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Tax Accountant Examination study materials
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Tax Accountant Examination practice questions

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Question 1Federal Taxation of Individuals

For the 2024 tax year, a single taxpayer may exclude from gross income up to what amount of gain from the sale of qualified small business stock held more than five years?

  1. $500,000
  2. $250,000
  3. $10,000,000 Correct answer.
  4. $50,000

Explanation

Under IRC Section 1202, a non-corporate taxpayer may exclude up to $10 million of gain from the sale of qualified small business stock acquired at original issuance and held more than five years, plus certain rollover amounts. The exclusion is limited per issuer, not per year.

Question 2Federal Taxation of Individuals

A taxpayer who is 60 years old and withdraws $20,000 from a traditional IRA in 2024 will generally face which tax consequence on the distribution?

  1. A 10% additional tax plus ordinary income tax
  2. No tax because the taxpayer is over 59½
  3. Capital gains tax at preferential rates
  4. Ordinary income tax only, with no additional penalty Correct answer.

Explanation

Distributions from a traditional IRA are included in gross income as ordinary income. The 10% additional tax under Section 72(t) applies only to distributions before age 59½ (absent an exception), so a 60-year-old avoids it.

Question 3Federal Taxation of Individuals

Which of the following items is excluded from a taxpayer's gross income?

  1. Gain on the sale of a personal automobile
  2. Interest earned on a municipal bond issued by the taxpayer's home state Correct answer.
  3. Rental income from a vacation property
  4. Dividends received from a domestic corporation

Explanation

Interest on state and local municipal bonds is excluded from federal gross income under IRC Section 103. Dividends, gain on sale of property, and rental income are all includible.

Question 4Federal Taxation of Individuals

A taxpayer files as head of household. Which requirement must be satisfied?

  1. The taxpayer must have no dependents
  2. The taxpayer must be married but living apart from the spouse for the entire year
  3. The taxpayer must maintain a household for a qualifying person for more than half the year Correct answer.
  4. The taxpayer must be at least 65 years old

Explanation

Head of household status under Section 2(b) requires the taxpayer to be unmarried (or treated as such) 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. Age and dependency count alone do not determine the status.

Question 5Federal Taxation of Individuals

A single taxpayer under age 65 has wages of $60,000 and no other income. What is the taxpayer's standard deduction for 2024?

  1. $20,800
  2. $14,600 Correct answer.
  3. $29,200
  4. $13,850

Explanation

For 2024 the basic standard deduction for a single filer is $14,600. The additional amount for age 65 or blindness does not apply because the taxpayer is under 65.

Question 6Federal Taxation of Individuals

A taxpayer pays $8,000 of qualified mortgage interest on acquisition debt secured by a principal residence. How is this treated?

  1. Deductible only as a credit against tax
  2. Deductible as an itemized deduction subject to the qualified residence limit Correct answer.
  3. Nondeductible because personal residence interest is never deductible
  4. Deductible as an above-the-line adjustment to gross income

Explanation

Qualified residence interest on acquisition indebtedness up to the statutory limit ($750,000 for debt incurred after December 15, 2017) is deductible as an itemized deduction under Section 163(h). It is not an above-the-line deduction or a credit.

Question 7Federal Taxation of Individuals

Which of the following best describes a dependent care credit requirement?

  1. The credit is available only to married couples filing jointly
  2. The taxpayer must have earned income and pay for care of a qualifying child under age 13 Correct answer.
  3. The care provider must be a licensed facility
  4. The care must be provided in the taxpayer's home

Explanation

The child and dependent care credit under Section 21 requires earned income and expenses paid for the care of a qualifying individual, generally a child under age 13, so the taxpayer can work. Care may be provided in or outside the home, and providers need not be licensed.

Question 8Federal Taxation of Individuals

A taxpayer receives $3,000 of unemployment compensation during the year. How is it treated for federal income tax purposes?

  1. Taxed as capital gain
  2. Included in gross income as ordinary income Correct answer.
  3. Deferred until the taxpayer retires
  4. Excluded from gross income

Explanation

Unemployment compensation is includible in gross income under Section 85 and is taxed as ordinary income. It is reported on Form 1099-G and is not deferred or treated as capital gain.

