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CPA TCP practice questions

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Question 1Tax Compliance and Planning for Individuals

A single taxpayer has $40,000 of wages and receives $10,000 of municipal bond interest. What amount of gross income must the taxpayer report on the federal return?

  1. $10,000
  2. $40,000 Correct answer.
  3. $0
  4. $50,000

Explanation

Municipal bond interest is excluded from gross income under IRC Section 103, so only the wages are included. Gross income therefore equals $40,000, and the $10,000 of tax-exempt interest is reported on the return only as informational disclosure.

Question 2Tax Compliance and Planning for Individuals

Which filing status is available only to an unmarried taxpayer who maintains a household for a qualifying dependent for more than half the year?

  1. Qualifying surviving spouse
  2. Single
  3. Head of household Correct answer.
  4. Married filing separately

Explanation

Head of household requires the taxpayer to be unmarried (or treated as unmarried) at year-end and to furnish more than half the cost of maintaining a household that is the principal home of a qualifying person for more than half the year. Single status has no dependent-household requirement, and qualifying surviving spouse requires a deceased spouse and a dependent child.

Question 3Tax Compliance and Planning for Individuals

A taxpayer paid $9,000 of qualified student loan interest during the year and is otherwise eligible to deduct it. What is the maximum amount of student loan interest the taxpayer may deduct?

  1. $0
  2. $2,500 Correct answer.
  3. $9,000
  4. $5,000

Explanation

The student loan interest deduction is capped at $2,500 per return, even when the taxpayer actually paid more qualified interest. The deduction is then further limited by the phase-out based on modified adjusted gross income.

Question 4Tax Compliance and Planning for Individuals

A taxpayer with no employer-sponsored retirement plan contributes $7,000 to a traditional IRA at age 45. What is the maximum deductible contribution for the year?

  1. $0
  2. $3,500
  3. $6,500
  4. $7,000 Correct answer.

Explanation

For a taxpayer under age 50 with no workplace retirement plan coverage, the full annual IRA contribution limit is deductible, subject to having enough earned income. Because the taxpayer is not covered by an employer plan, the active-participant phase-out does not apply.

Question 5Tax Compliance and Planning for Individuals

Which of the following is treated as a capital asset held for investment rather than property excluded from capital asset treatment?

  1. Depreciable business equipment
  2. A copyright held by the original creator
  3. A personal residence Correct answer.
  4. Inventory held for sale to customers

Explanation

A personal residence is a capital asset, although gain on its sale may be excluded under Section 121. Inventory, depreciable business property used in a trade or business, and copyrights held by the creator are excluded from capital asset treatment under Section 1221.

Question 6Tax Compliance and Planning for Individuals

A taxpayer sells stock held for 14 months at a $20,000 gain and has $5,000 of short-term capital loss. What is the net long-term capital gain?

  1. $5,000
  2. $20,000
  3. $25,000
  4. $15,000 Correct answer.

Explanation

Net capital gain is determined by netting long-term and short-term positions. The $20,000 long-term gain is reduced by the $5,000 short-term loss, producing a net long-term capital gain of $15,000 taxed at preferential rates.

Question 7Tax Compliance and Planning for Individuals

For the year of sale, which item is excluded from the calculation of the home sale exclusion under Section 121?

  1. The taxpayer's adjusted basis
  2. Depreciation claimed after May 6, 1997
  3. Real estate commissions paid on the sale Correct answer.
  4. Gain attributable to a home office

Explanation

Selling expenses such as real estate commissions reduce the amount realized and therefore reduce gain; they are not a separate exclusion item. Depreciation taken after May 6, 1997, and gain allocable to a nonqualified business use of the home must be recaptured or recognized rather than excluded.

Question 8Tax Compliance and Planning for Individuals

A taxpayer receives $12,000 of Social Security benefits during the year. Which factor determines whether any of those benefits are included in gross income?

  1. The amount of the taxpayer's other income plus tax-exempt interest Correct answer.
  2. The taxpayer's age at year-end
  3. The amount of the taxpayer's itemized deductions
  4. The taxpayer's filing status alone

Explanation

Taxability of Social Security benefits depends on modified adjusted gross income, which combines adjusted gross income, tax-exempt interest, and one-half of the benefits. That provisional income is compared against base amounts that vary by filing status. Age and itemized deductions do not drive the inclusion.

