Hock Questions Flashcards

Question

Answer 1

Correct Answer Explanation for A: This is a Section 1031 exchange. Nhan does not recognize any gain from the like-kind exchange on his individual tax return. Nhan’s adjusted basis in the Boise duplex was $85,000 ($65,000 purchase cost + $20,000 capital improvements), so this is also the basis of the apartment four-plex he received in the exchange. Note: A section 1031 like-kind exchange occurs when a taxpayer exchanges business or investment property for similar property. If the exchange qualifies under section 1031, he does not pay tax on a resulting gain and cannot deduct a loss until he disposes of the property. The basis of the property received is generally the adjusted basis of the property transferred. (Note: Because of the Tax Cuts and Jobs Act, now only exchanges of real property (i.e., real estate) qualifies for like-kind exchange treatment).

Answer 2

Correct Answer Explanation for B: Estates filing Form 1041 may have net operating losses. In the case of an estate, **any net operating loss carryover remaining when the estate is terminated is allowed to the beneficiaries** who succeed to the estate’s property. **Losses are only permitted to be passed to the beneficiaries in the year of termination.** For more information, see the Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.

Answer 3

The trustee must file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, to **apply for an automatic 5½-month extension of time to file**.

Answer 4

Correct Answer Explanation for D: None of the payments is taxable income. Compensation for physical injuries or sickness is always excluded from income, regardless of the form of payment. Workers' compensation benefits are not taxable, because they are treated as non-taxable benefits paid to workers injured or disabled on the job.

Answer 5

Correct Answer Explanation for D A bankruptcy estate with a filing requirement must file Form 1041 by the 15th day of the 4th month following the close of the tax year (usually, this date is April 15, for calendar-year bankruptcy estates). A bankruptcy estate that is created when an individual debtor files a bankruptcy petition under either chapter 7 or 11 of title 11 of the U.S. Code. A bankruptcy estate is treated as a separate taxable entity

Answer 6

Correct Answer Explanation for B: Jada’s modified adjusted gross income is $195,000 ($45,000 wages + $150,000 in taxable capital gains). Since her modified adjusted gross income is below the threshold amount of $200,000, she does not owe any Net Investment Income Tax.

Answer 7

Correct Answer Explanation for C: Crop insurance proceeds of $600 or more would be reported to the taxpayer on Form 1099-MISC. Nonemployee compensation is incorrect because nonemployee compensation is reported on Form 1099-NEC. Canceled debt income is incorrect because canceled debt is reported on Form 1099-C. Interest income is incorrect because interest income is reported on Form 1099-INT.

Answer 8

Correct Answer Explanation for B: **Home mortgage interest is only deductible if the mortgage is a secured debt.** The loan must be secured by the property for the interest to be deductible. Interest paid on unsecured loans (such as credit card debt) is not deductible as mortgage interest. Further, **the taxpayer must be legally liable for the debt in order to deduct the mortgage interest.** The home does not have to be the taxpayer’s main home in order for the mortgage interest to be deductible. A taxpayer may deduct the mortgage interest on a first home and a second home, up to the mortgage loan acquisition limit. Note: The $750,000 figure relates to the maximum amount of qualified acquisition debt, not the amount of interest paid. Also, **if the home was purchased on or before December 15, 2017, the qualified acquisition indebtedness limit is “grandfathered” at a higher limit of $1 million ($500,000 MFS).**

Answer 9

Correct Answer Explanation for C: Heidi has a long-term capital gain of $31,000 on the sale ($91,000 sale price - $60,000 transferred basis). **In the case of a gift where the donor’s basis is used, the holding period “tacks on” to produce, in this case, a long-term capital gain.**

Answer 10

Correct Answer Explanation for C: There is no such thing as a “disability test” for a qualifying child, although there is a component to the “age test” that allows a taxpayer to claim a child of any age if the child is permanently disabled. **The five tests for a qualifying child for the purposes of the Earned Income Tax Credit are: Age test Relationship test Residency test Joint Return test Tie-breaker test**

Answer 11

Correct Answer Explanation for A: Only the **interest Judd receives from tax-exempt municipal bonds will need to be reported on his tax return, even though the interest is not taxable.** He does not have to report any of the interest income on his traditional IRA on his tax return. **Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is nontaxable interest and not reportable.**The interest on HSA funds grows on a tax-free basis. Interest earned on an HSA is not considered taxable income when the funds are used for eligible medical expenses.

Answer 12

Correct Answer Explanation for B: Abel, Imelda, and Martina all qualify for the $500 ODC. The Credit for Other Dependents is a non-refundable tax credit of up to $500 per qualifying person. **Each dependent must be a U.S citizen, U.S. national, or resident of the U.S. The dependent must have a valid tax identification number (ATIN, ITIN, or SSN). Unlike the Child Tax Credit, the dependent is not required to have a valid SSN (an ITIN or ATIN is allowable)** for the taxpayer to claim the credit. The $500 non-refundable credit covers dependents who wouldn’t qualify for the Child Tax Credit, (such as elderly parents or grandparents). Note: None of the dependents listed would qualify for the Child Tax Credit. Abel would not because he is over the age limit for the Child Tax Credit. Imelda would not, because she does not have a valid SSN, and Martina would not, because she is a dependent parent, not a dependent child.

Answer 13

Correct Answer Explanation for A: Roland must report the full amount of punitive damages as ordinary income. Punitive damages are always taxable. The $625,000 would be reported as ordinary income in the year it is received. **The lawyer’s fees are not deductible because miscellaneous itemized deductions that were limited by the 2%-of-AGI rule prior to the TCJA are no longer deductible**. The $159,000 in compensatory damages for physical injury are not taxable and do not need to be reported on Roland’s tax return. As a result of the Tax Cuts and Jobs Act, **nonbusiness legal fees are generally not deductible through 2025, subject to a few exceptions. Attorney fees incurred in connection with legal claims of unlawful discrimination and certain claims against the federal government are still eligible for a deduction.**

Answer 14

Correct Answer Explanation for B: Courtney’s total allowable deductions on Schedule A are $17,300. Most employee-related unreimbursed work expenses are no longer deductible. Courtney’s gambling losses are only deductible to the extent of the gambling winnings ($3,000). The TCJA established a new limit on the amount of state and local taxes (SALT) that can be deducted on Schedule A.**The itemized deduction for state and local taxes paid is capped at $10,000 per return for single filers, HOH filers, and MFJ *(the cap is $5,000 for married taxpayers filing separately)*.** Since Courtney is filing MFS, her SALT deduction is capped at $5,000. The answer is calculated as follows: Type of Expense Actual Reason Allowable Mortgage interest on main home $6,700 Allowable $6,700 Property tax on main home $5,300 Allowable up to $5,000 $5,000 Misc. unreimbursed work expenses $5,200 Not allowable $0 Charitable donation to a church $2,600 Allowable $2,600 Gambling losses $6,600 Limited gambling winnings $3,000 Allowable deductions on Schedule A $17,300 Note: Military reservists, qualified performing artists, and fee-basis state and local government officials can still deduct certain job-related expenses. Certain other miscellaneous itemized expenses that were not subject to the 2%-of-AGI deduction are also still allowable, including impairment-related work expenses (work-related expenses incurred by a disabled individual relating to their disability, such as the purchase of a magnifying screen for a person with low vision).

Answer 15

Correct Answer Explanation for C: Rohan’s basis in the 10 shares received from his father would presumably be his father’s adjusted basis, or $100 (this is normally the case, although his basis could also include any gift tax paid by his father related to the appreciation of the stock’s value while he held it). Rohan’s basis in the stock he purchased would be $620. When shares of stock are sold from lots acquired at different times and the identity of the shares sold cannot be determined, the sale is charged first against the earliest acquisitions (first-in, first-out). The 20 shares sold in October would be presumed to be the 10 shares acquired by gift from Rohan’s father and half of the shares he purchased in January. Therefore, the basis of Rohan’s Valley Telecom Corporation shares he still owns would be half the basis of the purchased shares, or $310. Math calculation: Basis of 10 gifted shares = $10 x 10 shares = $100 Basis of 20 purchased shares = [$20 x 30 shares] + $20 brokerage fee = $620 Sold 20 shares, using FIFO, first in first out: (10 shares @ $100) + (10 shares @ $310 [$620÷2]) This leaves him 10 shares left with a $310 basis.

Answer 16

Correct Answer Explanation for A: Salem is an exempt individual. Teachers temporarily in the United States under a J or Q Visa are considered to be “exempt individuals” for purposes of the substantial presence test. Salem would file Form 1040NR (not Form 1040). There is a limit to the number of years that a J-1 Visa holder can be exempt from the substantial presence test. Note: The J-1 visa status permits a nonresident alien to temporarily reside in the United States to teach, conduct research, or receive on-the-job training at colleges and universities, hospitals, and research institutions. Generally, a J-1 alien cannot exclude days of presence as a “teacher or trainee” for more than two calendar years. A J-1 alien can exclude U.S. days of presence as a “student” for purposes of the Substantial Presence Test for up to five calendar years.

