the reduced deduction election is not made. c. Ohio The land had been held as an investment and was acquired 3 years ago.000 if the reduced deduction election is not made.010. $160. Shortly after receipt. $900 for lodging. $1.000 5. She normally makes $500 per week as a carpenter’s assistant and plans to deduct $1.000 8.000 12 . The allowable charitable contribution deduction is: a.000 2.Name: ________________________ ID: A ____ 69.000. $112. Jennifer. b. $1.000 240. who lives in New Jersey. made the following donations to qualified charitable organizations in 2005: Basis $40.000 if the reduced deduction election is not made.510.
It is used 100% of the time for business and it is the only business asset acquired by Norm during 2005. for $50. 74. The SUV has a gross vehicle weight of 6.000. Inc. what are Ethan’s: a. During 2005. Russell and Meg are married and file a joint return. $250.000. The stock of Eagle. As to these expenses. Ethan is single and his annual AGI is less than $65. Disregarding percentage limitations.Name: ________________________ ID: A 72. and meals while on campus.000. During the current year. Ethan is employed as an assistant manager in the menswear division of a national chain of department stores. for $100. They claim Meg’s father (Dennis) and Meg’s son (Joe) as dependents. because he felt living with Russell and Meg was too much of a burden for them.000 3. $600. an assisted living home. b.000. b.500 24. He is a recent college graduate with a degree in marketing.400 Dennis moved to Riverview Manor. is owned as follows: Tom Tom’s uncle Tom’s daughter Tom’s sister Tom’s spouse Tom’s cousin Tom’s attorney. Compute the maximum deduction with respect to the SUV for 2005. His adjusted basis for these assets is $125. how much qualifies as a medical expense on Russell and Meg’s tax return for: a. $300. 2005.200. they paid the following expenses: Tuition to send Joe to a special school for children with physical and learning disabilities Medical equipment for Joe Room and board at Riverview Manor paid on behalf of Dennis Doctor and hospital charges for Dennis’s arthritis $14. Inc. Joe? Dennis? 13 . he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition. books and computer supplies. transportation expense to and from the university. $4.000 4.200 lbs. Deductions for AGI? Deductions from AGI? 75. 73. unrelated 25% 20% 10% 15% 15% 5% 10% Tom sells land and a building to Eagle. Calculate Tom’s realized and recognized loss associated with the sale. Norm purchases a new sports utility vehicle (SUV) on October 12.
Taxpayer is provided with tools and a place to work j. In April 2005.) a. Lodging while in route e. Paralegal obtains a law degree l. 81.800. and she pays estimated state income tax of $700. Transportation must be allocated if taxpayer spends two weeks on business and one week sightseeing k. 87. How will the $1. Must involve the same trade or business b. lives in a state that imposes an income tax. Must be for the convenience of the employer c. how will the refund of $1. Payment for services rendered based on tasks performed h. 84.Name: ________________________ ID: A 76. Meals while in route d. 83. how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2005 (filed in April 2006)? Assuming Wilma itemized deductions in 2005. Wilma receives the refund in August 2006. she files her state income tax return for 2005 claiming a refund of $1. 80. Characteristic of a taxpayer who has the status of an employee Characteristic of a taxpayer who is self-employed Operating cost method of determining auto expense Automatic mileage method Deductible moving expense Nondeductible moving expense Mixed (both business and pleasure) foreign travel Education expense that is not deductible to maintain or improve existing skills Tax home has not changed Deductible job-hunting expenses Deduction by an employee of unreimbursed office-in-the-home expenses 14 . (Note: Choice L may be used more than once.800 refund applied toward her 2006 state income tax liability.400. who uses the cash method of accounting. 78. During 2005. c. how will the refund of $1. Excludes use of MACRS depreciation i. Out-of-town job assignment is temporary f. 85.000 in state income taxes.800 received in 2006 be treated for Federal income tax purposes? b. her withholdings for state income tax purposes amount to $7. 79.800 that she received in 2006 be treated for Federal income tax purposes? Assume that Wilma itemized deductions in 2005 and that she elects to have the $1. Can include actual cost of gasoline g. d. In April 2006. a.800 be treated for Federal income tax purposes? Assuming Wilma did not itemize deductions in 2005. Correct match not provided ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ 77. 82. 86. she files her state income tax return for 2004 and pays an additional $1. Assuming Wilma itemized deductions in 2005. Wilma. Matching Match the statements that relate to each other.