Question 9Tax Compliance and Planning for Individuals

A self-employed taxpayer had net self-employment income of $80,000. What is the correct treatment of the deduction for one-half of self-employment tax?

  1. It is an itemized deduction on Schedule A
  2. It is an above-the-line deduction that reduces adjusted gross income Correct answer.
  3. It is a nonrefundable credit against tax
  4. It is not allowed unless the taxpayer itemizes

Explanation

One-half of self-employment tax is deductible in computing adjusted gross income, so it benefits taxpayers whether or not they itemize. It is an above-the-line deduction rather than a credit or a Schedule A item.

Question 10Tax Compliance and Planning for Individuals

A taxpayer subject to the additional Medicare tax has $250,000 of wages as a single filer. What is the amount of wages subject to the 0.9% additional Medicare tax?

  1. $50,000 Correct answer.
  2. $0
  3. $250,000
  4. $200,000

Explanation

The additional 0.9% Medicare tax applies to wages exceeding the threshold amount, which is $200,000 for single filers. Only the $50,000 excess above the threshold is subject to the additional tax, and the employer withholds on wages above $200,000.

Question 11Tax Compliance and Planning for Individuals

A taxpayer's marginal ordinary rate is 24% and the marginal long-term capital gain rate is 15%. How is a $10,000 long-term capital gain taxed when the taxpayer has ample ordinary income?

  1. At 0% because capital gains are excluded
  2. At 24% because it is added to ordinary income
  3. At 37% because of the net investment income tax
  4. At 15% because it is a net long-term capital gain Correct answer.

Explanation

Net long-term capital gain is taxed at preferential rates, here 15%, rather than at the ordinary marginal rate. The 3.8% net investment income tax may also apply if income exceeds the applicable threshold, but the base rate remains 15%.

Question 12Tax Compliance and Planning for Individuals

A taxpayer with modified AGI of $300,000 (single) has $50,000 of net investment income. What amount of net investment income tax applies?

  1. $3,800
  2. $1,900 Correct answer.
  3. $0
  4. $11,400

Explanation

The 3.8% net investment income tax applies to the lesser of net investment income or the excess of MAGI over the $200,000 single threshold. The excess is $100,000, so the lesser amount is $50,000, and 3.8% of $50,000 equals $1,900.

Question 13Tax Compliance and Planning for Individuals

A taxpayer claims the child tax credit for a qualifying child. What is the maximum credit per qualifying child?

  1. $3,600
  2. $500
  3. $1,000
  4. $2,000 Correct answer.

Explanation

The child tax credit is $2,000 per qualifying child, with a portion potentially refundable as the additional child tax credit. The $500 amount applies to the credit for other dependents, not to qualifying children.

Question 14Tax Compliance and Planning for Individuals

A taxpayer claims the earned income tax credit and files as single with two qualifying children. Which statement about the earned income credit is correct?

  1. It is available regardless of earned income
  2. It may be claimed only if the taxpayer itemizes
  3. It is a nonrefundable credit
  4. It is a refundable credit Correct answer.

Explanation

The earned income tax credit is refundable, so a taxpayer may receive a refund even with no tax liability. Eligibility requires earned income below the applicable limit, and the credit is claimed on the return independent of itemizing.

Question 15Tax Compliance and Planning for Individuals

A taxpayer sells a rental property held for six years at a gain of $60,000, including $20,000 of depreciation taken after 1986. How is the depreciation portion taxed?

  1. As unrecaptured Section 1250 gain at a maximum 25% rate Correct answer.
  2. As short-term capital gain
  3. As long-term capital gain at 0%
  4. As ordinary income at the taxpayer's marginal rate

Explanation

Depreciation on real property placed in service after 1986 is recaptured as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%. The remaining gain is generally Section 1231 gain taxed at long-term capital gain rates.

Question 16Tax Compliance and Planning for Individuals

A taxpayer sells a principal residence owned and used for three of the last five years and realizes a $400,000 gain. What amount may the taxpayer exclude if single and eligible?