Answer 17

Correct Answer Explanation for D: All of the gain from the sale of Kenny and Glynda’s home is excludable. IRC Section 121 allows the exclusion of a capital gain of up to $250,000 ($500,000, if married filing jointly) from the sale of the taxpayer’s main home. Although there are some exceptions, in general, the taxpayer must have lived and owned the house for at least two years out of the previous five years before the sale. Since Kenny and Glynda owned and lived in the home for at least two years, all of their gain is excludable from income.

Answer 18

Correct Answer Explanation for D: Dahlia would report $1,800 in business income. Generally, the FMV of property exchanged for services is includable in income. However, **if services are performed for a price agreed on beforehand, the amount will be accepted as the FMV if there is no evidence to the contrary.**

Answer 19

Correct Answer Explanation for A: Under the section 121 exclusion, Bowen and Marguerite may exclude $500,000 of the gain on their primary residence. They must recognize $32,000 of long-term capital gain ($805,000 - $273,000 - $500,000 exclusion) in 2024. The exclusion may be claimed only on a main home and not on a second home, and it is subject to both the ownership and use tests. The loss from the Maui vacation home cannot be claimed or netted against the gain from the sale of their primary residence. **A loss on a personal residence, regardless of whether it is a main home or a second/vacation home, is not deductible.** Therefore, the losses that they incurred on their vacation home would not be reported on their tax return.

Answer 20

Correct Answer Explanation for A: Orson’s adjusted basis in the property is $117,300. The answer is calculated as follows: ($35,000 cash + $81,000 mortgage assumption + $1,300 legal fees = $117,300). **If a taxpayer buys property and assumes an existing mortgage on the property, the basis includes the amount of the assumed mortgage. The basis also includes the settlement fees and closing costs for buying a property.** However, the appraisal costs would not be included in the basis. The following items are examples of settlement fees or closing costs that are included in a property’s basis. Abstract fees (abstract of title fees). Charges for installing utility services. Legal fees, settlement costs, and recording fees. Transfer taxes. Owner’s title insurance. Any amounts the seller owes that the buyer agrees to pay, such as delinquent property taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. There are some costs that the owner cannot include in the basis of the property. The following fees are typical during the purchase of a property, but they cannot be added to the property’s basis: Casualty insurance premiums. Rent for occupancy of the property before closing. Charges for utilities or other services related to occupancy of the property before closing. Charges connected with getting a loan.**The following are examples of these charges: Points (discount points, loan origination fees). Mortgage insurance premiums. Loan assumption fees. Cost of a credit report. Fees for an appraisal that are required by a lender. Fees for refinancing a mortgage. A taxpayer also cannot include amounts placed in escrow for the future payments of items such as taxes and insurance. These costs should not be added to the basis of the property.**

Answer 21

Correct Answer Explanation for C: The calculation of Sherry’s gross estate includes all of the assets she owned outright at the date of her death, including the life insurance proceeds payable to her beneficiaries. However, only half of the amounts of the assets she owned jointly with her husband would be included in the calculation. Therefore, the answer is figured as follows: Asset Value % Included Amount Roth IRA $150,000 100% $150,000 Undeveloped land $15,000 100% $15,000 Life insurance payable to her children $1,750,000 100% $1,750,000 Brokerage account held jointly $1,100,000 50% $550,000 Checking account held in her name only $30,000 100% $30,000 Vacation home held jointly with her spouse $500,000 50% $250,000 Value of Sherry’s Gross Estate $2,745,000 Calculation: $150,000 IRA + $15,000 land + $1,750,000 life insurance + $30,000 checking account + $550,000 ($1,100,000/2) brokerage account + $250,000 ($500,000/2) other jointly-held property = $2,745,000. **Debts not paid before the decedent’s death, including medical expenses subsequently paid on her behalf, are liabilities that can be deducted from the gross estate on the estate tax return. However, the value of the “gross estate” is figured without regard to these liabilities.**Once the executor figures out the value of the gross estate, there are several deductions that are allowable to determine the amount of the taxable estate. Medical expenses can also be deducted on the taxpayer’s final Form 1040, even if they are paid in the year following the date of death. To make a portability election (also called a “DSUE” election), the decedent's estate must file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The election is made by the executor of the deceased spouse's estate. For more information, see Publication 559, Survivors, Executors, and Administrators.

Answer 22

Correct Answer Explanation for C: An IRA participant who misses the 60-day rollover window may be eligible for an automatic waiver of the 60-day rollover rule if certain requirements are met. Because the error was committed by her financial institution, Dixie may request an automatic waiver of the 60-day rollover requirement. The taxpayer can also request and receive a private letter ruling (PLR) granting a waiver of the 60-day rollover requirement. **The IRS permits an automatic waiver of the sixty-day rollover period for retirement plan distributions under 11 common circumstances (usually where the financial institution is at fault for not properly rolling over the funds).** Note: There is no fee for using the “self-certification” procedure. Dixie can also request a private letter ruling, but a private letter ruling is not free. The minimum fee for a PLR related to a late IRA rollover is $10,000, so **it would behoove Dixie to use the “self-certification” procedure. This procedure is outlined in Revenue Procedure 2016-47.**

Answer 23

Correct Answer Explanation for D: The entire gain can be excluded from income. **Stetson meets the ownership and use tests to exclude the gain because he owned and lived in the home for more than two years during the five-year period ending on the date of sale, so he can exclude up to $250,000 of gain from the sale of the home as a single individual. The required two years of ownership and use do not have to be continuous, nor do they have to occur at the same time.** A taxpayer will meet the tests if he can show that he owned and lived in the property as a primary residence for either 24 full months or 730 days (365 × 2) during the five-year period ending on the date of sale.

Answer 24

Correct Answer Explanation for C: Elias had a short-term capital loss of $1,200. His basis in the stock sold is figured as follows: (Gain or Loss = Sales Price - Basis) ($15,000 ÷ 1,000) x 600 shares = $9,000 basis in the shares sold. Sales Price of 600 shares = $7,800 $7,800 sales price - $9,000 basis = ($1,200) Since his holding period is less than one year, he has a short-term capital loss of ($1,200). A short-term holding period is a year or less, while a long-term holding period is defined as more than one year (a year plus one day or more).

Answer 25

Correct Answer Explanation for A: In this case, **the sales taxes are a liability, not income, and are therefore excluded from Regina’s gross receipts and deductible expenses, as the taxes are imposed on her buyers and she is merely collecting the taxes on behalf of the state.** *Note that in certain states, sales taxes are imposed on the seller, and in these states, a seller who collects sales tax from their customers must include the sales taxes in gross receipts and then deducts them when paid (or incurred).* Note that when a business pays sales tax in connection with the purchase of goods for use in the business, the sales tax is considered a component of the cost of the item purchased. Thus, if the item is depreciable property, the sales tax is added to its depreciable basis. If the item is merchandise for resale or to be used in the production of inventory, the tax is capitalized as a component of inventory. If the sales tax is related to a currently deductible business expense, it is likewise considered part of that expense.

Answer 26

Correct Answer Explanation for D: Kerrie is eligible for the Premium Tax Credit from January through July, assuming she meets all the eligibility criteria. The Premium Tax Credit (PTC) is a refundable tax credit for health insurance purchased through the Health Insurance Marketplace. To be eligible for the Premium Tax Credit, the taxpayer must have been enrolled at some point during the year in one or more qualified health plans offered through the Health Insurance Marketplace (both federal and state exchanges qualify). For more information, see Publication 974, Premium Tax Credit.

Answer 27

Correct Answer Explanation for D: Abdullah's expenditures qualify him for a $1,100 credit, calculated as follows: **Exterior doors:** $500 (**30% of costs up to a maximum credit of $250 per door,** up to a total of $500) **Windows and/or skylights:** $600 **(30% of costs up to a maximum credit of $600); The energy efficient** home improvement credit is a tax credit available to individuals who make qualified energy-efficient improvements to their home. This credit is designed to encourage homeowners to invest in energy-saving upgrades. The **home must be located in the United States and be an existing home, not a new construction. T**he credit is claimed on Form 5695. It is **nonrefundable**, meaning a taxpayer cannot receive more back on the credit than they owe in taxes. Any **excess credit cannot be carried forward**to future tax years.

Answer 28

orrect Answer Explanation for A: Gambling income does not qualify as “earned income” for purposes of the Earned Income Tax Credit. *For purposes of the EITC, earned income includes:* **Wages, salaries, tips, jury duty pay, and union strike benefits Long-term disability benefits that are received prior to minimum retirement age Statutory employee pay Net earnings from self-employment Nontaxable combat pay, and Qualified Medicaid waiver payments.** Note: Although combat pay and qualified Medicare waiver payments are generally not taxable, the taxpayer can elect to have this income included in income for the Earned Income Tax Credit if it gives them a better tax result.