person who is employed overseas) returns home to retire j. Does not have to be job related f.S. 10) plans Cutback adjustment applies Cutback adjustment does not apply Deemed substantiation Job hunting expenses Qualified tuition and related expenses (under § 222) Club dues deductible Club dues not deductible ID: A 15 . Expatriate (U. Taxpayer moves to a new residence 55 miles closer to his present job k. Correct match not provided ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ 89. Safety goggles purchased by an employed carpenter Match the statements that relate to each other.R. 98. 95. 94. Company picnic sponsored by employer d. Annual Rotary Club membership fee l. Cover charge paid to entertain client at a night club b. Not deductible unless taxpayer takes the new job c. Contribution to plan is not deductible h. 92. Contribution to plan is deductible i. Can include cost of car insurance and automobile club dues g. 100. 90. 96. 99.) a. 91. (Note: Choice L may be used more than once. 97. 93. Operating cost method of determining car expense Distance test (for moving expenses) not satisfied Time test (for moving expenses) waived Roth IRAs Keogh (H.Name: ________________________ ____ 88. Use of Federal per diem allowance to substantiate meals while in travel status e.
6-9 2. 7-8 11. 6-13 4. 6-13 | p. PTS: 1 REF: p. or the decline in fair market value resulting from the casualty. ANS: F A taxpayer cannot deduct another taxpayer’s obligation. PTS: 1 REF: p. ANS: T PTS: 1 REF: p. ANS: T The use of the funds by the debtor is of no consequence in making the determination. ANS: T At the time a cash basis taxpayer charges the expense on his or her bank credit card. PTS: 1 REF: p. 7-5 9.ID: A Sample Exam 2 Answer Section TRUE/FALSE 1. Example 22 PTS: 1 6. The determination is made at the creditor level. This is not the case where the charge is made on a department store credit card. 7-6 10. 7-3 8. PTS: 1 REF: p. PTS: 1 REF: p. Thus. 7-11 1 . 6-14 5. For personal use property. 6-13 3. His daughter is not eligible for a deduction since she did not pay them. Ralph cannot deduct his daughter’s property taxes. PTS: 1 REF: p. ANS: T PTS: 1 REF: p. ANS: F Such expenses are an itemized deduction and are subject to the 2% floor on miscellaneous itemized deductions except for the property tax and mortgage interest. the amount of the loss is the lesser of the adjusted basis of the property. ANS: F The amount of the loss for business use property or property held for the production of income is the adjusted basis of the property. ANS: F This is a deduction for AGI. ANS: T PTS: 1 REF: p. ANS: F This deduction is expressly allowed under § 212. ANS: T PTS: 1 REF: p. the taxpayer is deemed simultaneously to have borrowed money from the credit card issuer and constructively paid the expense. 6-25 7.
8-17 17. ANS: T The absence must be a period substantially longer than an ordinary day’s work and must require rest. 9-27 | p. a taxpayer must continue to expense these items in subsequent years. PTS: 1 REF: p. PTS: 1 REF: p. PTS: 1 REF: p. ANS: F Once an election has been made to expense research and experimental expenditures. ANS: T For self-employed taxpayers. ANS: F The taxpayer does not meet either the seven-days-or-less or the less-than-25%-personal-time tests. travel expenses are deductions for adjusted gross income. ANS: F Residential rental real estate has a cost recovery period of 27. 9-8 19. PTS: 1 REF: p. 9-13 PTS: 1 22. ANS: T A change in employment status is immaterial as long as all other requirements are met for the moving expense deduction.5 years. ANS: T PTS: 1 REF: p. The 2%-of-AGI floor applies only to certain deductions from AGI. PTS: 1 21. PTS: 1 REF: p. PTS: 1 REF: p. 8-12 16. 8-9 15.ID: A 12. 9-7 | p. 9-28 2 . PTS: 1 REF: p. 8-20 18. Example 22 PTS: 1 20. ANS: F Depreciation on a building used for research can be a research and experimental expenditure. such as unreimbursed employee expenses. 7-17 14. ANS: T The basis is reduced by the § 179 amount before the business income ceiling is applied. 7-16 13. ANS: T Example 32 REF: p. ANS: F Section 197 intangibles must be amortized over the statutory 15-year amortization period regardless of the actual life of the intangible asset.