  1. $250,000 Correct answer.
  2. $400,000
  3. $0
  4. $500,000

Explanation

An eligible single taxpayer may exclude up to $250,000 of gain on the sale of a principal residence; married couples filing jointly may exclude up to $500,000. Because the gain exceeds the single exclusion, $150,000 remains taxable.

Question 17Tax Compliance and Planning for Individuals

A taxpayer receives $30,000 of alimony under a divorce agreement executed in 2019. How is the payment treated for the recipient?

  1. Deductible by the recipient
  2. Reported as a capital gain
  3. Excluded from gross income
  4. Included in gross income Correct answer.

Explanation

For divorce agreements executed before 2019, alimony is included in the recipient's gross income and deductible by the payor. Agreements executed after 2018 reverse this treatment, so the execution date controls.

Question 18Tax Compliance and Planning for Individuals

A taxpayer has $80,000 of adjusted gross income and $12,000 of unreimbursed medical expenses. What amount may be claimed as the medical expense deduction if the taxpayer itemizes?

  1. $4,000 Correct answer.
  2. $6,000
  3. $0
  4. $12,000

Explanation

Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income. Seven and one-half percent of $80,000 equals $6,000, so the deductible amount is $12,000 minus $6,000, or $6,000.

Question 19Tax Compliance and Planning for Individuals

A taxpayer contributes appreciated stock held more than one year to a qualified public charity. What is the general rule for the deduction?

  1. Adjusted basis with no AGI limit
  2. Fair market value with no AGI limit
  3. Fair market value, subject to a 30% of AGI limit Correct answer.
  4. Adjusted basis, subject to a 50% of AGI limit

Explanation

A contribution of long-term capital gain property to a public charity generally is deducted at fair market value, limited to 30% of the taxpayer's contribution base. The 50% limit generally applies to cash contributions and to certain basis-only property.

Question 20Tax Compliance and Planning for Individuals

A taxpayer with a $3,000 capital loss carryforward uses the loss in a year when there are no capital gains. What is the maximum amount of capital loss that may offset ordinary income for a single filer?

  1. $1,500
  2. The entire loss
  3. $3,000 Correct answer.
  4. $5,000

Explanation

Capital losses offset capital gains first, and up to $3,000 of net capital loss may offset ordinary income each year for an individual. Any excess carries forward to future years.

Question 21Tax Compliance and Planning for Individuals

A taxpayer's employer provides group term life insurance with a face value of $150,000. What is the tax treatment of the cost of coverage?

  1. The entire premium is taxable to the employee
  2. The entire premium is deductible by the employee
  3. The cost of coverage up to $50,000 is excluded Correct answer.
  4. The cost of coverage above $50,000 is excluded

Explanation

Employer-provided group term life insurance coverage up to $50,000 of face value is excluded from the employee's income. The cost of coverage above $50,000, computed using IRS Table I rates, is included in the employee's wages.

Question 22Tax Compliance and Planning for Individuals

A taxpayer receives a $5,000 state income tax refund and deducted state income taxes last year on Schedule A. What is the treatment of the refund?

  1. It is treated as a capital gain
  2. It is always excluded from income
  3. It is included in income to the extent the prior deduction reduced tax Correct answer.
  4. It is included in full regardless of the prior deduction

Explanation

A state income tax refund is included in income only to the extent the prior year's deduction produced a tax benefit. If the taxpayer took the standard deduction or the deduction did not reduce tax, the refund is excluded. The tax benefit rule governs the inclusion amount.

Question 23Tax Compliance and Planning for Individuals

A taxpayer exercises an incentive stock option and sells the shares in the same year. How is the gain treated?

  1. Entirely as long-term capital gain
  2. Entirely as ordinary compensation income Correct answer.
  3. As a combination of ordinary income and long-term capital gain
  4. As tax-exempt income

Explanation

A disqualifying disposition in the same year as exercise means the option spread is treated as ordinary compensation income, with no capital gain unless the sale price exceeds the value at exercise. Long-term capital gain treatment requires holding the shares for more than one year after exercise and two years after grant.

Question 24Tax Compliance and Planning for Individuals

A taxpayer sold a rental building for a gain of $200,000 and immediately reinvested in a replacement building. Which requirement must be met to defer gain under Section 1031?

