I85PREP
⌘ K
EA Part 1 study materials
EA Part 1 study resources

EA Part 1 practice questions

One question at a time. Build your EA Part 1 understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Preliminary Work with Taxpayer Data

Trevor is unmarried and paid 60% of the cost of maintaining his home for the entire year. His 10-year-old daughter lived with him for nine months of the year, and for more than half the year she lived with no one else. Which filing status applies for Trevor?

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

Explanation

Head of household requires the taxpayer to be unmarried at year end, to have paid more than half the cost of maintaining the household, and to have a qualifying person live with the taxpayer for more than half the year. Trevor meets all three requirements, so head of household gives him the most favorable rate schedule.

Question 2Preliminary Work with Taxpayer Data

Form 8867, Paid Preparer's Due Diligence Checklist, must be completed and filed with a return that claims which of the following?

  1. The adoption credit
  2. The child and dependent care credit
  3. The residential clean energy credit
  4. The earned income credit Correct answer.

Explanation

The due diligence rules and Form 8867 apply to returns claiming the earned income credit, the child tax credit and related credits, the American opportunity tax credit, and head of household filing status. Other credits, such as the child and dependent care credit, are outside this list.

Question 3Preliminary Work with Taxpayer Data

Which statement about the preparer tax identification number (PTIN) is correct?

  1. A PTIN is required only for preparers who transmit returns electronically.
  2. A PTIN may be shared by all employees of the same firm.
  3. A PTIN is issued once and remains valid without renewal.
  4. A PTIN must be renewed each year during the annual renewal period. Correct answer.

Explanation

Every preparer who prepares returns for compensation must have a PTIN and use it on the returns, regardless of whether paper or electronic filing is used. The number belongs to the individual preparer and must be renewed annually, generally between mid-October and the end of December.

Question 4Preliminary Work with Taxpayer Data

A preparer must retain a copy of a prepared return, or a list of its contents, for at least:

  1. Two years after the return is filed with the Internal Revenue Service.
  2. Five years after the return is filed with the Internal Revenue Service.
  3. Three years after the return is due or, if later, the date it was filed. Correct answer.
  4. One year after the return is filed with the Internal Revenue Service.

Explanation

Circular 230 requires a preparer to keep a copy of the return or a record of its contents for three years measured from the return's due date or the filing date, whichever is later. Retaining supporting records that support the items on the return is also a recommended practice.

Question 5Preliminary Work with Taxpayer Data

An enrolled agent discovers an error or omission in a client's previously filed return that the client has not corrected. Under Circular 230, the enrolled agent must:

  1. Take no action because the return has already been filed.
  2. Promptly advise the client of the error and its consequences. Correct answer.
  3. Report the client to the IRS Office of Professional Responsibility.
  4. File an amended return without the client's consent.

Explanation

Circular 230 requires the practitioner to advise the client promptly upon learning of an error or omission in a prior return and to explain the consequences. The client decides whether to correct the return; the practitioner may not amend it unilaterally.

Question 6Preliminary Work with Taxpayer Data

Under IRC §7216, a preparer generally may disclose a client's tax return information to an unrelated third party only when:

  1. The preparer believes the disclosure will benefit the client.
  2. The third party is the client's adult child.
  3. The information is disclosed orally rather than in writing.
  4. The client has given a written consent that satisfies the regulations. Correct answer.

Explanation

Section 7216 makes unauthorized disclosure or use of return information a crime and permits disclosure to third parties only under specified exceptions, the most common being a valid written consent from the taxpayer. A preparer's belief that disclosure helps the client does not substitute for consent.

Question 7Preliminary Work with Taxpayer Data

The age test for a qualifying child is satisfied if the child is:

  1. Permanently and totally disabled during the year, at any age. Correct answer.
  2. Under age 21 at the end of the tax year.
  3. Any age, if the child lived with the taxpayer for the entire year.
  4. Under age 26 at the end of the tax year.

Explanation

A child meets the age test if under 19 at year end, under 24 and a full-time student, or permanently and totally disabled at any time during the year regardless of age. Living with the taxpayer satisfies the residency test but does not by itself satisfy the age test.