Answer 29

Correct Answer Explanation for A: Kendra can use $22,000 of passive income from the partnership investment to offset her $24,000 rental loss. The remaining rental losses of $2,000 ($22,000 - $24,000) would need to be carried over to the following year. Even though she materially participated in the rental activity, she must carry over her excess rental losses because her modified adjusted gross income is over the phaseout threshold of $100,000. **An individual may deduct up to $25,000 of real estate loss per year as long as their adjusted gross income is under the phaseout threshold. This is also called the special “$25,000 rental loss allowance.” However, if the taxpayer’s MAGI is $150,000 or more ($75,000 or more if married filing separately), then no deduction can be claimed for a rental activity loss for the year.** Since Kendra’s wages exceed $150,000, she must carryover any of her excess losses to the following year.

Answer 30

Nathaniel’s deductions from his gross estate are first figured as follows: Funeral and burial costs $23,000 Attorney’s fees $37,950 Debts owed at the time of death $86,500 Unpaid mortgage on the decedent’s primary residence $723,700 Property taxes accrued after death Not Allowable Amount deductible from Nathaniel’s Gross Estate $871,150 Certain deductions are available to reduce the Estate Tax. These amounts would be deductible from the “gross estate” in order to figure the “taxable estate” on Form 706. The most common of these is the Marital Deduction. **All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction if the surviving spouse is a U.S. citizen. The property must pass “outright”. Examples of other estate tax deductions include:** **Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate. Mortgages, property taxes, and debts owed by the decedent at the time of death. Administration expenses of the estate (such as lawyer’s fees and accounting costs). Funeral and burial expenses. Losses during estate administration. These deductions are allowable in addition to the estate and gift tax exemption. For 2024, the estate and gift tax exemption is $13,610,000 per taxpayer.** So, using the figures above, the amount of Nathaniel’s taxable estate would be figured as follows: Gross estate on the date of death $18,000,000 Amount deductible from the Gross Estate ($871,150) Estate Tax Exemption in 2024 ($13,610,000) Nathaniel’s Taxable Estate $3,518,850 Since the property taxes in the question accrued after the date of Nathaniel’s death, they would not be includable in the calculation of the taxable estate. Since the property would pass to a daughter (instead of a surviving spouse), then Nathaniel’s estate would be subject to the estate tax.

Answer 31

Correct Answer Explanation for A: Katherine may use Head of Household status because she is not married, and she provided over half the cost of keeping up the primary home of her dependent child for more than six months. **A taxpayer may still qualify for Head of Household filing status even though the taxpayer is not claiming an exemption for their child if the taxpayer meets the following requirements:** **The taxpayer must be single or “considered unmarried” on the last day of the year. The taxpayer paid more than half of the cost of keeping up a home, which was the main home of their child for more than half of the year.**

Answer 32

Correct Answer Explanation for C: Because she is over 50 years of age, Melanie can contribute $8,000 to a Roth IRA, but her contribution is subject to a phaseout because of her MAGI (Modified Adjusted Gross Incomeand her contribution is not limited.). **Even though Cadence Melanie is “married filing separately,” she did not live with her spouse at any time during the year, so she may use the higher same phase-out threshold for single taxpayers. For single filers, in 2024, Modified Adjusted Gross Income (MAGI) must be under $146,000 in order to make a full contribution to a Roth IRA.** The Roth IRA contribution limit is $7,000, or $8,000 if the taxpayer is 50 or older.

Answer 33

Naomi may be eligible for the Retirement Savings Contributions Credit. None of the other credits listed would be applicable. Naomi would not qualify for the Child and Dependent Care Credit, or the Credit for Other Dependents, because she does not have any dependents. Her taxable income is also above the threshold for the Earned Income Tax Credit (for taxpayers with no dependents). **The Retirement Savings Contributions Credit is between 10% – 50% of eligible contributions to IRAs and retirement plans up to a maximum credit of $1,000 ($2,000 MFJ).** The eligibility criteria: Key Eligibility Rules To claim the credit, you must meet the following criteria: Age: You must be **18 or older by the end of the year.** Student Status: You **cannot be a full-time student.** Dependency: You **cannot be claimed as a dependent on another person’s return.** Eligible Contributions: Contributions to Traditional/Roth IRAs, 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plans qualify.* Contributions to ABLE accounts (for the designated beneficiary) also qualify.

Answer 34

Correct Answer Explanation for D: Based on Vincent’s AGI of $45,000, qualifying medical expenses beyond the first $3,375 (or 7.5% of his AGI) would be tax-deductible. Vincent has $8,000 in medical expenses for himself, as well as $2,000 in medical expenses for his daughter. The calculation is as follows: $45,000 x 7.5% AGI threshold = $3,375 ($8,000 + $2,000) = $10,000 in qualifying medical expenses $10,000 - $3,375 = $6,625 allowable deduction **Noncustodial parents who pay medical expenses for a child after a divorce or separation, may deduct those costs on their federal income tax return, even though the other spouse may have custody of the child and/or claim the child.** The fact that Vincent does not claim his daughter as a dependent is irrelevant in this case. **For the purposes of the medical expense deduction, a child of divorced or separated parents can be treated as a dependent of both parents**

Answer 35

Correct Answer Explanation for B: Vanessa must report the $100 in capital gain distributions. Capital gain distributions, such as those from mutual funds and real estate investment trusts (REITs), are taxable income. These distributions are treated as long-term capital gains, regardless of how long the taxpayer holds the shares. The other types of distributions listed are not taxable. A $350 return of capital from Decker Corporation is incorrect because a return of capital reduces a taxpayer’s stock basis, and is generally not taxable until a taxpayer’s entire basis is recovered. A 2-for-1 stock split where she receives 150 additional shares is incorrect because a stock dividend reduces the basis of the individual shares held prior to the distribution. **Dividends paid on her cash-value life insurance policy is incorrect because dividends paid to cash-value life insurance policyholders are normally considered nontaxable distributions.** Note: Do not confuse “capital gains” with “capital gain distributions.” A capital gain occurs when a taxpayer sells stock, shares of a mutual fund, or another capital asset. A capital gain distribution occurs when the mutual fund sells assets for more than their cost and distributes the realized gain to its investors.

Answer 36

Correct Answer Explanation for A: Azumi does not need to pay estimated tax because she expects her current year income tax withholding ($10,250) to be more than her prior-year tax of $9,224. Therefore, Azumi qualifies for the safe harbor rule and is not required to make estimated tax payments. Her expected income tax withholding is also more than 90% of the expected tax liability on her current year return ($11,270 × 90% = $10,143). **A taxpayer is not required to pay estimated tax for the current year if: The taxpayer had no tax liability in the prior year, and the taxpayer was a U.S. citizen or resident alien, and the current tax year covered a twelve-month period.** The taxpayer **also does not have to pay estimated tax if she pays enough through withholding so that the tax due**on the return (minus the amounts of tax credits or paid through withholding) **is less than $1,000.** For a taxpayer with AGI of $150,000 or less, estimated tax payments must be made if she expects the amount owed after withholding and credits to be less than the smaller of: **90% of the tax liability on the current year tax return, or 100% of the tax liability on the prior-year tax return.** Note: For **high-income taxpayers with adjusted gross income of over $150,000 ($75,000 if married filing separately),** the estimated tax safe harbor threshold for the amount owed would be **110% of the previous year’s tax liability** (rather than 100%).

Answer 37

Correct Answer Explanation for C: A statutory nonemployee is the most likely to be subject to estimated taxes. There are three categories of **statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters. These taxpayers are treated as self-employed for FICA purposes and are usually required to pay estimated taxes.** Household employees and statutory employees are incorrect because household employees and statutory employees would have Medicare and Social Security taxes withheld by their employers. The nonresident alien choice is wrong because investment income is typically not subject to SE tax.

Answer 38

Correct Answer Explanation for C: The basis of property received from a decedent’s estate is generally the fair market value of the property on the date of the decedent’s death. However, when an executor elects the alternate valuation date, the basis to the heirs is generally the fair market value of the assets six months after the date of death. **Only if assets are distributed prior to six months after the date of death will the basis to the heirs be the fair market value of the assets as of the date of distribution.** In this case, the stock was distributed to Benjamin after the six-month post-death period. Therefore, his basis in the stock is $21,500, which is the FMV on August 20 (6 months after the date of his grandmother’s death, which is the alternate valuation date for the estate). Benjamin’s holding period is long-term, because **inherited property is always treated as long-term property,**regardless of how long the beneficiary holds the property after he receives it.

Answer 39

Correct Answer Explanation for B: Malika will be forced to file MFS, as a joint return will require both spouses to agree to file jointly and both will need to participate in the preparation and review of the return. **She cannot file as head of household because she did not live apart from her husband for the last six months of the year. There is a special exception that applies to married persons who live apart from their spouses for at least the last six months of the year. In this case, the taxpayer will be “considered unmarried” for head of household** filing purposes. However, since Anwar and Malika did not separate until August, and they are not legally separated, they are considered married for the entire taxable year.