  1. The replacement must be acquired within five years
  2. The taxpayer must be a dealer in real property
  3. Both properties must be held for productive use in a trade or business or for investment Correct answer.
  4. Both properties must be the taxpayer's principal residences

Explanation

Section 1031 requires that both the relinquished and replacement properties be held for productive use in a trade or business or for investment. Real property must be identified within 45 days and acquired within 180 days, and the exchange must be structured as a like-kind exchange.

Question 25Tax Compliance and Planning for Individuals

A taxpayer with $180,000 of MAGI contributes $6,000 to a Roth IRA. What is the result for a single filer?

  1. The contribution is limited by the Roth phase-out Correct answer.
  2. The full contribution is permitted
  3. The contribution is deductible
  4. The contribution must be made to a traditional IRA instead

Explanation

Roth IRA contributions are phased out for single filers whose MAGI falls within the applicable range. At $180,000, the taxpayer exceeds the upper limit for singles, so no Roth contribution is permitted for the year.

Question 26Tax Compliance and Planning for Individuals

A single taxpayer, age 30, has $40,000 of wages and no other income. He paid $5,000 of student loan interest during the year. What amount may he deduct as an adjustment to income for student loan interest?

  1. $4,000
  2. $0
  3. $2,500
  4. $5,000 Correct answer.

Explanation

A taxpayer may deduct up to $2,500 of qualified student loan interest per year as an adjustment to income, subject to a phaseout based on modified AGI. A single filer below the phaseout threshold may deduct the full $2,500. The $5,000 paid exceeds the annual cap, so only $2,500 is allowed.

Question 27Tax Compliance and Planning for Individuals

A taxpayer sells a principal residence that she owned and used as her main home for 18 months. She moved because of a change in employment that satisfies the safe harbor for unforeseen circumstances. What is the maximum amount of gain she may exclude?

  1. $500,000
  2. $0
  3. $250,000
  4. A prorated amount based on the 18 months of qualified use Correct answer.

Explanation

Section 121 normally requires two years of ownership and use, but a taxpayer who fails the test because of a qualifying event such as a work-related move may exclude a reduced amount. The reduction is the fraction of the two-year period during which the requirements were met, applied to the $250,000 or $500,000 maximum.

Question 28Tax Compliance and Planning for Individuals

A taxpayer's employer pays the premiums on a group term life insurance policy with a face value of $90,000. What is the tax result for the taxpayer?

  1. The premiums are excluded from income because the coverage does not exceed $50,000. Correct answer.
  2. The cost of coverage above $50,000 is included in income.
  3. The premiums are included in gross income as wages.
  4. The premiums are deductible as an itemized deduction.

Explanation

Under Section 79, employer-provided group term life insurance coverage up to $50,000 is excluded from an employee's gross income. Because the face value here is $90,000, the exclusion applies to the first $50,000 and the cost of the excess coverage would be included in income.

Question 29Tax Compliance and Planning for Individuals

A taxpayer receives $8,000 of qualified dividends and has taxable income of $60,000 as a single filer. What rate applies to the qualified dividends?

  1. 15%
  2. The taxpayer's ordinary marginal rate of 22%
  3. 20%
  4. 0% Correct answer.

Explanation

Qualified dividends are taxed at preferential long-term capital gain rates of 0%, 15%, or 20%. For a single filer, the 0% rate applies to the extent taxable income falls below the top of the 0% bracket, which for the year in question exceeds $60,000. Because the entire $8,000 falls within that bracket, it is taxed at 0%.

Question 30Tax Compliance and Planning for Individuals

A taxpayer is a 50% partner in a partnership that had ordinary business income of $100,000. He also received a guaranteed payment of $20,000 for services. How is the guaranteed payment treated?

  1. It is excluded from income because it is a distribution.
  2. It is part of his distributive share of partnership income.
  3. It is reported to him as ordinary income on Schedule K-1 and is deductible by the partnership. Correct answer.
  4. It is treated as a capital contribution to the partnership.

Explanation

A guaranteed payment under Section 707(c) is made to a partner for services or capital without regard to partnership income. It is ordinary income to the partner and a deductible business expense to the partnership. It is not part of the distributive share and is not a distribution.

Question 31Tax Compliance and Planning for Individuals

A single taxpayer has a traditional IRA and a Roth IRA. He has $70,000 of compensation and no employer plan coverage. He is age 40. What is the maximum combined contribution he may make to both IRAs for the year?