Question 8Preliminary Work with Taxpayer Data

An individual who is not eligible for a Social Security number but has a U.S. federal tax filing obligation should obtain:

  1. An individual taxpayer identification number Correct answer.
  2. A preparer tax identification number
  3. An employer identification number
  4. An adoption taxpayer identification number

Explanation

An individual taxpayer identification number is issued by the IRS to individuals who have a federal tax obligation but cannot obtain a Social Security number. It is requested on Form W-7 and used on returns and information documents in place of an SSN.

Question 9Preliminary Work with Taxpayer Data

Nadia is 45, unmarried, and paid 55% of the cost of maintaining her apartment for the entire year. Her 70-year-old mother, whose only income was $3,000 of interest, lived with Nadia all year, and Nadia provided more than half of her mother's support. Which filing status may Nadia use?

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

Explanation

A parent who meets the qualifying relative tests counts as a qualifying person for head of household purposes, and the mother's $3,000 of interest is below the gross income threshold. Because Nadia is unmarried, paid more than half the household cost, and supported a qualifying person who lived with her, head of household applies.

Question 10Preliminary Work with Taxpayer Data

Leo wants to claim his 22-year-old nephew as a qualifying relative for 2024. The nephew lived with Leo all year and is not a student, his wages were $6,000, and Leo provided more than half of his support. Which requirement does the nephew fail?

  1. The member of household or relationship test
  2. The support test
  3. The joint return test
  4. The gross income test Correct answer.

Explanation

A qualifying relative's gross income must not exceed the annually adjusted threshold, which is $5,050 for 2024. Because the nephew earned $6,000, he fails the gross income test and cannot be claimed as a qualifying relative regardless of the other tests being met.

Question 11Preliminary Work with Taxpayer Data

A divorced couple's child lived with the mother for nine months and with the father for three months. The father wants to claim the child as a dependent. What must the father obtain?

  1. A written release from the mother, such as Form 8332 Correct answer.
  2. Nothing, because he paid more than half of the child's support
  3. A court order granting him custody for more than half the year
  4. A signed statement from the child consenting to the claim

Explanation

The custodial parent is generally entitled to claim the child, and the noncustodial parent may claim the child only if the custodial parent signs a release, such as Form 8332 or a substantially similar statement. Support payments alone do not shift the dependency to the noncustodial parent.

Question 12Preliminary Work with Taxpayer Data

Three adult siblings each provide 30% of their mother's support, and no one provides more than half. Their mother's gross income is below the threshold. How may one sibling claim the mother as a qualifying relative?

  1. By claiming the mother on a joint return filed with her
  2. By obtaining a court order naming that sibling as the mother's support provider
  3. By proving the mother lived with that sibling for the entire year
  4. By using a multiple support agreement and obtaining waivers from the others Correct answer.

Explanation

When two or more persons together provide more than half of a dependent's support but no one provides more than half alone, the group may use a multiple support agreement. The claiming sibling must have provided more than 10% of support, and the other contributors who provided more than 10% must sign statements waiving the claim, typically on Form 2120.

Question 13Preliminary Work with Taxpayer Data

A client wants her CPA to receive copies of IRS notices and transcripts but does not want the CPA to represent her before the IRS. Which form should be filed?

  1. Form 8822
  2. Form 8821 Correct answer.
  3. Form 2848
  4. Form 4506-T

Explanation

Form 8821, Tax Information Authorization, lets a designee receive and inspect confidential tax information but does not authorize the designee to represent the taxpayer. Representation authority, including the power to act on the taxpayer's behalf before the IRS, requires Form 2848.

Question 14Preliminary Work with Taxpayer Data

A preparer is asked to prepare returns for both spouses in a pending divorce, and their interests conflict. Under Circular 230, the preparer may undertake the engagement only if:

  1. Each client consents in writing and the preparer can serve both competently. Correct answer.
  2. The preparer discloses the conflict to the IRS in writing on the returns.
  3. Both spouses agree orally to the arrangement before the work begins.
  4. The preparer charges each spouse an identical fee for the engagement.