10-13 29. PTS: 1 REF: p. ANS: F The mailing date is treated as the date of the charitable contribution. ANS: T The reimbursement is included in gross income only to the extent the taxpayer derived a tax benefit from deducting the expense in the previous year. ANS: F The real property taxes paid by the seller (Felix) but apportioned to the buyer (Julio) reduce the amount Felix realized from the sale of the residence. Example 12 PTS: 1 27. Felix may not deduct the portion of the taxes related to the period Julio owned the property. ANS: F The § 222 amount is a deduction for AGI. 10-13 28.000. along with the costs for medical or nursing care. ANS: F State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer’s sole source of income is from a business. the cost of meals and lodging can be included in medical expenses. ANS: F The appraisal fee does not qualify as a medical expense. she received no tax benefit. Because Rhonda did not itemize in 2005.ID: A 23. Example 19 PTS: 1 REF: p. PTS: 1 REF: p. PTS: 1 REF: p. PTS: 1 REF: p. ANS: F The deduction is phased out when MAGI reaches $65. 9-16 24. 10-22 3 . ANS: T If the primary reason for being in a nursing home is medical. but it qualifies as a deduction under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction. PTS: 1 REF: p. 10-14 30. 10-5 26. Example 4 PTS: 1 REF: p. 10-4 25.
ANS: C PTS: 1 REF: p. ANS: B Larry’s AGI is calculated as follows: Salary Alimony paid AGI Larry’s medical expense deduction is $675 [$4.800 PTS: 1 REF: p. 6-4 32.000 (200) $37. 6-13 | p. ANS: A All usual expenses of operating an illegal business are deductible. 6-26 38.000 (31. 6-3 | p.000 5. Income Expenses: Commissions to other brokers Travel and transportation Supplies Office and phone Net income Examples 14 and 16 PTS: 1 37.000 . PTS: 1 REF: p. ANS: D PTS: 1 REF: p.5%($51. 6-3 to 6-5 35. all of the investigation expenses can be deducted.000) $51. 6-3 | p.000)].000 (9. 6-4 33.000 12.000 $10. ANS: E The illegal commissions and the parking tickets are in violation of public policy and are not deductible.500 – 7. 6-3 to 6-5 34.000 4. Example 18 PTS: 1 REF: p. 6-10 36. The building must be capitalized and depreciated. ANS: E Janice’s AGI is calculated as follows: Gross income Deductions for AGI: Penalty on early withdrawal of savings AGI $60.000 $38. ANS: E PTS: 1 REF: p.ID: A MULTIPLE CHOICE 31. the illegal expenses are not. ANS: B Since Iris owns and operates TV rental outlets. 6-9 | p. 6-15 4 $100. Example 2 PTS: 1 REF: p.000) $ 69.
000 – $50.000) by Lance’s disallowed loss of $2. ANS: D Lance’s realized loss of $2.000 5 . ANS: B Salary § 1244 ordinary loss Long-term capital gain Long-term capital loss Excess § 1244 loss ($75.000) $90.000) ($5.000) $30.000 $25. ANS: C Examples 35 and 36 PTS: 1 44.000) ($3. 19 PTS: 1 40. James may reduce his realized gain of $3.000) is disallowed. 7-6 to 7-8 $5.000) $38.000 (9.000 (50.000 – $26.000 ($27.000 (32.000. 6-16 | p. PTS: 1 REF: p.000) ($8. Example 35 PTS: 1 REF: p.000) Worthless security Net long-term capital loss (limited to $3.000 7. 6-27 43. 7-5 to 7-8 45. So James’ recognized gain is $1. ANS: C Ordinary loss (small business stock) Long-term capital gain Less long-term capital loss (worthless securities) Net long-term capital gain Less short-term capital loss (nonbusiness bad debt) Net short-term capital loss Short-term capital loss limited to PTS: 1 REF: p.000) (2. 6-25 42. ANS: E All of these items are relevant factors in determining whether an activity is profit-seeking or a hobby.000) Adjusted gross income PTS: 1 REF: p.000 – $24. 6-17 41. ANS: B PTS: 1 REF: p. ANS: B Concept Summary 6-1 Examples 18.000) $4.ID: A 39.000 ($24.000.000 (1.