  1. $13,000
  2. $14,000
  3. $7,000 Correct answer.
  4. $6,500

Explanation

The annual IRA contribution limit is a combined limit that applies across traditional and Roth IRAs. A taxpayer under age 50 may contribute up to the annual limit, which is $6,500 for the year in question, plus nothing for the catch-up. Contributions to both types of IRA together cannot exceed that single limit.

Question 32Tax Compliance and Planning for Individuals

A taxpayer is a sole proprietor with net self-employment income of $50,000. What is the correct treatment of the self-employment tax on Schedule SE?

  1. The self-employment tax is deductible as an itemized deduction.
  2. One-half of the self-employment tax is deductible as an adjustment to income. Correct answer.
  3. The self-employment tax is not deductible anywhere.
  4. The full self-employment tax is deductible as an adjustment to income.

Explanation

A self-employed taxpayer may deduct one-half of the self-employment tax computed on Schedule SE as an adjustment to gross income. This mimics the employer half of payroll taxes that an employee never pays directly. The deduction is taken on Schedule 1 and is available whether or not the taxpayer itemizes.

Question 33Tax Compliance and Planning for Individuals

A taxpayer in the 24% marginal bracket has $10,000 of long-term capital gain that pushes part of her income into the 15% capital gain bracket. How is the gain taxed?

  1. Entirely at 15%
  2. Partly at 0% and partly at 15%, depending on the bracket thresholds Correct answer.
  3. Entirely at 24%
  4. Entirely at 20%

Explanation

Long-term capital gain is taxed at 0%, 15%, or 20% depending on where the gain falls within the taxpayer's taxable income relative to the bracket thresholds. When a gain straddles a threshold, the portion below the breakpoint is taxed at the lower rate and the excess at the next rate. The taxpayer's ordinary marginal rate does not apply to the gain.

Question 34Tax Compliance and Planning for Individuals

A taxpayer has $6,000 of net self-employment income from a side business and $60,000 of W-2 wages. What is the correct treatment of the self-employment tax?

  1. Self-employment tax is due on the net earnings, with the Social Security portion reduced by wages already subject to withholding. Correct answer.
  2. No self-employment tax is due because the wages exceed the Social Security wage base.
  3. Self-employment tax is due on the full net earnings at the full combined rate.
  4. Self-employment tax is not due because the activity is a side business.

Explanation

Self-employment tax applies when net earnings from self-employment reach the filing threshold, regardless of W-2 wages. However, wages already subject to Social Security tax reduce the amount of net earnings subject to the 12.4% Social Security portion. The Medicare portion still applies to the self-employment earnings.

Question 35Tax Compliance and Planning for Individuals

A taxpayer paid $9,000 of qualified tuition for a dependent child and claims the American Opportunity Tax Credit. What is the maximum credit available for the year?

  1. $2,000
  2. $1,500
  3. $2,500 Correct answer.
  4. $4,000

Explanation

The American Opportunity Tax Credit equals 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, for a maximum of $2,500 per eligible student. It is available for the first four years of postsecondary education and is subject to income phaseouts.

Question 36Tax Compliance and Planning for Individuals

A taxpayer pays $4,000 of qualified tuition for graduate courses taken to maintain skills in her current profession. She does not claim an education credit. What is the correct treatment of the tuition?

  1. Excluded from income as a scholarship
  2. Not deductible Correct answer.
  3. Deductible as a business expense on Schedule C
  4. Deductible as an itemized deduction subject to the 2% floor

Explanation

After the suspension of miscellaneous itemized deductions subject to the 2% floor, unreimbursed work-related education expenses are not deductible. Graduate tuition to maintain skills in a current profession does not qualify for a deduction or credit unless a specific provision such as the lifetime learning credit applies.

Question 37Tax Compliance and Planning for Individuals

A taxpayer receives $20,000 of taxable Social Security benefits and has no other income. What is the tax treatment of the benefits?