Explanation

Circular 230 permits a practitioner to represent clients with conflicting interests only when the conflict is not prohibited by law, each affected client gives informed written consent, and the practitioner reasonably believes the engagement can be performed competently and diligently for each client.

Question 15Preliminary Work with Taxpayer Data

A client cannot explain a $40,000 deposit and tells the preparer to "make something up." Under Circular 230, the preparer should:

  1. Refuse to sign the return unless the item is resolved satisfactorily. Correct answer.
  2. Report the deposit as miscellaneous income and note the uncertainty on the return.
  3. Attach a disclosure statement to the return and sign it.
  4. Sign the return, because the client bears the ultimate responsibility.

Explanation

A practitioner may not sign a return or claim for refund that contains a position the practitioner knows, or reasonably should know, lacks a reasonable basis. Fabricating an income item or signing with unresolved questions violates that duty, so the preparer must decline to sign until the item is properly supported.

Question 16Preliminary Work with Taxpayer Data

Under the FTC Safeguards Rule, a tax return preparation firm must:

  1. Report all client data to the IRS annually.
  2. Purchase cyber liability insurance before accepting new clients.
  3. Encrypt every client file that is stored in paper form.
  4. Maintain a written information security program suited to its size and activities. Correct answer.

Explanation

The Safeguards Rule requires covered financial institutions, which include tax return preparers, to develop, implement, and maintain a written information security program. The program must be appropriate to the firm's size, complexity, and the sensitivity of the customer data it handles.

Question 17Preliminary Work with Taxpayer Data

A preparer may rely in good faith on information the client provides, but Circular 230 requires the preparer to:

  1. Make reasonable inquiries if the information appears incorrect or incomplete. Correct answer.
  2. Verify all income items against IRS transcripts.
  3. Obtain a signed statement from the client promising the information is true.
  4. Independently audit every item on the return before signing.

Explanation

Reliance on client information is permitted, but the practitioner may not ignore warning signs. If information appears incorrect, inconsistent, or incomplete, the practitioner must make reasonable inquiries before signing the return.

Question 18Preliminary Work with Taxpayer Data

Before an individual income tax return is transmitted to the IRS under the e-file program, the taxpayer must:

  1. Sign a paper copy of the return and mail it to the IRS.
  2. Sign Form 8879 or another authorized electronic signature document. Correct answer.
  3. Pay the preparer's fee in full.
  4. Obtain an electronic filing identification number from the IRS.

Explanation

An electronically filed individual return must be authorized by the taxpayer's signature on Form 8879 or an equivalent IRS-approved electronic signature method before transmission. The electronic filing identification number is issued to the provider, not the taxpayer.

Question 19Preliminary Work with Taxpayer Data

A client married in October and wants to file under her new married name, but she has not reported the name change to the Social Security Administration. What should the preparer advise?

  1. Update her Social Security record before filing so the name and number match IRS records. Correct answer.
  2. File under her maiden name and write the spouse's name in the margin.
  3. File as single to avoid the name-matching problem.
  4. File under the new name; the IRS will match the return to the Social Security number.

Explanation

The IRS matches the name and Social Security number on a return against Social Security Administration records. If the client has not updated her record, the return may be rejected electronically or delayed in processing, so she should contact the Social Security Administration before filing.

Question 20Preliminary Work with Taxpayer Data

A preparer's laptop containing client returns is stolen. Which response is most appropriate?

  1. Take no action unless the laptop is later recovered by the police.
  2. Follow the firm's security plan: notify affected clients and the IRS. Correct answer.
  3. Notify only the clients whose returns were filed electronically.
  4. Wait until the filing season ends to evaluate the extent of the loss.

Explanation

A data loss involving client tax information must be handled under the firm's written information security plan, which typically requires prompt notice to affected clients, notification to the IRS and other authorities as appropriate, and steps to mitigate harm. Delaying notice increases the risk of identity theft and the firm's exposure.