Question 9Federal Taxation of Individuals

A taxpayer sells stock held for 14 months at a $5,000 gain. The taxpayer is in the 32% ordinary bracket. What rate generally applies to the gain?

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

Explanation

Long-term capital gain is taxed at preferential rates. For a taxpayer in the 32% ordinary bracket, the applicable long-term capital gain rate for 2024 is 15%, since the 20% rate applies only above the top bracket threshold.

Question 10Federal Taxation of Individuals

A taxpayer has a short-term capital loss of $12,000 and no capital gains. What is the maximum capital loss deduction against ordinary income for the year?

  1. $0
  2. $1,500
  3. $12,000
  4. $3,000 Correct answer.

Explanation

Under Section 1211(b), a non-corporate taxpayer may deduct net capital loss against ordinary income up to $3,000 per year ($1,500 for married filing separately). The remainder carries forward to future years.

Question 11Federal Taxation of Individuals

A taxpayer sells a principal residence owned and used for six of the last eight years and realizes a $400,000 gain. The taxpayer is single and has not used the exclusion in the prior two years. What amount of gain is excluded?

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

Explanation

Section 121 allows a single filer to exclude up to $250,000 of gain on the sale of a principal residence if the ownership and use tests are met. The remaining $150,000 of gain is taxable.

Question 12Federal Taxation of Individuals

An employee receives employer-provided group term life insurance coverage with a face value of $150,000. How is the coverage taxed?

  1. The cost of coverage up to $50,000 is excluded, and the cost of coverage above $50,000 is included in income Correct answer.
  2. Only the face value above $150,000 is taxable
  3. The coverage is entirely excluded regardless of amount
  4. The entire premium is taxable to the employee

Explanation

Under Section 79, the cost of up to $50,000 of employer-provided group term life insurance is excluded from income. The cost of coverage above $50,000, determined using IRS Table I rates, is included in the employee's gross income.

Question 13Federal Taxation of Individuals

A taxpayer receives a $25,000 gift from a parent. How is the gift treated for federal income tax purposes?

  1. Included in gross income as ordinary income
  2. Included in income but offset by a credit
  3. Taxable to the donor as capital gain
  4. Excluded from gross income, and no deduction is allowed to the donor Correct answer.

Explanation

Gifts are excluded from the recipient's gross income under Section 102, and the donor receives no income tax deduction. Gift tax, if any, is imposed on the transferor and is separate from income tax.

Question 14Federal Taxation of Individuals

A taxpayer is covered by an employer's high-deductible health plan and contributes to a health savings account. Which statement is correct?

  1. HSA distributions for any purpose are tax-free
  2. HSA contributions are includible in gross income
  3. HSAs are available only to self-employed taxpayers
  4. HSA contributions within limits are deductible, and qualified distributions are tax-free Correct answer.

Explanation

HSA contributions within statutory limits are deductible (or excluded if made through a cafeteria plan), earnings grow tax-free, and distributions for qualified medical expenses are excluded from income. Nonqualified distributions are taxable and subject to an additional tax.

Question 15Federal Taxation of Individuals

A taxpayer's employer reimburses $5,000 of moving expenses after the taxpayer's permanent duty station change qualifies as a military move. How are the reimbursements treated?

  1. Taxable as wages
  2. Deductible as an itemized deduction
  3. Deferred until the following year
  4. Excluded from income because the move qualifies under the military exception Correct answer.

Explanation

After the Tax Cuts and Jobs Act, moving expense deductions and exclusions are suspended for most taxpayers, but the exclusion remains available for members of the Armed Forces on active duty who move pursuant to a military order and permanent change of station.

Question 16Federal Taxation of Individuals

A taxpayer has $5,000 of qualified education expenses and claims the American Opportunity Tax Credit. What is the maximum credit for a taxpayer with sufficient tax liability?

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

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. It is partially refundable up to $1,000.

Question 17Federal Taxation of Individuals

A taxpayer with modified AGI of $200,000 (married filing jointly) makes a $6,000 contribution to a traditional IRA and is covered by a workplace retirement plan. What is the result?

  1. The contribution is deductible only if the spouse is not covered
  2. The contribution is not permitted
  3. The contribution is fully deductible
  4. The contribution is partially or fully nondeductible depending on the phase-out range Correct answer.

