For the current year, Salvador’s regular tax liability is $17,000, and his tentative
alternative minimum tax is $19,000. Salvador has $16,250 withheld from his salary.
I. Salvador has a tax due of $750.
II. Salvador’s alternative minimum tax is $0.
III. Salvador has a tax due of $2,750.
IV. Salvador’s total tax liability is $19,000
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Statements I, II and IV are correct.
d. Statements III and IV are correct.
e. Statements II, III and IV are correct
Sonya and Butch divorce during the current year. Their divorce agreement requires
Sonya to pay Butch alimony of $2,500 monthly. When their son, Bubba, attains the
earliest of either the age 23 or graduates from college, the payments will cease.
I. Butch must recognize gross income of $2,500 monthly.
II. Sonya may deduct $2,500 monthly from her gross income.
III. Butch will not recognize any gross income due to the payments.
a. Only statements I and II are correct.
b. Only statement I is correct.
c. Only statement II is correct.
d. Only statement III is correct.
Several factors are used to determine whether an activity is classified as a hobby or as a
business. Which of the following are factors that aid in this determination?
I. The financial status of the taxpayer
II. The expectation that the assets involved in the activity will increase in value.
III. The taxpayer’s success in similar activities.
IV. The amount of personal pleasure and enjoyment that accrues to the taxpayer.
a. Only statements II, III, and IV are correct.
b. Only statement III is correct.
c. Statements I, II, and III are correct.
d. Only statement IV is correct.
e. Statements I, II, III, and IV are correct.
Julian and Deloris move during the current year from their home in Houston to Santa
Fe. Julian was a rocket scientist with NASA in Houston and has accepted a new job
with the Los Alamos research lab near Santa Fe. Moving expenses and reimbursement
information are presented below.
” Direct costs of moving themselves, furnishings and other personal belongings to Santa
Fe total $8,000.
” A house-hunting trip before their move to Santa Fe resulted in the total costs of
$2,500.
” Julian and Deloris incurred commissions and legal costs in the amount of $12,000 in
conjunction with the sale of their Houston residence.
” Los Alamos research laboratories reimbursed Julian and Deloris for $5,000 of their
moving costs.
What is their Moving Expense deduction?
a. $17,500 deduction from AGI.
b. $8,000 deduction for AGI.
c. $10,500 deduction from AGI.
d. $3,000 deduction for AGI.
e. $22,500 decution from AGI.
Bernice is the beneficiary of a $50,000 insurance policy on her father’s life. If she
receives the proceeds in installments from the insurance company that carries the
policy, she will earn only five-percent interest per year, receiving $10,500 per year for
five years. Bernice decides to take the $50,000 in a lump-sum payment and invest the
funds herself. Of the $50,000 received:
a. All $50,000 is tax-free.
b. All $50,000 is taxable income.
c. $500 is interest income for each year.
d. The first $25,000 is taxable.
Tax planning involves the timing of income and deductions. General rules of thumb to
follow when planning include
I. putting income into the year with the lowest marginal tax rate.
II. deferring deductions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Any corporate capital loss not used in the current year can be carried back 2 years and
carried forward 20 years to offset capital gains in those years.
a. True
b. False
To be away overnight requires the taxpayer to be away from their tax home for more
than 24 hours.
a. True
b. False
During the current year, Timepiece Corporation has operating income of $460,000 and
dividend income of $70,000 from 45% owned domestic corporations. Total operating
expenses for the year are $470,000. What is Timepiece’s dividends-received deduction
for the current year?
a. $- 0 –
b. $48,000
c. $56,000
d. $60,000
e. $70,000
Mario receives a liquidating distribution of land with a fair market value of $19,000 and
a basis of $15,000 from Blithe Corporation, an S corporation. Mario’s basis in the stock
is $21,000. What must Mario and Blithe report as income (loss) from the property
distribution?
Mario Blithe
a. $-0- $-0-
b. $(2,000) $4,000
c. $(6,000) $-0-
d. $(6,000) $4,000
Which of the following factors absolutely must be present for an activity to be
considered a trade or business for tax purposes?
a. The activity is profitable most of the time.
b. Taxpayer has experience in the activity.
c. Taxpayer has a mailing address and phone number for his business that is different
from his personal address and phone number.
d. Taxpayer has a profit motive for engaging in the activity.
e. All of the above factors must be present to have a trade or business activity.
A Keogh plan is administratively more convenient and economical than a simplified
employee pension plan (SEP).
a. True
b. False
Aaron is a 34-year-old head of household and a self-employed taxpayer. He contributed
the maximum amount to his IRA account during the current year, and his net earnings
from his business totaled $29,000. How much can Aaron deduct for AGI this year?
a. $- 0 –
b. $3,200
c. $3,800
d. $5,000
e. $5,500
To be a qualifying relative, an individual must meet certain tests. These tests include,
I. the citizen or residency test.
II. the gross income test.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
When securities are sold and the securities were purchased on different dates and at
different prices
I. the basis of the shares may be determined on a first-in, first-out basis.
II. the basis of the shares may be determined on a last-in, first-out basis.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In 2015, Steve purchases $175,000 of equipment. The taxable income of the business is
$10,000. What is Steve’s maximum Section 179 deduction in 2015?
a. $10,000
b. $- 0 –
c. $5,000
d. $15,000
e. $25,000
Taxpayers need to pay the tax deficiency in advance and sue for a refund in
I. U.S. Tax Court.
II. U.S. District Court.
III. U.S. Court of Federal Claims.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements II and III are correct.
e. Statements I, II, and III are correct.