Answer 40

Correct Answer Explanation for B: Oliver has until December 31, 2027, to reinvest the proceeds in similar property without having to recognize gain from the involuntary conversion. This is because Oliver first realized a gain from the insurance reimbursement during 2025 (even though the actual fire occurred in 2024), so he will have until December 31, 2027, to replace the property under the involuntary conversion rules. **To postpone reporting gain from an involuntary conversion, the taxpayer must buy replacement property within a specified period of time. This is also called the “replacement period.” In this case, Oliver’s “replacement period” ends two years after the close of the first tax year in which any part of his gain is realized.** Since his insurance company did not issue a reimbursement until 2025, the “realized gain” occurs in 2025. As such, Oliver has until the end of 2027 (2 years after the close of the tax year in which the gain is realized)[1] to purchase a replacement property. For more information on this topic, see Publication 547, Casualties, Disasters, and Thefts. [1] There are certain events that have a longer replacement period. For example, if the taxpayer has lost property in a Presidentially declared disaster area, the taxpayer has a total of four years in which to replace the lost property.

Answer 41

Jaxson has $1,100 of net long-term capital gains ($1,600 gain - $500 loss). The gain on the Hibbert, Inc. stock is short-term because the shares were not held for more than a year. Activity Bought Sold Gain/Loss Character 1,400 shares at $3,000 (basis: $1,400) 1/3/2020 12/1/2024 $1,600 LT gain 200 shares at $500 (basis: $1,000) 1/3/2017 12/25/2024 ($500) LT loss 50 shares at $1,700 (basis: $1,500) 2/1/2024 9/12/2024 $200 ST gain

Answer 42

Correct Answer Explanation for C: Florencia’s maximum deduction on Schedule A for taxes is $10,000. **A taxpayer’s total allowable deduction for state and local income, sales and property taxes is limited to a combined total deduction of $10,000 ($5,000 if Married Filing Separately).** Any state and local taxes she paid above this amount cannot be deducted. This is also called the “SALT cap.” The SALT cap refers to the limit on the amount of state and local taxes (SALT) that can be deducted on an individual’s federal income tax return. **Key points: Deductible Taxes: A taxpayer can deduct state and local income taxes, or sales taxes (if elected), and property taxes on Schedule A of Form 1040.** To claim this deduction, the taxpayer must itemize their deductions on Schedule A, rather than take the standard deduction. Cap Amount: T**he total deduction for these taxes is “capped” at $10,000 for individuals or $5,000 if married filing separately.** This cap was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 and remains a significant consideration for taxpayers, especially in high-tax states.

Answer 43

Correct Answer Explanation for B: Even though Hank provided over half the cost of providing a home for his daughter, he cannot file as Head of Household because his daughter did not live with him for over half the year. **He is not eligible for the Child and Dependent Care Credit, either, because only a custodial parent may claim the credit.** Hayley cannot be Head of Household either because she did not provide more than one-half the cost of keeping up the home for her daughter. However, as the custodial parent, Haley has the primary right to claim her daughter, Brianne, as her qualifying child. Haley may file as “single.”

Answer 44

Correct Answer Explanation for C: **Life insurance proceeds payable to Dillon’s beneficiaries would be included**in the calculation of his gross estate. The gross estate includes the value of property that the taxpayer owns at the time of death. In addition to the value of life insurance proceeds, the gross estate includes the following: **The value of certain annuities payable to the estate or to the taxpayer’s heirs, and The value of certain property transferred within three years before the taxpayer’s death.** Although life-insurance proceeds are generally not taxable to the beneficiary who receives them, the value of life insurance proceeds insuring a decedent’s life must be included in the valuation of the gross estate if the proceeds are payable to the estate, or to named beneficiaries, if the taxpayer owned the policy at the time of his death.

Answer 45

Correct Answer Explanation for C: William may deduct his own HSA contributions on his Form 1040 (via Form 8889 and Schedule 1) as an adjustment to income. A health savings account (HSA) is a tax-favored medical savings account available to taxpayers.**HSAs are owned by individuals, but contributions may be made by an employer, the taxpayer themselves, or any other person.** Amounts in an HSA may be accumulated over the years and distributed on a tax-free basis to pay for or reimburse qualified medical expenses. **The HSA contribution limit (employer + employee) for 2024 is $4,150 for a single individual,**so he did not make an overcontribution. Note: If a taxpayer makes cash deposits directly into their own health savings account (HSA), they can take an HSA tax deduction on their individual tax return. Generally, **HSA contributions paid through an employer are already excluded from taxable income on the employee’s W-2.** If a taxpayer uses the health savings account (HSA) to pay medical expenses, then they cannot itemize medical deductions for the same expenses (no “double-dipping”). However, if the taxpayer has additional medical expenses that are not paid with HSA funds, they may be able to claim those additional expenses as an itemized deduction on Schedule A.

Answer 46

Correct Answer Explanation for D: Tatum may deduct the entire cost of the fire protection system using section 179. Since Tatum’s building is a commercial building (not a residential rental), then the cost of the fire protection system would qualify. **There are certain types of improvement property eligible for Section 179 that can potentially be immediately deducted if the costs are incurred on nonresidential real property.** These are: **Nonresidential roofs Heating, ventilation, and air-conditioning property; (HVAC systems) Fire protection and alarm systems Security systems**

Answer 47

Correct Answer Explanation for C: Piper’s qualifying educational costs are determined as follows: Required textbooks $450 Required lab equipment $1,260 Tuition ($6,800 - $4,750 scholarship) $2,050 Qualifying costs for the AOTC $3,760 To figure the amount of qualifying educational expenses for purposes of the AOTC, Piper must first subtract the $4,750 scholarship from tuition expenses ($6,800 - $4,750). The books and lab equipment are allowable expenses, but the student health fees are specifically disallowed (even if they are mandatory). Parking fees or tickets, commuting costs, and meal costs are not allowable for the American Opportunity Tax Credit or the Lifetime Learning Credit.

Answer 48

Correct Answer Explanation for D: Under the “optional method” of calculating the home office deduction, a taxpayer can deduct $5 per square foot for the space in the home that is used for business, with a maximum allowable square footage of 300 square feet. Therefore, the maximum deduction is $1,500. The criteria for who qualifies for the deduction remains the same, but the calculation and recordkeeping requirements have been simplified. There is no depreciation expense and no recapture of depreciation upon the sale of the home. Home-related itemized deductions, such as for mortgage interest and real estate taxes, may be claimed in full on Schedule A, without allocation of portions to the home office space.

Answer 49

The entire gain can be excluded from income. Stetson meets the ownership and use tests to exclude the gain because he owned and lived in the home for more than two years during the five-year period ending on the date of sale, so he can exclude up to $250,000 of gain from the sale of the home as a single individual. n the date of sale**The required two years of ownership and use do not have to be continuous, nor do they have to occur at the same time. A taxpayer will meet the tests if he can show that he owned and lived in the property as a primary residence for either 24 full months or 730 days (365 × 2) during the five-year period ending on the date of sale**.

Answer 50

Correct Answer Explanation for A: Dahlia would report $1,800 in business income. Generally, the FMV of property exchanged for services is includable in income. However, if services are performed for a price agreed on beforehand, the amount will be accepted as the FMV if there is no evidence to the contrary.

Answer 51

Correct Answer Explanation for D: Abdullah's expenditures qualify him for a $1,100 credit, calculated as follows: **Exterior doors: $500 (30% of costs up to a maximum credit of $250 per door, up to a total of $500) Windows and/or skylights: $600 (30% of costs up to a maximum credit of $600);** **The energy efficient home improvement credit** is a tax credit available to individuals who make qualified energy-efficient improvements to their home. This credit is designed to encourage homeowners to invest in energy-saving upgrades. **The home must be located in the United States and be an existing home, not a new construction.** The credit is claimed on **Form 5695.** It is nonrefundable, meaning a taxpayer cannot receive more back on the credit than they owe in taxes. Any **excess credit cannot be carried forward to future tax years.**

Answer 52

Correct Answer Explanation for D: Abner and Viola are required to file a tax return, whether they file jointly or separately. Although Abner and Viola earned less than the standard deduction amount for married couples, a filing requirement is triggered because Abner received HSA distributions. **Any taxpayer who received HSA, Archer MSA, or Medicare Advantage MSA distributions must file a return.** If Abner were to file his own separate return (MFS), then Viola would be forced to file a separate return as well, because the filing threshold for MFS is only $5 of gross income in 2024.

Answer 53

Correct Answer Explanation for B: Lennox is allowed to roll over his traditional IRA into a 401(k) plan. Taxpayers are **allowed to roll over their traditional IRA to any of the following plans without incurring tax or penalty: A rollover into another traditional IRA A qualified plan, like a 401(k) or 403(b) A tax-sheltered annuity plan A government deferred compensation plan.** Although a traditional IRA can be converted to a Roth IRA, the taxable amount that is converted is added to the taxpayer’s income and would be taxed as ordinary income. Note: IRAs cannot be held jointly, so **spouses are not allowed to roll over funds into each other’s retirement plans**. However, a taxpayer is allowed to roll over an inherited IRA from a deceased spouse. After death, a surviving spouse may elect to treat the IRA as their own, and roll it over into another traditional IRA.