the lower of the adjusted basis ($120.000) Casualty loss deduction PTS: 1 REF: p. ANS: C Timber is subject to depletion. ANS: A Asset A Asset B Asset C Less: Statutory floor Less: AGI limitation (10% X $18.000) $3.000 (71.600 PTS: 1 REF: p.000 (10. 7-11 to 7-16 48.500 500 $2.000) at the date of conversion.000) AGI floor (10% X $40.000 – $10.400) $23.000 – $10.000 -0$40.000) or fair market value ($90. ANS: A Salary Personal use casualty gains in excess of personal use casualty losses ($10.ID: A 46.000.000 $7. $90. ANS: D Amount of loss (adjusted basis for business property that is completely destroyed) Less: Insurance proceeds received ($75. ANS: B The basis is $90.750 PTS: 1 REF: p. 8-3 50.000 4.000 (4.000 $7. PTS: 1 REF: p. 7-11 to 7-14 47.300 (100) (1.000) Deductible casualty loss Other itemized deductions Total itemized deductions Standard deduction (larger than itemized deductions) Personal exemption Taxable income $ 300 1. 7-8 to 7-12 49.000) Adjusted gross income Less: Deductions Itemized deductions Casualty loss ($17. 8-4 6 .000) (6. Example 3 PTS: 1 REF: p.000 X 95%) Business loss A business casualty loss is classified as an ordinary loss.250) $18.800) $ 400 $40.
000 – $25.680) Adjusted basis The recognized gain is $11.360. Example 23 and Table 8-1 PTS: 1 56.1152 X 1/2 = $5.800 + $7. PTS: 1 REF: p.760.000 – $3.000 (36.000 X . § 179 expensing (limited to $25. 8-7 53.000 + $12.32 = $6.000 for such SUVs) Regular MACRS [($60. ANS: E Since the SUV weighs over 6.520). Table 8-8 PTS: 1 REF: p.800*) $4.03636 = $36.000 7.360 $40.000 $3.800 X 70% *These depreciation limits are indexed annually.000 $32.ID: A 51. ANS: A .520 7 .000.000) X . Table 8-8 PTS: 1 REF: p. 8-9 54. 8-10 55. it is not subject to the statutory dollar limits on luxury automobiles.480) $ 3.000 pounds.000 X . ANS: A $1.000 X 1.5/12 = $16.025. 8-13 to 8-15 $25.20] Total PTS: 1 REF: p.480 ($15. ANS: C $21.02564 X $5.000 X .000. ANS: C $100.720 (limited to $4. 8-9 | p. ANS: D Cost Less the greater of cost recovery allowed or allowable ($16. Example 2 PTS: 1 52.
355.. Example 28 PTS: 1 61. No allocation is required for domestic transportation costs (i.800 + $600 + $400 [50%($500 + $300)] = $2.) is not deductible.000) = $3. PTS: 1 REF: p.1071 X $50. 8-19 58. As Carolyn spent only $3.) is not allowed because the location is not used exclusively for business. ANS: C . An office in the home deduction (choice b. an allocation must be made to determine the portion of the airfare that is deductible (6 days/10 days = 60%).800 (60% X $3. The remaining expenses of $700 ($300 + $200 + $200) can be claimed as deductions from AGI. ANS: E As Irv was gone for over one week and more than 25% was devoted to personal. Example 22 PTS: 1 60. Table 8-4 PTS: 1 REF: p. 8-18 | p. The deduction is: $1.000) + $800 + $500 (50% X $1. Example 20 PTS: 1 59.000 for qualified tuition and related expenses.000 = $5.) are not allowed because a change from fishing guide to insurance salesman is a different trade or business. ANS: C $1. 9-22 to 9-24 8 .900.ID: A 57. 9-21 | p. Moving expenses (choice c.e. this is the amount she can claim as a deduction for AGI. 9-13 | p.800. ANS: B Section 222 allows up to $4. ANS: C Contribution to a Roth IRA (choice a.) are allowed even in a first-job context. Job hunting expenses (choice d. the airfare).100.
10-3 to 10-9 9 . and hospital expenses Less: Reimbursement Unreimbursed expenses Health insurance premiums Prescribed medicines and drugs Total medical expenses Less: 7.400 to the HSA is a deduction for AGI. Therefore.000 (AGI) Deductible medical expenses $ 7.500 (2.790 (9.600 7.5% of $125.100 (6.700 $10. they could have been had they not filed a joint return.400 3. Therefore. dentist bills. 10-4 | p.100) $ 5. Examples 12 and 15 PTS: 1 REF: p.500 7. they qualify for the medical expense deduction.100.ID: A 62.750 200 740 $19.100 The contribution of $2.5% of $80.000 1.375) $10.000 (AGI) Deductible portion of medical expenses $ 3.415 Although John and Carol cannot be claimed as Charles’s dependents.000) $ 4. it has no effect on the medical expense deduction for 2005. 10-3 | p. determined as follows: Medical insurance premiums Doctor and dentist bills for John and Carol Doctor and dentist bills for Charles Prescribed medicines for Charles Nonprescribed insulin for Charles Total medical expenses Less: 7. 10-8 to 10-11 63. Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical expenses.415. Exhibit 10-1 PTS: 1 REF: p. ANS: A Charles’s medical expense deduction is $10. ANS: A Larry and Beth can claim a medical expense deduction for the current year of $4. and is not included in the medical expense calculation. The insurance recovery was not received until 2006. determined as follows: Physician bills.