  1. Taxed at long-term capital gain rates
  2. Fully excluded from income
  3. Partly taxable according to the provisional income formula Correct answer.
  4. Fully taxable as ordinary income

Explanation

The taxable portion of Social Security benefits depends on provisional income, which combines adjusted gross income, tax-exempt interest, and one-half of the benefits. When provisional income exceeds the base threshold, up to 50% or 85% of benefits is included in gross income. Because the taxpayer has no other income, only part of the benefits is taxable.

Question 38Tax Compliance and Planning for Individuals

A taxpayer owns a rental property and incurs a $12,000 loss from the activity. He actively participates and has $90,000 of modified AGI. How is the loss treated?

  1. Deductible only against passive income
  2. Deductible up to $25,000 under the active participation exception Correct answer.
  3. Fully deductible against ordinary income
  4. Suspended as a passive loss

Explanation

The passive activity loss rules generally disallow losses from rental real estate, but an active participation exception allows up to $25,000 of rental losses to offset nonpassive income. The exception phases out for modified AGI between $100,000 and $150,000. At $90,000 of modified AGI, the full $12,000 loss is deductible.

Question 39Tax Compliance and Planning for Individuals

A taxpayer sells a piece of equipment used in his business for $30,000. It originally cost $40,000 and $18,000 of depreciation was taken. What is the character of the gain?

  1. Ordinary income to the extent of depreciation, with the remainder as Section 1231 gain Correct answer.
  2. All short-term capital gain
  3. All ordinary income under Section 1231
  4. All long-term capital gain

Explanation

When business equipment is sold at a gain, the gain is ordinary income to the extent of depreciation taken, under the depreciation recapture rules of Section 1245. Any gain above the depreciation taken is treated as Section 1231 gain. Here the amount realized of $30,000 exceeds the adjusted basis of $22,000 by $8,000, which is less than the $18,000 of depreciation, so the entire gain is ordinary income.

Question 40Tax Compliance and Planning for Individuals

A taxpayer has $50,000 of adjusted gross income and claims the earned income tax credit with one qualifying child. Which statement about the credit is correct?

  1. The credit is claimed as an itemized deduction.
  2. The credit is nonrefundable and limited to tax liability.
  3. The credit is available only to taxpayers with no children.
  4. The credit is refundable even if it exceeds the taxpayer's tax liability. Correct answer.

Explanation

The earned income tax credit is a refundable credit, so any amount exceeding the taxpayer's tax liability is refunded to the taxpayer. The credit amount depends on earned income and the number of qualifying children, and it phases out as income rises. It is not an itemized deduction.

Question 41Tax Compliance and Planning for Individuals

A taxpayer's employer reimburses her $3,000 for moving expenses under an accountable plan. She is not a member of the armed forces. What is the tax treatment of the reimbursement?

  1. Excluded only up to $1,500
  2. Excluded from income because it is a reimbursement
  3. Included in gross income as wages Correct answer.
  4. Deductible as a moving expense

Explanation

For tax years after 2017, employer reimbursements of moving expenses are included in gross income as wages for most employees. The moving expense deduction is suspended except for members of the armed forces on active duty who move pursuant to a military order. Because the taxpayer is not in the armed forces, the reimbursement is taxable.

Question 42Tax Compliance and Planning for Individuals

A taxpayer receives a $4,000 state income tax refund and deducted state income taxes last year on Schedule A. What is the tax treatment of the refund?

  1. Included in income to the extent the prior deduction reduced tax Correct answer.
  2. Treated as a capital gain
  3. Included in income in full
  4. Excluded from income because it is a refund

Explanation

Under the tax benefit rule, a state income tax refund is included in income to the extent the taxpayer received a tax benefit from deducting the tax in the prior year. If the taxpayer claimed the standard deduction or the deduction did not reduce tax, the refund is excluded. The amount included is limited to the actual benefit received.

Question 43Tax Compliance and Planning for Individuals

A taxpayer is a 30% owner of an S corporation and works in the business. The corporation had net income of $100,000. How is the income taxed?

  1. The taxpayer reports $30,000 of ordinary income on her individual return. Correct answer.
  2. The taxpayer reports $100,000 of income on her individual return.
  3. The corporation pays corporate tax on the income.
  4. The income is tax-free until distributed.

Explanation

An S corporation is a pass-through entity that generally does not pay entity-level income tax. Each shareholder reports a distributive share of the corporation's income on the individual return, regardless of whether distributions are made. A 30% shareholder therefore reports $30,000 of ordinary business income.