Answer 54

Correct Answer Explanation for D: **IRD is included in the decedent’s estate and may be subject to estate tax.** Income in respect of a decedent (IRD) is any taxable income that was earned but not received by the decedent by the time of death. IRD is not taxed on the final return of the deceased taxpayer. **IRD is reported on the tax return of the person (or entity) that receives the income. This could be the estate, in which case, it would be reported on Form 1041.** Otherwise, it could be the surviving spouse or another beneficiary, such as a child. If it is received by a beneficiary and subject to income tax on the beneficiary’s return, **the beneficiary can claim a deduction for any estate tax paid on the IRD. This deduction is taken as a miscellaneous itemized deduction on Schedule A and is not subject to the 2% floor, so it is fully deductible.**

Answer 55

Correct Answer Explanation for B: Rowan does not have to report the gain on the sale because it qualifies for exclusion under Section 121. Rowan would normally not meet the “use test” in the five-year period before the sale. However, Rowan is subject to special rules for military personnel because he was on qualified official extended duty. In general, to qualify for the Section 121 exclusion, a taxpayer must meet both the ownership test and the use test, which means that the taxpayer must have “owned and used” the home as a primary residence at least two years out of the five years prior to its date of sale. However, **a taxpayer on qualified official extended duty in the U.S. Armed Forces may elect to suspend the five-year test period for up to ten years.**

Answer 56

Correct Answer Explanation for C: In Skylar’s case, since her funds in her foreign accounts totaled $52,000 on the last day of the tax year, she is required to file both Form 8938, Statement of Specified Foreign Financial Assets, and an FBAR. There are two separate reporting requirements that may apply to taxpayers who hold certain types of foreign assets or who have certain amounts of funds in foreign bank accounts. An FBAR generally must be filed with the Treasury Department if a taxpayer has more than $10,000 in offshore bank accounts. Taxpayers also must file a Form 8938 with the IRS if they hold foreign financial assets with an aggregate value that exceeds $50,000 ($100,000 MFJ) on the last day of the tax year, or that exceeds $75,000 ($150,000 MFJ) at any time during the tax year. Note: The due date for FBAR filings is generally April 15, consistent with the Federal income tax due date, but there is an automatic extension to file the FBAR until October 15.

Answer 57

Correct Answer Explanation for B: Diallo and Hadiza would not qualify for EITC, because Hadiza does not have a valid Social Security number. **Both spouses on a joint return must have valid Social Security numbers in order to qualify for EITC.** None of the other scenarios would automatically disqualify a taxpayer from claiming EITC.

Answer 58

Correct Answer Explanation for A: Wilson’s office is 20% (240 ÷ 1,200) of the total area of his home. Therefore, his business percentage is 20%. His year-end expenses were $12,000 in rent ($1,000 per month × 12 months) and $600 in utilities ($50 × 12 months). The answer is calculated as follows: $12,000 total rent $600 total utilities $12,600 total expenses for the year × 20% (business-use percentage) = $2,520. Note: The amount above, using the “actual expense” method, is more than the $1,200 amount using the simplified safe harbor method of $5.00 per square foot of office space. In this case, using actual costs will generate a larger deduction for Wilson. The home office deduction is figured on Form 8829, Expenses for Business Use of Your Home.

Answer 59

Correct Answer Explanation for A: **Amounts contributed** to Jayden’s FSA are **not subject to employment taxes or federal income taxes.**FSAs are usually funded through **voluntary salary reduction agreements** with an employer, and **employers and employees may both contribute.** Healthcare flexible spending arrangements (FSAs) allow employees to be reimbursed for medical expenses on a pre-tax basis. **Unlike HSAs, for which contributions must be reported on Form 1040, there are no reporting requirements for FSAs on a taxpayer’s individual return.**

Answer 60

Correct Answer Explanation for D: Only certain expenses are deductible as medical expenses on Schedule A. The answer is figured as follows: Expense Amount Vitamins for general health Not deductible Prescription medications imported from Canada Not deductible Hearing aids for Wesson $320 Prescription eyeglasses $1,000 Chiropractor fees $4,400 Acupuncture $1,250 Qualifying medical expenses $6,970

Answer 61

Correct Answer Explanation for C: **A “recovery” is a refund or return of an amount for which a taxpayer deducted or took a credit in an earlier year.** A taxpayer **must include a recovery in income in the year he receives it, to the extent the deduction or credit reduced his tax in the earlier year.** Refunds of federal income taxes are never included in a taxpayer’s income because they are not allowed as a deduction.

Answer 62

Correct Answer Explanation for D: The full amount of the $5,000 scholarship is taxable to Nevin, because **if a student is not a degree candidate, all scholarships are subject to federal income tax** (*even if they are spent on educational expenses).*

Answer 63

Correct Answer Explanation for D: If Axel claims a deduction for a charitable **contribution of noncash property worth more than $5,000, he is required to obtain a qualified appraisal and must fill out Form 8283, Noncash Charitable Contributions.** All of the other contributions would be deductible and fulfill the IRS’ recordkeeping requirements for charitable gifts.

Answer 64

Correct Answer Explanation for C: Wade’s son, Linus, is a qualifying child. **A U.S. citizen’s child is usually a U.S. citizen by birth, even if the child is born in another country. Wade would have to request a Social Security number for his child.**

Answer 65

Answer C is correct: Tobias can claim head of household status since his wife is a nonresident alien who will not file a joint return with him, and he meets all the other qualifications for head of household. There is a special exception that allows U.S. citizens and U.S. resident aliens who live with their nonresident alien spouses to file as head of household. In order to qualify for this exception, all of the following **requirements** must be met: The **taxpayer is a U.S. citizen or resident alien for the entire year and meets all the rules for head of household except for living with the nonresident alien spouse.** The **nonresident alien spouse does not meet the substantial presence test.** The nonresident alien spouse does not choose to file a joint return with the taxpayer.

Answer 66

Correct Answer Explanation for C: Laureen can **deduct any jury duty pay remitted to her employer as an adjustment to income on Schedule 1** of Form 1040. Many employers (including most large employers and government agencies) have a policy that compensates employees for any time spent on jury service. Sometimes an employer will continue to pay an employee their regular salary while the employee serves on a jury. If employers do continue to pay the employee’s salary, the **employer has the right to require the employee to remit to them the fees received for jury service. The employee can then deduct the amount remitted as an adjustment to their income.**

Answer 67

Correct Answer Explanation for C: Clarence’s qualifying medical expenses are $5,100 for the year ($2,300 + $1,200 + $1,100 + $500). Health club dues and medical marijuana are not qualifying medical expenses, so those expenses are not included in the calculation. In this example, Clarence could deduct $2,100 of his medical expenses because $2,100 is the amount of qualifying medical expenses that exceeds 7.5% of his AGI ($40,000 AGI X 7.5% = $3,000). To review a full list of qualifying medical expenses, see Publication 502, Medical and Dental Expenses.

Answer 68

Correct Answer Explanation for A: The distribution from the estate would be reported to Kenzie on Schedule K-1 (Form 1041). Nonpassive distributions would be reported on Kenzie’s Schedule E (Form 1040). How a taxpayer reports distributions from an estate depends on the character of the income in the hands of the estate. Each item of income retains the same character as it passes through to the individual. For example, if the income distributed includes dividends, tax-exempt interest, or capital gains, it would retain the same character in the hands of the beneficiary. **Business income and other nonpassive income that is distributed from an estate would be reported on Part III of the taxpayer’s Schedule E (Form 1040).** The estate’s personal representative (executor) should provide a Schedule K-1 (Form 1041) to each beneficiary who receives a distribution from the estate. The executor must furnish Schedule K-1 to each beneficiary by the date on which Form 1041 is due (including extensions).

Answer 69

Correct Answer Explanation for D: Prescott can only contribute $5,200, the amount of his qualifying compensation for the year. For 2024, a taxpayer’s total contributions to all traditional and Roth IRAs cannot be more than $7,000 (or $8,000 if the taxpayer is age 50 or older). However, these amounts are also limited by the taxpayer’s “qualifying compensation.” Qualifying compensation is generally earned income, including *wages or self-employment income. Nontaxable combat pay and taxable alimony are also considered earned income* for IRA purposes. **Passive income, such as rental income, interest income, unemployment payments, and Social Security benefits, do not qualify as “compensation” for making an IRA contribution.** Since Prescott’s only qualifying compensation is his wages, his IRA contribution would be limited to that amount.

Answer 70

Correct Answer Explanation for B: Blakely’s main home is her rental apartment in Salt Lake City because she lives and works there most of the time.[1] If she were to sell the ski condo in Park City, she would not qualify for the section 121 exclusion on the sale because it is a vacation home and not her primary residence (unless she were to own and have previously used the condo as her primary residence for at least two years in the five years preceding its sale). [1] Generally, a taxpayer’s **“main home” is the home that the taxpayer spends most of their time**. The IRS allows taxpayers to designate one residence only as a “main home” at any one time.

Answer 71

Correct Answer Explanation for D: Heath has made an IRA-type distribution. A checkmark in the “IRA/SEP/SIMPLE” checkbox in box 7 of Form 1099-R indicates that the taxpayer received an IRA-type distribution. Since Heath is over the age of 59½, he can take distributions from his IRA without facing a 10 percent early distribution penalty, although he will owe income tax on the distribution, unless he rolls over his distribution within 60 days into another qualifying retirement plan.