Question 21Preliminary Work with Taxpayer Data

Ravi's wife died in 2021 and he has not remarried. His 9-year-old daughter lived with him all year, and he paid all of the household costs. Which filing status should Ravi use for 2024?

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

Explanation

Qualifying surviving spouse status is available only for the two tax years following the year of the spouse's death, which would be 2022 and 2023 here. For 2024 Ravi no longer qualifies for that status but meets all head of household requirements through his daughter.

Question 22Preliminary Work with Taxpayer Data

A preparer takes a position on a client's return that lacks substantial authority but has a reasonable basis and is adequately disclosed on the return. What is the preparer's position under IRC §6694?

  1. No penalty applies, because preparer penalties reach only tax shelters.
  2. The preparer is subject to a penalty unless the client signs a consent.
  3. The preparer is subject to a penalty because substantial authority is required in every case.
  4. No penalty applies, because the position is disclosed and has a reasonable basis. Correct answer.

Explanation

For a return that is not a tax shelter or reportable transaction, the preparer penalty applies when a position is not disclosed and lacks substantial authority, or when it is disclosed but lacks a reasonable basis. A disclosed position supported by a reasonable basis therefore avoids the penalty.

Question 23Preliminary Work with Taxpayer Data

A former client asks a preparer to return records the client provided for a completed engagement. Under Circular 230, the preparer must:

  1. Refuse the request because the records were used to prepare a filed return.
  2. Return the records only after the client pays all outstanding fees, in every case.
  3. Retain the original records permanently as required by Circular 230.
  4. Return the records the client needs to meet tax obligations, but may keep copies. Correct answer.

Explanation

At the client's request, a practitioner must promptly return any records needed by the client to comply with federal tax obligations. The practitioner may retain copies and may retain limited records where state law grants a lien for unpaid fees, but cannot hold the client's records hostage in every case.

Question 24Preliminary Work with Taxpayer Data

Two unmarried adults who are not the child's parents each claim the same child as a qualifying child, and both meet all of the tests. How is the tie resolved?

  1. The taxpayer who provided more support for the child.
  2. Neither may claim the child unless the parents sign a release.
  3. The taxpayer the child lived with longer during the year.
  4. The taxpayer with the higher adjusted gross income. Correct answer.

Explanation

When a child could be a qualifying child of two or more taxpayers and neither claimant is the child's parent, the tie-breaker rule assigns the child to the taxpayer with the highest adjusted gross income. Parental status outranks AGI only when a parent is one of the claimants.

Question 25Preliminary Work with Taxpayer Data

A taxpayer's 25-year-old son is permanently and totally disabled, lived with the taxpayer all year, and had $9,000 of interest income. The son did not provide more than half of his own support. How should the taxpayer treat the son?

  1. As a qualifying relative, because his income exceeds the threshold amount.
  2. As a qualifying relative only, because he is over age 24.
  3. As a qualifying child, because the age test is met by disability. Correct answer.
  4. As neither, because a disabled child over 24 is never a dependent.

Explanation

A child who is permanently and totally disabled during the year satisfies the age test at any age, and the qualifying child rules contain no gross income limit. Because the son also met the relationship, residency, support, and joint return tests, he is a qualifying child and his interest income is irrelevant.

Question 26Preliminary Work with Taxpayer Data

Under IRC §6107, a paid preparer must retain a copy of a taxpayer's return (or the information needed to reconstruct it) for at least how long after the close of the return period?

  1. Five years
  2. Three years Correct answer.
  3. Two years
  4. One year

Explanation

IRC §6107 requires a paid preparer to retain a copy of the return or the information needed to reconstruct it for three years after the close of the return period. This record supports the preparer's work if the IRS examines the return. A shorter or longer period does not satisfy the statutory minimum.

Question 27Preliminary Work with Taxpayer Data

A preparer's Preparer Tax Identification Number (PTIN) must be renewed:

  1. Only when the preparer changes firms
  2. Every three years
  3. Every five years
  4. Annually, before the filing season Correct answer.