100. installing support bars and railings in bathrooms and other rooms. he must report the reimbursement as gross income in 2005 to the extent he received a tax benefit from deducting medical expenses in 2004. Examples of such improvements include dust elimination systems.950).950. Example 6 The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Example 17 PTS: 1 REF: p. Lonnie’s medical expense related to the room addition is $16. Exhibit 10-2 PTS: 1 REF: p. widening hallways and doorways to accommodate wheelchairs.5% X $80. The state occupational license fee ($250) is deductible for AGI as a business expense. so Sam will choose to deduct the sales tax rather than the state income tax. 10-5 | p. 10-11 to 10-14 67.888) + $220] = $3. 10-13 10 . ANS: B State sales taxes ($1.ID: A 64. ANS: B If Scotty did not itemize in 2004.900 + $900) are deductible as itemized deductions. the personal property tax on the auto ($200).000 + $12.000 + $7. So Lonnie’s medical expense deduction is as follows: Qualifying medical expenses ($16.000). If Scotty itemized deductions in 2004. and the increase in the home’s value is deemed to be zero. ANS: C [(90 days/184 days X $5. Example 12 PTS: 1 66. Whether he itemized in 2005 will have no impact on the treatment of the reimbursement.000). and a room built to house an iron lung.5% floor only. he can exclude the reimbursement from gross income in 2005. The total itemized deductions are $6. and adjusting electrical outlets and fixtures. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence.000) $22.000 PTS: 1 REF: p.950) are more than the state income tax ($1.000 – $12. elevators.000) Less: 7. The state sales tax ($1.000 ($28.000 ($5. Lonnie’s medical expense related to the ramp and hallways is $12.400). These expenditures are subject to the 7.000 Deductible medical expenses $28.000 (6. 10-12 | p. 10-6 65. and the real estate taxes ($3. ANS: C A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property.
If the reduced deduction election is made.000 are not deductible. she can deduct out-of-pocket costs of $1. 2005. and $210 for meals).000 The bribes to police of $10.000 (deduction allowed for 2005)].000 AGI.350 PTS: 1 REF: p.000 AGI) = $160. However. His deduction is limited to the amounts paid in 2005.000 (FMV of the land) – $120.550 $5. PTS: 1 REF: p. The carryover to the next five years is $120.000. ANS: Income Expenses: Rent Utilities Medical Legal fees Depreciation REF: p.000 and illegal kickbacks of $15. 10-21 70.000 (cash) + $120. ANS: D Jennifer cannot deduct the estimated value of $1. ANS: C Dirk is a cash basis taxpayer. ANS: C $40. 10-25 | p.500 of her contributed services. 10-26 $200. Examples 35 and 36 PTS: 1 PROBLEM 71.000) $151.000 (cash) + $80. The long-term capital gain property is limited to 30% of $400.000 (basis of land)]. The $900 refund is reported as income in 2006 under the tax benefit rule.000 [$40. $900 for lodging.000 2.510 ($400 for transportation.ID: A 68.000 14. 10-20 | p.000 $ 8. the deduction becomes $120.000 [$240.000 (30% X $400. for 2004 Withholdings for 2005 Total deduction $ 800 4.000.000 20. 10-13 69. Dirk’s state income tax deduction for 2005 is determined as follows: Paid April 14.000 5.000 (49. Example 16 PTS: 1 11 . or $120.