Answer 72

Correct Answer Explanation for A: Maeve and Slade are both eligible to claim a 50% credit for their IRA contributions; therefore, Maeve’s credit is $500 ($1,000 contribution × 50%), and Slade’s credit is worth $900 ($1,800 contribution × 50%). So, on a joint return, they are allowed a $1,400 credit ($500 for Maeve and $900 for Slade). To claim this credit in 2024, the taxpayer's modified adjusted gross income **(MAGI) must not be more than $38,250 for Single, Married Filing Separately, or Qualifying Surviving Spouse. MAGI must not be more than $57,375 for Head of Household, and $76,500 for Married Filing Jointly.** Note: This credit is also called the “Saver’s Credit.” The IRS uses the two names interchangeably on the IRS website as well as in IRS publications.

Answer 73

Correct Answer Explanation for A: The flight, lodging, restaurant meals, groceries, and laundry supplies or services are all considered non-taxable and not counted as part of his income, because the expenses reimbursed by an employer under an accountable plan are generally not taxable income.

Answer 74

Correct Answer Explanation for B: Peter would report $0 income, and $0 expenses (i.e., this rental activity does not have to be reported). **If you rent out a personal dwelling *for less than 15* days during the tax year, this is considered "Minimal Rental Use." This is a special rule that applies, *if the property qualifies as a residence and is rented for less than 15 days during the year*, then the rental income is not taxable, and no expenses would be deductible.**

Answer 75

Correct Answer Explanation for B: Boyce cannot deduct any charitable contributions on Schedule C, because the Schedule C is for reporting business activities only. If he itemizes deductions, he may be able to take a charitable deduction for the cost of the materials only. The value of his labor is not a tax deductible expense for charitable purposes.

Answer 76

Correct Answer Explanation for D: Hester's loss is $4,000 ($14,000 - $10,000 sale price). Since she sold the property at a loss, her basis in the land for calculating the loss is $14,000, because it is the lower of her aunt's adjusted basis and the fair market value on the date of the gift. See IRS Publication 551, Basis of Assets, for more information on how to calculate the basis of gifted property.

Answer 77

Correct Answer Explanation for B: Because this is a like-kind exchange and Franklin received no cash or non-like-kind property in the exchange, he will recognize no gain on the exchange. Franklin's basis in the real property he received is $80,000 (the $65,000 adjusted basis of the real property given up (the strip mall) plus the $15,000 cash he paid). His sister recognizes gain only to the extent of the money she received, $15,000. Her basis in the real property she received was $70,000 (the $70,000 adjusted basis of the real property she exchanged minus the $15,000 received, plus the $15,000 gain she recognized).

Answer 78

Correct Answer Explanation for C: He can make a nondeductible IRA contribution. Even if a taxpayer isn't eligible to deduct their traditional IRA contribution on their taxes, many taxpayers still choose to make a non-deductible IRA contribution. Jacques' contribution will grow on a tax-deferred basis, despite the fact that it is nondeductible. **Form 8606 is used by taxpayers to report nondeductible contributions to their traditional IRAs.**

Answer 79

Correct Answer Explanation for D: Jason and his wife have a $4,500 capital loss carryover. The capital loss of $11,500 on the stock sale is offset by the $4,000 capital gain passed through from the limited partnership investment, resulting in a net capital loss of $7,500. Jason and his wife can claim $3,000 of the loss on their current year return. The remaining $4,500 of capital loss must be carried over to the next year. The deduction **for capital losses is limited to $3,000 ($1,500 for MFS) per year,** with a carryforward of excess loss to future years.

Answer 80

Correct Answer Explanation for D: Cecil should use the information on the Schedule K-1 and report the income on Schedule E of his Form 1040. Schedule K-1 (Form 1041) is used to report a beneficiary's share of an estate, including income, credits, deductions and profits. Since Cecil is one of the beneficiaries of the estate, he will continue to receive a Schedule K-1 until all the assets of his aunt's estate are distributed to her heirs.

Answer 81

Correct Answer Explanation for C: Installment sales to related persons are generally allowed. However, if a taxpayer sells property to a related person who then subsequently, the buyer sells or disposes of the property within two years of the original sale, the original seller will lose the benefit of installment sale reporting. Peggy must report the entire gain of $50,000, even though she has not received all of the installment payments.

Answer 82

Correct Answer Explanation for B: Hyun's basis in the property is determined as follows: ($90,000 + $12,000 = $102,000). Hyun **cannot deduct the delinquent property taxes** as a current expense, because the **property taxes were not his liability (they were assessed on the previous owner and owed by the previous owner). Any obligations of the seller that are assumed by the buyer increase the basis of the asset, and are not currently deductible.** Since Hyun did not own the property when the taxes accrued but agreed to pay them as a condition of the sale, he should add the property tax payment to his basis in the property.

Answer 83

Correct Answer Explanation for C: Vinita can exclude the full $8,000 of the fellowship and $2,500 of the scholarship. The $3,000 portion of the scholarship that is designated for her teaching is taxable income, because it is compensation for teaching two classes. A scholarship or fellowship is tax-free only if it meets all of the following requirements: The taxpayer must be a degree candidate at an eligible educational institution that has been nationally accredited. It does not exceed qualified educational expenses. It is not designated for other purposes, such as room and board. It does not represent payment for teaching, research, or other services.

Answer 84

Correct Answer Explanation for D: Joel has $40,000 of cancelled debt from the discharge of indebtedness. However, none of the canceled debt is taxable to Joel because it is excluded from income because it is primary residence indebtedness. **Qualified principal residence indebtedness can be excluded from income**. Generally, if a taxpayer excludes canceled debt from income, the taxpayer must **attach Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness,** to report the amount of debt qualifying for exclusion.

Answer 85

Correct Answer Explanation for A: $75,000 would be taxable as a court award ($95,000 damages - $20,000 reimbursement for her medical care), and $4,000 would be taxable separately, as interest income. Note: **Damages for harassment and emotional distress would generally be taxable, if the damages were not directly related to a "physical injury or physical illness."** However, any damages received for medical care directly related to the harassment or emotional distress are not taxable. Interest payments on any settlement award are also taxable.

Answer 86

Correct Answer Explanation for C: Based on his AGI, Frank is eligible for a Child Tax Credit of $2,000 for his son Paul.

Answer 87

Correct Answer Explanation for A: Her credit amount will be $0. If she chooses to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship. Bernice will not include any part of the Pell grant in gross income, and it will be nontaxable. After reducing qualified education expenses by the tax-free scholarship, Bernice will have $0 ($5,000 - $5,000) of adjusted qualified education expenses available to figure her American Opportunity Credit. Her credit will be $0.

Answer 88

Correct Answer Explanation for C: To qualify for the Earned Income Tax Credit, **a taxpayer must be a U.S. citizen or legal resident all year, and have a valid SSN that is valid for work purposes.** A taxpayer does not need to have a dependent child in order to qualify for the Earned Income Tax Credit; however, the EITC is greatly increased if the taxpayer has a qualifying child. A taxpayer must have earned income to qualify for the EITC, but there are other types of earned income that exist besides wages, such as tips and self-employment income, which would also be qualifying income for EITC purposes.

Answer 89

Correct Answer Explanation for D: The following amounts are deductible. ($7,500 + $5,000 +$50) = $12,550 A taxpayer can deduct mortgage interest on up to two homes. A second home can include any other residence a taxpayer owns and treats as a home, but the taxpayer does not have to actually use the second home during the year in order to deduct the mortgage interest paid on the related loan. The late fees on her primary mortgage are also treated as mortgage interest for tax purposes. The HOA fees are not deductible on a personal residence. The interest on the timeshare is not deductible because she has already deducted the mortgage interest on two personal homes.

Answer 90

A. $250 Answer (A) is incorrect. Based on his tax status and AGI, Brad would be eligible for a credit that is equal to 50% of his $500 contribution. However, as a full-time student, Brad is not eligible for the Retirement Savings Contributions Credit. B. $100 Answer (B) is incorrect. The amount of $100 is 20% of Brad’s contributions. However, Brad is not eligible for the credit as a full-time student. C. $50 Answer (C) is incorrect. The amount of $50 is 10% of Brad’s contributions. However, Brad cannot claim the credit because he is a full-time student. D. $0 Answer (D) is correct. A taxpayer is **eligible for the Retirement Savings Contributions Credit if the taxpayer is Age 18 or older, Not claimed as a dependent on another person’s return, and Not a full-time student.** Because Brad is a full-time student, he is ineligible for the credit.