Explanation

A PTIN is valid for one calendar year and must be renewed annually before the filing season. The IRS requires renewal even if the preparer's information has not changed. Failure to renew can prevent the preparer from filing returns electronically.

Question 28Preliminary Work with Taxpayer Data

To allow a noncustodial parent to claim a child for the child tax credit, the custodial parent generally must provide:

  1. Form 8822
  2. Form 8867
  3. Form 2848
  4. Form 8332 Correct answer.

Explanation

Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, lets the custodial parent release the child's claim to the noncustodial parent. The noncustodial parent attaches the form or a written declaration to the return. The other forms serve different purposes.

Question 29Preliminary Work with Taxpayer Data

A preparer is preparing a return that claims the earned income tax credit. Which action best satisfies the preparer's due diligence obligation under IRC §6695(g)?

  1. Charging a separate fee for each credit claimed on the return
  2. Completing Form 8867 and documenting the client's eligibility answers Correct answer.
  3. Relying solely on the client's oral statement that the child lived with her
  4. Attaching a disclaimer to the return that the preparer did not verify the credit

Explanation

IRC §6695(g) requires a preparer claiming the EITC and certain other credits to exercise due diligence, including completing Form 8867 and making reasonable inquiries. The preparer must document the client's answers and retain the form. A disclaimer or extra fee does not satisfy the duty.

Question 30Preliminary Work with Taxpayer Data

A client tells the preparer that the IRS issued an identity protection PIN (IP PIN). What should the preparer do?

  1. Use the IP PIN in place of the client's Social Security number
  2. Ignore it because it applies only to paper returns
  3. Report the client to the IRS as a possible identity thief
  4. Enter the IP PIN on the electronic return Correct answer.

Explanation

An identity protection PIN is a six-digit number the IRS issues to victims of identity theft. It must be included on an e-filed return, or the IRS will reject the return. The PIN changes each year and is used in addition to, not instead of, the Social Security number.

Question 31Preliminary Work with Taxpayer Data

While preparing a current-year return, a preparer discovers that the client failed to report $10,000 of income on the prior-year return. The client refuses to amend. Under Circular 230 §10.21, the preparer should:

  1. Ignore the prior-year error because it is outside the current engagement
  2. Report the client immediately to the IRS Office of Professional Responsibility
  3. Advise the client of the error and the consequences, and consider withdrawing Correct answer.
  4. Amend the prior-year return without the client's consent

Explanation

Circular 230 §10.21 requires a practitioner who knows of a client's noncompliance or error to advise the client promptly of the noncompliance and its consequences. If the client refuses to correct it, the practitioner should consider whether to continue the engagement. The practitioner may not amend a return without the client's consent or ignore the issue.

Question 32Preliminary Work with Taxpayer Data

A married couple decides to file separate returns for 2024. One spouse has enough itemized deductions to itemize; the other does not. What must they do?

  1. The spouse with fewer deductions must itemize
  2. Both spouses must use the same deduction method Correct answer.
  3. They cannot file separately if one spouse itemizes
  4. Each spouse may choose itemized or standard independently

Explanation

When married taxpayers file separate returns, both must use the same deduction method. If one spouse itemizes, the other must also itemize, and the other spouse's standard deduction is zero. They may still choose to file separately.

Question 33Preliminary Work with Taxpayer Data

Marta is married, but her spouse moved out on March 1, 2024, and did not return. She paid more than half the cost of maintaining a home for herself and her 12-year-old son, who lived with her all year. She did not remarry. Which filing status may she use for 2024?

  1. Head of household as considered unmarried Correct answer.
  2. Qualifying surviving spouse
  3. Single
  4. Married filing separately, because she is still legally married

Explanation

A married taxpayer may be treated as unmarried and file as head of household if she files a separate return, paid more than half the cost of maintaining the home, had a qualifying child live there for more than half the year, and her spouse was not a household member for the last six months. Marta meets these requirements. She is not single or a qualifying surviving spouse.

Question 34Preliminary Work with Taxpayer Data

A client omitted $30,000 of gross income from a return that reported $80,000 of gross income. How long should the client keep the records supporting that return?