000) However. ANS: Tom’s realized loss is $25.e. ANS: a. ANS: The SUV is not classified as a passenger automobile because of its GVW exceeding 6. Further adjustment will be required due to the 2%-of-AGI limitation on certain itemized deductions. Tom Tom’s daughter Tom’s sister Tom’s spouse 25% 10% 15% 15% 65% Tom’s uncle.000.200. b. it is not subject to the cost recovery limits of § 280F.. 8-9 | p. 9-16 12 .000 – $25.250 $26.050.ID: A 72. $200 (excess tuition not allowed under § 222) + $600 (books and computer supplies) + $250 (transportation) = $1. since Ethan is not in travel status. A related party includes a corporation more than 50% (directly or indirectly) owned by the taxpayer. is 65%.000 lbs. Therefore. his recognized loss is $0 because the loss is disallowed as a § 267 related party transaction. Inc.000 for tax years 2004 and 2005. $1. and the attorney are not related parties for § 267 purposes. $25. 8-13 to 8-15 | 74. both direct and constructive) of Eagle. Tom’s total ownership (i. § 179 expense (limited to $25.000 1. 8-8 | p.000) X .000 (125.000.250 Figure 9-1 for (a) and Examples 27 and 28 for (b) PTS: 1 REF: p. 6-27 | p. $4. Although the tuition was $4. Amount realized Adjusted basis Realized loss $100. No deduction is allowed for meals. PTS: 1 REF: p. § 222 imposes a limitation of $4.000) MACRS ($50. 6-28 73. cousin.05 Total deduction Table 8-2 PTS: 1 REF: p.050.000) ($ 25.
79. 9-10 NOT: Allocation is necessary since the taxpayer meets neither of the two exceptions—trip lasts 7 days or less.500 ($14. 87. REF: p. 10-13 | p. ANS: E PTS: 1 NOT: Example 10 ANS: A PTS: 1 REF: p. The income must be reported whether the taxpayer receives a cash refund or has the refund applied against taxes. Example 4 PTS: 1 REF: p. b. Any refund of state income taxes must be reported as income in the year received to the extent the taxpayer received a tax benefit from deducting the taxes in a prior year. she is not required to report any of the $1. 10-14 b. 83. The $1. 85. a. 9-14 | p.).500) for Joe. $7. 9-7 ANS: D PTS: 1 REF: p. 80. 9-23 ANS: B PTS: 1 REF: p. ANS: I PTS: 1 REF: p.ID: A 75. ANS: K PTS: 1 REF: p. 9-21 13 . If Wilma did not itemize deductions in 2005.400 withheld in 2005 + $700 estimated tax payment in 2005 + $1. 9-3 ANS: F PTS: 1 REF: p. 84. Going to Riverview Manor appears to be a matter of personal choice and not necessitated by medical reasons.800 refund as income in 2006. 9-6 ANS: H PTS: 1 REF: p. ANS: General discussion. d.100. 86. $4. 78. 81. 9-12 ANS: C PTS: 1 REF: p. a law degree does not maintain or improve existing skills but leads to the creation of a new skill (see choice K. The $1. $17. A cash basis taxpayer deducts state income taxes in the year paid or withheld. 9-3 ANS: G PTS: 1 REF: p. 82. 9-12 ANS: J PTS: 1 REF: p.800 will be included in 2006 gross income to the extent the taxpayer derived a tax benefit from itemizing in 2005.800 will be included in 2006 gross income to the extent the taxpayer derived a tax benefit from itemizing in 2005. 9-15 NOT: According to the IRS. ANS: a.400 for Dennis. PTS: 1 MATCHING 77. or less than 25% of time was for personal purposes. 10-4 76.000 paid in 2005 for 2004 = $9. c. even if she elects to have the refund applied toward her 2006 state income tax.000 + $3.
9-6 | p. so no moving expense deduction is allowed. 9-16 NOT: One of the major advantages of § 222 is that the education need not be job related. ANS: H PTS: 1 REF: p. ANS: D PTS: 1 REF: p. 9-18 95.). ANS: I PTS: 1 REF: p. 9-30 90. 9-19 14 . ANS: C PTS: 1 REF: p. 9-24 NOT: The advantage to a Roth IRA is that withdrawals are nontaxable exclusions. 9-24 NOT: However. ANS: G PTS: 1 REF: p. ANS: E PTS: 1 REF: p. 91. 9-13 NOT: Global Tax Issues on p. ANS: L PTS: 1 REF: p. 9-26 97. ANS: A PTS: 1 REF: p. 98. ANS: J PTS: 1 REF: p. 9-13 92. 9-23 NOT: Taxpayer need not accept any employment offers that result from the job search (see choice B. 93. 9-18 96. ANS: L PTS: 1 REF: p. ANS: K PTS: 1 REF: p. ANS: F PTS: 1 REF: p. withdrawals are subject to tax. 9-11 NOT: Taxpayer did not change jobs. 9-19 100. 94. ANS: L PTS: 1 REF: p. 9-23 89.ID: A 88. 99.
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