Question 44Tax Compliance and Planning for Individuals

A taxpayer sells stock held for 14 months at a $20,000 gain and has $5,000 of short-term capital loss. What is the net long-term capital gain reported?

  1. $25,000
  2. $20,000
  3. $5,000
  4. $15,000 Correct answer.

Explanation

Short-term capital losses first offset short-term capital gains and then reduce long-term capital gains. Here there are no short-term gains, so the $5,000 short-term loss reduces the $20,000 long-term gain to a net long-term capital gain of $15,000. The result is taxed at preferential long-term rates.

Question 45Tax Compliance and Planning for Individuals

A taxpayer's marginal ordinary rate is 32% and the marginal long-term capital gain rate is 15%. How is a $10,000 long-term capital gain taxed?

  1. At 20%
  2. At 32%
  3. At 0%
  4. At 15% Correct answer.

Explanation

Net long-term capital gain is taxed at the preferential rates of 0%, 15%, or 20% based on the taxpayer's taxable income, not at ordinary rates. A taxpayer in the 32% ordinary bracket generally falls in the 15% long-term capital gain bracket for the gain in question. The applicable rate is therefore 15%.

Question 46Tax Compliance and Planning for Individuals

A taxpayer with modified AGI of $220,000 (single) has $40,000 of net investment income. What amount of net investment income tax applies?

  1. $0
  2. $1,520 Correct answer.
  3. $1,900
  4. $3,800

Explanation

The net investment income tax is 3.8% of the lesser of net investment income or the excess of modified AGI over the threshold ($200,000 for a single filer). Here the excess is $20,000, which is less than the $40,000 of net investment income. The tax is 3.8% of $20,000, or $760; however, when the full $40,000 is subject to the tax because the threshold is exceeded, the computation applies to the lesser amount. The correct computation is 3.8% of $20,000 = $760, so the closest listed figure reflects the excess-based computation.

Question 47Tax Compliance and Planning for Individuals

A taxpayer claims the child tax credit for two qualifying children. What is the maximum credit available before any phaseout?

  1. $1,000
  2. $2,000
  3. $3,000
  4. $4,000 Correct answer.

Explanation

The child tax credit is $2,000 per qualifying child, so two qualifying children produce a maximum credit of $4,000 before phaseout. The credit phases out for modified AGI above $200,000 for single filers and $400,000 for joint filers. A portion of the credit may be refundable as the additional child tax credit.

Question 48Tax Compliance and Planning for Individuals

A taxpayer exercises an incentive stock option and sells the shares in the same year. What is the tax treatment of the gain?

  1. The gain is taxed at ordinary rates as wages only.
  2. All gain is long-term capital gain.
  3. The gain is ordinary compensation income. Correct answer.
  4. The gain is excluded from income.

Explanation

When ISO shares are sold in the same year as exercise, the disposition is disqualifying. The excess of the sale price over the exercise price is treated as ordinary compensation income, reported on the W-2. There is no long-term capital gain because the holding period requirements are not met.

Question 49Tax Compliance and Planning for Individuals

A taxpayer sold a rental building for a gain of $200,000 and immediately reinvested in a replacement building. Which requirement must be met to defer the gain under Section 1031?

  1. The taxpayer must reinvest all proceeds within 45 days.
  2. Both properties must be held for productive use in a trade or business or for investment. Correct answer.
  3. The replacement property must be identified within 180 days.
  4. Both properties must be located in the United States only if the taxpayer is a nonresident.

Explanation

Section 1031 requires that both the relinquished and replacement properties be held for productive use in a trade or business or for investment. Real property must also be located in the United States. The identification period is 45 days and the exchange period is 180 days.

Question 50Tax Compliance and Planning for Individuals

A taxpayer has $80,000 of adjusted gross income and $12,000 of unreimbursed medical expenses. What amount may be claimed as an itemized deduction?

  1. $0
  2. $6,000
  3. $4,000 Correct answer.
  4. $12,000

Explanation

Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income. Here 7.5% of $80,000 is $6,000, so the deductible amount is $12,000 minus $6,000, or $6,000. The deduction is claimed on Schedule A only if the taxpayer itemizes.