  1. Four years from the filing date
  2. Three years from the filing date
  3. Six years from the filing date Correct answer.
  4. Seven years from the filing date

Explanation

The normal assessment period is three years, but it is six years if the taxpayer omits gross income exceeding 25% of the gross income stated on the return. Here, $30,000 exceeds 25% of the $80,000 reported. Records should therefore be kept for six years.

Question 35Income and Assets

Which of the following amounts is included in a taxpayer's gross income for the year?

  1. The death benefit paid by a life insurance policy
  2. Wages earned from part-time employment Correct answer.
  3. Interest received on a city general obligation bond
  4. A cash gift received from a parent

Explanation

Gross income includes compensation for services, so wages are includible no matter how small the amount. Municipal bond interest, life insurance death benefits, and gifts are all statutory exclusions from gross income.

Question 36Income and Assets

A taxpayer received interest from a general obligation bond issued by the state in which the taxpayer resides. How is that interest treated for federal income tax purposes?

  1. Taxable as ordinary interest income
  2. Deferred until the bond matures
  3. Excluded from federal gross income Correct answer.
  4. Taxed at capital gain rates

Explanation

Interest on obligations of a state or its political subdivisions is excluded from federal gross income under §103. The exclusion is an exception to the general rule that interest is taxable.

Question 37Income and Assets

A beneficiary receives a $500,000 death benefit because the insured decedent held a life insurance policy. What amount is included in the beneficiary's gross income?

  1. The excess over the decedent's basis
  2. The full $500,000
  3. Nothing; the proceeds are excluded Correct answer.
  4. Only the premiums paid by the decedent

Explanation

Life insurance proceeds paid by reason of the insured's death are excluded from the recipient's gross income under §101(a). The exclusion covers the full death benefit.

Question 38Income and Assets

A taxpayer received a $25,000 cash gift from an aunt. What is the federal income tax treatment of the gift?

  1. Fully taxable as ordinary income
  2. Taxable as short-term capital gain
  3. Not included in the recipient's gross income Correct answer.
  4. Taxable to the extent it exceeds the annual exclusion

Explanation

Gifts are excluded from the recipient's gross income under §102. The donor may have a gift tax filing obligation, but the recipient reports no income.

Question 39Income and Assets

A taxpayer received state unemployment compensation during the year. How is it treated for federal income tax purposes?

  1. It is taxable only if the taxpayer itemizes
  2. It is deferred until the taxpayer returns to work
  3. It is taxable income reported on the return Correct answer.
  4. It is excluded, like workers' compensation

Explanation

Unemployment compensation is includible in gross income and is reported to the taxpayer on Form 1099-G. By contrast, workers' compensation benefits for a work-related injury are excluded under §104.

Question 40Income and Assets

Under a divorce decree, a taxpayer pays $1,200 per month of child support. What is the tax treatment of those payments?

  1. Deductible by the payor and includible by the recipient
  2. Not deductible, and not income to the payee Correct answer.
  3. Deductible by the payor as alimony
  4. Income to the recipient but not deductible

Explanation

Child support payments are neither deductible by the payor nor includible by the recipient, regardless of when the decree was executed. Only alimony under pre-2019 instruments had those consequences.

Question 41Income and Assets

A divorce decree executed in 2021 requires one spouse to pay the other $3,000 per month as alimony. How does the recipient treat the payments?

  1. As taxable alimony income
  2. As taxable income only if the payor deducts it
  3. As nontaxable, because the payor cannot deduct it Correct answer.
  4. As a tax-free return of capital

Explanation

For divorce or separation instruments executed after December 31, 2018, alimony is not deductible by the payor and not includible by the recipient. The recipient therefore reports nothing.

Question 42Income and Assets

A single taxpayer has $80,000 of taxable income, including $5,000 of qualified dividends. What rate applies to the qualified dividends?

  1. Ordinary income rates up to 37%
  2. A flat 28% rate
  3. The net investment income tax rate of 3.8%
  4. A 15% maximum rate Correct answer.