Ortiz Corporation determined its AMTI to be $120,000 for 2015. If the regular income
tax liability is $15,000, what is the amount of the alternative minimum tax for 2015?
a. $- 0 –
b. $1,000
c. $9,000
d. $16,000
e. $24,000
Brandon and Judy divorce during the year and agree that Brandon will pay Judy
$24,000 a year in alimony. Brandon will be able to reduce his income by $24,000, but
Judy does not have to report any income since it was not earned..
a. True
b. False
Myra’s employer paid her health and accident insurance premium of $5,600. Since she
had the option to take the cash and purchase her own insurance, the $5,600 must be
included in income.
a. True
b. False
“Active participation” and “real estate professional” are both exceptions to the general
rule for passive activity losses with rental real estate.
I. A taxpayer qualifying under both exceptions is limited to a maximum annual
deduction of $25,000.
II. Active participation results from owning at least a 10% interest in the activity and
arranging for repairs and maintenance and collecting rents.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Lyle and Louise are retired living on income from their investments and Social Security
benefits. During the current year, they receive the following:
Cash dividends on stock investments $28,000
Interest on municipal bonds 5,000
Social Security benefits 18,000
Lyle and Louise’s adjusted gross income is:
a. $28,000
b. $33,000
c. $37,000
d. $48,000
e. $41,300
Lee’s 2015 taxable income is $88,000 before considering charitable contributions. Lee
is a single individual. She makes a donation of $10,000 to the American Heart
Association in December 2015. By how much did Lee’s marginal tax rate decline
simply because of the donation?
a. 0%
b. 10%
c. 3%
d. 5%
e. 8%
General Telelpnone gave Wynonna $2,000 for an easement for power lines across her
property. She must realize the gain or loss on the receipt of cash.
a. True
b. False
Ruth purchased an annuity contract for $10,000. When she turns 65, she will receive
$150 a month for the rest of her life. The first $10,000 she receives is a return of her
capital and is not taxable.
a. True
b. False
A tax is an enforced contribution used to finance the functions of government.
a. True
b. False
During the current year, Vera receives the following interest payments:
Third National Bank Savings Account $1,000
Toaster oven received for opening the savings account 100
Treasury Bond interest 2,000
City of Nassau, Bahamas, bonds 500
Interest from Federal income tax refund 75
How much of the $3,675 Vera receives is taxable?
a. $2,100
b. $2,175
c. $3,100
d. $3,175
e. $3,675
Tax law generally disallows deductions for personal expenditures. However, due to
legislative grace, there are certain exceptions to this general provision of tax law. These
exceptions include
I. Itemized Deductions.
II. Standard Deduction amount.
III. Personal Exemption amounts.
IV. Dependency Exemption amounts.
a. Statements I and IV are correct.
b. Statements I, II, and III are correct.
c. Statements I and II are correct.
d. Statements I, II, III, and IV are correct.
e. Statements III and IV are correct.
Jim, age 71, is a single taxpayer who retired from his job at the Lansing Corporation in
2014. On January 1, 2015, when he begins to receive his annuity distribution, the value
of his pension plan assets is $200,000 and his basis is zero. What amount must Jim
receive in 2015 and how much of the amount he receives is taxable?
Required Amount
Distribution Taxable
a. $7,299 $7,299
b. $7,547 $-0-
c. $7,547 $7,547
d. $12,000 $10,000
Legal expenses are generally deductible if they have a business purpose; they are
generally not deductible if they originate from a personal transaction.
a. True
b. False
Which of the following statements is/are correct?
I. The carryover-holding period only applies if the property exchanged is personal-use
property.
II. The holding period of like-kind property received includes the holding period of the
property exchanged.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Fire and casualty insurance premium on business warehouse
The excess of the selling price of an asset over its tax basis.
Unemployment compensation
Depletion
Larry is a history teacher. He subscribes to several periodicals about teaching history
and judging history fairs. This year Larry spends $285 on subscriptions to various
periodicals. Discuss the deductibility of the expenditures for tax purposes.
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.
Adjusted basis
Contrast the facts and circumstances depreciation approach commonly used before
1981 with Modified Accelerated Cost Recovery (MACRS).
House of Representatives
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Lobbying expense
Compare the deferral of recognition of losses resulting from an involuntary conversion
with the deferrals for like-kind exchanges.
Office copier for an office fax machine.
Each of the numbered items below is accorded only one of the following lettered
treatments. Use the existing law as it applies to the current year, match the best answer
to the statements below.
a. Fully excluded from gross income.
b. Fully included in gross income.
c. Partially excluded from gross income.
Kenneth receives a new Ford Explorer worth $28,900 that his parents bought him for
his 24th birthday.
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Federal lobbying expenditures
Match each statement with the correct term below.
a. Computers, and automobiles.
b. Used to recover the investment in intangible assets.
c. Used to recover the investment in long-lived tangible business-use assets.
d. An attempt to stimulate capital investment by small businesses.
e. Used to recover the investment in assets that waste away through extraction.
Amortization
Farm land for an office building and its land.
Unrecaptured Section 1250 gain