Answer 91

A. If the obligation is sold, the gain or loss is the difference between the basis in the obligation and the amount realized. Answer (A) is incorrect. The gain or loss on sale of an installment obligation is the difference between the amount realized and the basis in the obligation. B. If an installment obligation is canceled, it is not treated as a disposition. Answer (B) is correct. Section 453B provides that, **when an installment obligation is disposed of, gain or loss is recognized to the extent of the difference between the basis of the obligation and the amount realized (or the fair market value of the obligation if disposed of other than by sale or exchange). The main purpose of Sec. 453B is to prevent the shifting of income between taxpayers. Section 453B(a) expressly requires recognition whether the obligation is sold or otherwise disposed of. Cancellation of an installment obligation is a disposition of the obligation.** C. A gift of an installment obligation is considered a disposition. Answer (C) is incorrect. A gift is a disposition for purposes of Sec. 453B. D. No gain or loss is recognized on the transfer of an installment obligation between a husband and wife if incident to a divorce. Answer (D) is incorrect. Section 453B(g) excludes from the definition of a disposition a transfer between husband and wife incident to a divorce. The same tax treatment with respect to the obligation that would have applied to the transferor then applies to the transferee.

Answer 92

A. $20,740,000 Answer (A) is incorrect. The $20,000 unpaid mortgage is deductible. B. $20,720,000 Answer (B) is correct. Deductions from the GE in computing the taxable estate (TE) include ones with respect to the following: **Administration and funeral expenses are deductible. Unpaid mortgages on property are deductible if the value of the decedent’s interest is included in the GE. Bequests to qualified charitable organizations are deductible. Outright transfers to a surviving spouse are deductible from the GE,** to the extent the interest is included in the gross estate. John’s estate is computed as follows: GE items $21,000,000 Funeral expenses (10,000) Marital transfer ($240,000 – $20,000 mortgage on residence) (220,000) Charitable contribution (50,000) Total estate $20,720,000

Answer 93

D. $150 common; $50 preferred. Answer (D) is correct. Since the preferred stock dividend was nontaxable, the **original basis of the common stock would be allocated between the common stock and the preferred stock based on the relative fair market values of each on the date of the stock dividend** (Reg. 1.307-1). The market values of Alex’s common and preferred stock on the date of the dividend were $240 and $80, respectively. Alex’s tax basis in the common stock after the receipt of the dividend is $150 [($240 FMV of common stock ÷ $320 total FMV) × $200 original cost of stock]. Alex’s tax basis in the preferred stock is $50 [($80 FMV of preferred stock ÷ $320 total FMV) × $200 original cost of stock].

Answer 94

A. Both I and II. Answer (A) is correct. Payments made to graduate students in return for services performed, including teaching and research, must be included in gross income. Only payments that are used for required tuition, fees, books, supplies, or equipment are excluded from gross income (Publication 17).

Answer 95

A. The couple need not be married at the time of the gift, but must be married by the end of the year. Answer (A) is incorrect. A married couple is not allowed gift splitting if the couple is not married at the time of the gift. B. The couple must have been married at the time the gift was given, and neither spouse may remarry during the year. Answer (B) is correct. Publication 950 states, “If you or your spouse make a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse.” Furthermore, Instructions for Form 709 state that **if a taxpayer is divorced or widowed after the gift, neither spouse may remarry during the rest of the calendar year to qualify for gift splitting.** C. The couple must be married at all times during the year. Answer (C) is incorrect. The couple can divorce after the gift, but neither spouse can remarry before the end of the calendar year. D. The couple must have been married at the time the gift was given, but either or both spouses may be remarried during the year. Answer (D) is incorrect. A married couple is not allowed gift splitting if the couple divorces after the gift, and one of the spouses remarries before the end of the calendar year.

Answer 96

B. $60,000 Answer (B) is correct. Under Sec. 1001, the gain on the sale or other disposition of property is the excess of the amount realized over the adjusted basis. Any capital repairs, such as a new roof, are added to the adjusted basis. The amount realized is the sum of any money received plus the fair market value of the nonmoney property received. The amount realized includes relief from liabilities and, in this case, the assumption of the mortgage.**When calculating the amount realized, the seller does not include the reimbursement for real property taxes treated under Sec. 164(d) as imposed on the purchaser. The property taxes paid by Robert are not included in either the amount realized or the adjusted basis because they are deductible expenses.** The full amount of the realized gain is recognized unless all or some portion thereof is specifically excluded by another statute. Cash received $100,000 FMV of other property 20,000 Mortgage assumed 80,000 Amount realized $200,000 Less: Adjusted basis (130,000) Commissions (10,000) $ 60,000

Answer 97

B. $1,160 Answer (B) is correct. Generally, traveling expenses of a **taxpayer who travels outside of the United States away from home must be allocated between time spent on the trip for business and time spent for pleasure.** When a **trip is for no more than 1 week, as Ernest’s was, the full cost of travel to and from the destination is deductible.** The **travel expenses while at the destination are still allocated between business and pleasure.** Ernest will be able to deduct the entire cost of the airfare, 2/5 of the lodging, a portion of the meals, and all of the seminar and registration fees (Publication 463). The total deduction equals $1,160 [$500 + ($1,000 × 2/5) + ($300 × 1/2 × 2/5) + $200].

Answer 98

A. A $10,000 gain, of which $5,000 is ordinary income and $5,000 is Sec. 1231 gain. Answer (A) is incorrect. Only the depreciation recapture is recognized in Year 1. B. A $5,000 gain, of which $2,500 is Sec. 1231 gain and $2,500 is ordinary income. Answer (B) is incorrect. The depreciation recaptured is recognized as ordinary income. C. A $5,000 gain, of which all $5,000 is ordinary income. Answer (C) is correct. The realized gain from the sale of the equipment is $10,000. Since the equipment is Sec. 1245 property, the realized gain is characterized as ordinary income to the extent of any depreciation that has been taken and must be fully recognized in the year of sale without regard to the timing of payments [Sec. 453(i)]. $5,000 of depreciation was taken, so $5,000 of the realized gain must be recognized as ordinary income in Year 1. All of the remaining gain is Sec. 1231 gain, and will be recognized when payments are received (the installment method is required absent an election not to use it). Sales proceeds $ 50,000 Less: Adjusted basis (40,000) Realized gain $ 10,000 Recognized gain in Year 1 is Sec. 1245 recapture of $5,000. D. No gain or loss. Answer (D) is incorrect. A gain is recognized on the sale in Year 1.

Answer 99

A. $0 Answer (A) is incorrect. Ms. Gower is allowed a credit before any income tax limitations. B. $375 Answer (B) is correct. A 15% tax credit applies to citizens or residents who are elderly or disabled when they retire (Sec. 22). The initial amount of allowable credit for single individuals is $5,000. For permanently and totally disabled individuals under age 65, the applicable initial amount noted above may not exceed the amount of disability income. The Sec. 22 amount is equal to an initial amount of $5,000 reduced by any amounts received as tax-exempt Social Security benefits and also reduced by one-half of the excess of AGI over $7,500 (Publication 524). Initial Sec. 22 amount $ 5,000 Less: Social Security (2,000) Less: AGI limitation [($8,500 – $7,500) × 50%] (500) Section 22 amount $ 2,500 × .15 Ms. Gower’s credit $ 375 However, the income tax is zero, and the taxpayer would have no credit after the income tax limitation.

Answer 100

A. Payments are from spouses filing a joint return. Answer (A) is correct. Section 215 allows a deduction for alimony or separate maintenance payments (Sec. 71) from a pre-2019 divorce. Section 71(b) defines **alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse.** However, the spouses cannot file a joint tax return when the payments are being made (Publication 17).

Answer 101

A. Pay the penalty in full. There is no relief from the penalty tax for reasonable cause. Answer (A) is incorrect. There is relief for a reasonable cause for excess accumulation. B. Do not pay the penalty tax with the return. Instead, attach a statement to the return explaining the situation and wait for the IRS to respond. Answer (B) is incorrect. The penalty should be paid to avoid the accumulation of interest and penalties. C. Avoid having to pay the tax or send a statement by withdrawing the excess accumulation by the due date of the tax return. Answer (C) is incorrect. This is a solution for excess contributions for the year, not for excess accumulations, which are a required minimum distribution issue. D. Pay the penalty tax that is due with the return, attach a written statement to the return explaining the situation, and wait for the IRS to approve by sending a refund of the penalty tax that was paid. Answer (D) is correct. The IRS can waive the excise tax if it is satisfied that there was a reasonable error and that reasonable remedial steps have been taken by the taxpayer. **To make a waiver request, a taxpayer must file Form 5329, pay excise tax owed, and attach a written explanation showing when excess accumulation was removed or what the taxpayer has done to have it withdrawn. Any tax paid will be refunded if the waiver is granted.**

Answer 102

A. $14,640,000 Answer (A) is incorrect. The $100,000 unpaid mortgage reduces the value of the marital transfer of the residence. B. $14,540,000 Answer (B) is correct. Deductions from the GE in computing the taxable estate (TE) include ones with respect to the following: Administration and funeral expenses are deductible. Unpaid mortgages on property are deductible if the value of the decedent’s interest is included in the GE. Bequests to qualified charitable organizations are deductible. Outright transfers to a surviving spouse are deductible from the GE, to the extent the interest is included in the gross estate, the property passes in a qualifying manner, and interest conveyed must not be a nondeductible terminable interest. Jim’s estate is computed as follows: GE items $15,000,000 Funeral expenses (35,000) Marital transfer ($450,000 – $100,000 mortgage on residence) (350,000) Charitable contribution (75,000) Taxable estate $14,540,000 C. $14,615,000 Answer (C) is incorrect. The charitable contribution is deductible from the gross estate. D. $14,575,000 Answer (D) is incorrect. The $35,000 of funeral expenses is deductible.