Explanation

Qualified dividends are taxed at 0%, 15%, or 20% depending on the taxpayer's taxable income. For a single filer with $80,000 of taxable income, the 15% rate applies.

Question 43Income and Assets

A degree candidate receives a scholarship that covers $10,000 of tuition, $2,000 of required books, and $6,000 for room and board. What amount is excluded from gross income?

  1. $16,000
  2. $18,000
  3. $10,000
  4. $12,000 Correct answer.

Explanation

A qualified scholarship covering tuition, required fees, books, supplies, and equipment for a degree candidate is excluded under §117. Room and board are not qualified expenses, so the excluded amount is $10,000 plus $2,000, or $12,000.

Question 44Income and Assets

Which requirement must be met to exclude interest on Series EE savings bonds used for education?

  1. Proceeds pay qualified education costs within income limits Correct answer.
  2. The bond must be redeemed at least 12 months after the purchase date
  3. The exclusion applies to any U.S. savings bond, including Series HH
  4. The bond must be held in the student's own name

Explanation

§135 excludes interest on Series EE and Series I bonds redeemed to pay qualified higher education expenses for the taxpayer, spouse, or dependent. The exclusion is phased out at higher modified AGI levels.

Question 45Income and Assets

A taxpayer bought stock on March 1, 2022, and sold it on March 1, 2023. How is the resulting gain classified?

  1. As a §1231 gain
  2. As long-term, because it was held for exactly one year
  3. As short-term, because it was not held more than one year Correct answer.
  4. As ordinary income

Explanation

Capital assets must be held more than one year to qualify for long-term treatment. A holding period of exactly one year is short-term, so the gain is short-term capital gain.

Question 46Income and Assets

A taxpayer inherits stock worth $80,000 at the date of death. The decedent's basis had been $20,000. What is the taxpayer's basis in the stock?

  1. $80,000 Correct answer.
  2. $50,000
  3. $20,000
  4. Zero

Explanation

Under §1014, property acquired from a decedent generally takes a basis equal to fair market value at the date of death or the alternate valuation date. The $60,000 of pre-death appreciation escapes income tax.

Question 47Income and Assets

A taxpayer receives a gift of stock with the donor's basis of $30,000 and a fair market value of $22,000 at the date of the gift. The taxpayer later sells it for $19,000. What is the recognized loss?

  1. $3,000 Correct answer.
  2. $11,000
  3. $8,000
  4. $0

Explanation

For loss property, the donee's basis for determining loss is the lesser of the donor's basis or the fair market value at the date of the gift, here $22,000. A sale for $19,000 therefore produces a $3,000 loss.

Question 48Income and Assets

A credit card company forgives $8,000 of a taxpayer's debt. What is the general rule?

  1. The forgiven amount is income unless an exclusion applies Correct answer.
  2. The forgiven amount reduces the taxpayer's wages
  3. Forgiven debt is never taxable income
  4. The forgiven amount is a capital gain

Explanation

Discharge of indebtedness is included in gross income under §61(a)(11) and is reported on Form 1099-C. Exceptions such as insolvency, bankruptcy, and qualified principal residence indebtedness can exclude some or all of the amount.

Question 49Income and Assets

A landlord receives a $2,000 security deposit from a tenant under a lease that requires its return at move-out if there is no damage. How is the deposit treated?

  1. As rental income spread over the lease term
  2. Not income when received, because it must be refunded Correct answer.
  3. As rental income when received
  4. As a capital contribution by the tenant

Explanation

A deposit held subject to an obligation to return it is not income when received. It becomes rental income only in the year the landlord keeps it, for example to cover unpaid rent or damages.

Question 50Income and Assets

A taxpayer has $30,000 of losses from a limited partnership rental activity and $10,000 of interest income. Assuming no other passive income and no exception applies, how much of the loss is deductible?

  1. $10,000
  2. $30,000
  3. $0 Correct answer.
  4. $20,000

Explanation

Passive activity losses are deductible only against passive activity income, and portfolio interest is not passive income. With no passive income, the entire loss is suspended and carried forward.