Answer 103

A. Violet will not owe a penalty for the quarter ending December 31, 2024, because she made sufficient payment before January 15, 2025. Answer (A) is incorrect. Violet will not owe a penalty on the last quarter because she paid the balance of her estimated tax liability by the due date of the last quarter. B. Violet could owe a penalty for one or all of the first three quarters even though she is due a refund for the year. Answer (B) is incorrect. Violet could owe a penalty on one or all of the first three quarters of the year because she did not make quarterly payments of estimated tax C. Violet will not owe a penalty for any quarter because her total payments exceed her tax liability. Answer (C) is correct. **A penalty may be imposed if, by the quarterly payment date, the total of estimated tax payments and income tax withheld is less than 25% of the required minimum payment for the year.** The penalty is determined each quarter. In addition, it is calculated by adding 3 percentage points to the federal short-term rate and multiplying this percent by the amount of the underpayment. Finally, the penalty is not allowed as an interest deduction. Although Violet paid her tax liability by the due date for the last quarter, she may still be assessed a penalty for not making estimated tax payments in the first three quarters of the year (Publication 505). D. If Violet owes a penalty for any quarter, the underpayment will be computed from the date the amount was due to the date the payment is made. Answer (D) is incorrect. The penalties on estimated tax are computed as of the due date for the quarter in which the estimated tax was due and will be assessed for the period between that due date and the date in which the payment was made.

Answer 104

A. $400,000 Answer (A) is incorrect. The amount of $400,000 is the total original basis for both investors. B. $500,000 Answer (B) is incorrect. The amount of $500,000 cannot be the basis. C. $320,000 Answer (C) is incorrect. The amount of $320,000 is the total original basis reduced by depreciation. D. $435,000 Answer (D) is correct. The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death [Sec. 1014(a)]. Under Sec. 2040, the general rule is that the gross estate of a decedent includes the entire value of property held jointly at the time of death except that portion of the property that was acquired by the other joint owner for adequate and full consideration. In this question, each investor contributed one-half of the purchase price. Therefore, when Mr. Apple died, his gross estate included only one-half of the apartment house. Accordingly, Ms. Melon will receive only a step-up in basis for that one-half of property included in Mr. Apple’s estate. Ms. Melon’s basis in the apartment house is $435,000 [$275,000 (1/2 of $550,000 FMV that represents Mr. Apple’s portion) + $160,000 (Ms. Melon’s original one-half basis in the property of $200,000 minus her share of depreciation of $40,000)].

Answer 105

A. $240,000 Answer (A) is incorrect. This amount includes only the cash, the home, and the savings bonds. B. $610,000 Answer (B) is incorrect. This amount includes a $10,000 reduction to the gross estate for the loan against the insurance policy. C. $420,000 Answer (C) is incorrect. This amount excludes the life insurance. D. $620,000 Answer (D) is correct. Under Sec. 2033, the value of a gross estate includes the value on the date of death of all property in which the decedent had an interest at the time of death. Section 2042 requires the inclusion of proceeds from life insurance policies when the proceeds are receivable by, or for the benefit of, the estate. U.S. savings bonds purchased by a decedent with his own funds are includible in his gross estate if registered in his own name or with another person as co-owner. The value of the municipal bonds is includible in the gross estate. The fact that the income generated by municipal bonds is tax exempt does not prevent the bonds from being included in the gross estate. The federal estate tax is a tax upon the value of the property and not upon the income the property generates. The cash and the value of the home are also included in the gross estate. **The estate’s liability for the loan does not affect the amount of the gross estate unless the estate actually pays the loan.**

Answer 106

A. The value of the part of a deceased husband’s real property allowed to his widow for her lifetime (dower interest). Answer (A) is incorrect. Section 2034 provides that dower interests will not prevent the inclusion of such property in the decedent’s gross estate. B. Outstanding dividends declared to the decedent after the date of death. Answer (B) is correct. Under Sec. 2033, the value of a gross estate includes the value at the time of death of all property in which the decedent had an interest at the time of death. **A shareholder has a right to, or an interest in, only the dividends that have been declared by the directors.** Since the dividends were declared after death, the decedent had no interest in them at the time of his or her death, so they are not included in the gross estate. Note that, **if the dividends had been declared (and the record date had passed) but not paid before the decedent’s death, they would be includible in the gross estate.** C. Proceeds of life insurance on the decedent’s life if the decedent possessed incidents of ownership in the policy. Answer (C) is incorrect. Section 2042 provides that the value of the gross estate includes proceeds of life insurance when the decedent possessed incidents of ownership in the policy. D. Medical insurance reimbursements that were due the individual at death. Answer (D) is incorrect. Medical insurance reimbursements due the individual at death are considered property in which the decedent had an interest.

Answer 107

A. $0 Answer (A) is incorrect. Mark’s Uncle Seth is not a related party for federal income tax purposes. Therefore, Gathers is allowed to recognize a loss on this transaction. B. $(4,000) Answer (B) is incorrect. Gathers cannot subtract the selling price from the FMV to arrive at the recognizable loss. C. $(3,000) Answer (C) is incorrect. Gathers cannot subtract the adjusted basis from the FMV to arrive at the recognizable loss. D. $(1,000) Answer (D) is correct. Tax laws limit tax avoidance between related parties. Losses realized on sale or exchange of property to a related person is not recognized. The transferee takes a cost basis. Uncles, however, are not considered related parties for federal income tax purposes. Gathers may recognize a loss on the sale of $1,000 ($4,000 selling price – $5,000 basis).

Answer 108

A. Transferred basis. Answer (A) is incorrect. **Transferred basis is computed by reference to basis in the same property in the hands of another.** B. Cost basis. Answer (B) is incorrect. Cost basis is the sum of capitalized acquisition costs (i.e., the financial price paid). C. Exchanged basis. Answer (C) is correct. **Exchanged basis is computed by reference to basis in other property previously held by the person**. D. Converted basis. Answer (D) is incorrect. Converted basis is when personal-use property is converted to business use. The basis of the property is the lower of its basis or the FMV on the date of conversion.

Answer 109

A. An individual retirement annuity. Answer (A) is incorrect. An individual retirement annuity is a permitted individual retirement account. B. A trust or custodial account at an IRS-approved entity. Answer (B) is incorrect. A trust or custodial account at an IRS-approved entity is a permitted individual retirement account. C. An employer and employee association trust account. Answer (C) is incorrect. An employer and employee association trust account is a permitted individual retirement account. D. Individual savings bonds clearly designated as an IRA. Answer (D) is correct. An IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. Beginning in 1997, an IRA can be part of a savings incentive match plan for employees (SIMPLE). Publication 590-A lists individual retirement bonds but does not list individual savings bonds as a permitted individual retirement account.

Answer 110

A. $8,000 Answer (A) is correct. If you repossess your property after making an installment sale, you must figure the following amounts: (1) Your gain (or loss) on the repossession and (2) your basis in the repossessed property. The rules for figuring these amounts depend on the kind of property you repossess. The rules for repossessions of personal property differ from those for real property. The taxable gain for the repossession of real property is figured using the following schedule. 1) Payments received before repossession $16,000 2) Minus: Gain reported 8,000 3) Gain on repossession $ 8,000 4) Gross profit on sale $20,000 5) Gain reported (line 2) $8,000 6) Plus: Repossession costs 2,500 10,500 7) Subtract line 6 from line 4 $ 9,500 8) Taxable gain (lesser of line 3 or 7) $ 8,000 B. $9,500 Answer (B) is incorrect. The lesser of the two methods of computing the capital gain must be chosen. C. $0 Answer (C) is incorrect. A gain exists on the repossession of this property. D. $4,000 Answer (D) is incorrect. This property is real property, and the gain must be computed using the schedule for real property.

Answer 111

A. $0 Answer (A) is incorrect. The expenses do qualify as medical expenses. B. $1,200 Answer (B) is correct. Section 213(a) allows a deduction for expenses paid for medical care of the taxpayer, his or her spouse, or a dependent. Dependent is defined in Publication 502 and Sec. 152 to include the mother of the taxpayer and the son of the taxpayer if each received over half of his or her support from the taxpayer. Gail’s mother and son are thus considered dependents for purposes of the medical deductions, regardless of their gross income or filing status (these other factors do affect the availability of the dependency exemption). Therefore, all the medical expenses incurred by Gail and Jeff ($1,200) for their son and Gail’s mother are considered qualifying medical expenses. C. $500 Answer (C) is incorrect. The expenses for Gail’s mother qualify as medical expenses. D. $700 Answer (D) is incorrect. The expenses for the son qualify as medical expenses.

Hock Questions Flashcards

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