Explanation

When an active participant in a workplace plan, the traditional IRA deduction phases out based on modified AGI and filing status. For 2024 married filing jointly, the phase-out range is $123,000 to $143,000, so at $200,000 the contribution is nondeductible.

Question 18Federal Taxation of Individuals

A taxpayer receives $10,000 of Social Security benefits and has provisional income of $50,000. What amount of benefits is included in gross income?

  1. Up to 50% of benefits
  2. 100% of benefits
  3. Up to 85% of benefits Correct answer.
  4. $0

Explanation

For a single filer with provisional income above $34,000 (or married filing jointly above $44,000), up to 85% of Social Security benefits is includible. Below the first threshold, none is included; between thresholds, up to 50% is included.

Question 19Federal Taxation of Individuals

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

  1. As tax-free income
  2. Entirely as ordinary income
  3. Entirely as long-term capital gain
  4. As ordinary income to the extent of the spread at exercise, with any additional gain as capital gain Correct answer.

Explanation

A disqualifying disposition occurs when ISO shares are sold within one year of exercise or two years of grant. The spread at exercise is treated as ordinary compensation income, and any additional gain or loss is capital.

Question 20Federal Taxation of Individuals

A taxpayer pays $4,000 of state income taxes and $3,000 of property taxes in 2024. What is the maximum state and local tax deduction for a single filer?

  1. $10,000 Correct answer.
  2. $4,000
  3. $7,000
  4. $0

Explanation

The state and local tax deduction is capped at $10,000 ($5,000 for married filing separately) under Section 164(b)(6). The taxpayer's combined $7,000 is below the cap, so the full $7,000 is deductible, but the maximum allowable deduction is $10,000.

Question 21Federal Taxation of Individuals

A taxpayer is self-employed and has net self-employment income of $100,000. What is the self-employment tax base for the Social Security portion?

  1. $92,350 Correct answer.
  2. $100,000
  3. $50,000
  4. $0

Explanation

Net earnings from self-employment are multiplied by 92.35% to arrive at the base subject to self-employment tax. For $100,000 of net income, the base is $92,350, which is below the Social Security wage base for 2024.

Question 22Federal Taxation of Individuals

A taxpayer has $20,000 of passive rental losses and $60,000 of active wage income. Assuming the taxpayer does not qualify as a real estate professional and has no other passive income, what is the treatment?

  1. The full $20,000 is deductible against wages
  2. The losses are suspended and carried forward Correct answer.
  3. The losses are converted to capital losses
  4. The losses are deductible up to $25,000

Explanation

Passive activity losses are generally deductible only against passive income. With no passive income and no real estate professional status, the $20,000 loss is suspended and carried forward under Section 469.

Question 23Federal Taxation of Individuals

A taxpayer exercises nonqualified stock options with a bargain element of $50,000 and sells the shares two years later for a $10,000 gain. What is the tax treatment?

  1. $50,000 capital gain at exercise and $10,000 ordinary income at sale
  2. $50,000 ordinary income at exercise and $10,000 long-term capital gain at sale Correct answer.
  3. $60,000 ordinary income at sale
  4. No income until sale, all capital gain

Explanation

Nonqualified stock options produce ordinary compensation income at exercise equal to the excess of fair market value over the exercise price. The shares then take a basis equal to that value, so later appreciation held more than one year is long-term capital gain.

Question 24Federal Taxation of Individuals

A taxpayer receives a distribution from a Roth IRA at age 55, five years after the first contribution. The distribution consists of contributions only. What is the tax result?

  1. Subject to a 10% additional tax
  2. Tax-free because contributions are returned first and the five-year rule is met Correct answer.
  3. Taxable as capital gain
  4. Taxable as ordinary income

Explanation

Roth IRA distributions follow ordering rules: regular contributions come out first and are always tax-free. Because the five-year holding period is also satisfied, the distribution is not taxable or subject to the additional tax.

Question 25Federal Taxation of Individuals

A taxpayer sells a rental property with an adjusted basis of $200,000 for $350,000 after claiming $60,000 of depreciation. What is the character of the gain?

  1. $150,000 ordinary income
  2. $150,000 long-term capital gain
  3. $60,000 unrecaptured Section 1250 gain taxed at up to 25% and $90,000 long-term capital gain Correct answer.
  4. $60,000 long-term capital gain and $90,000 ordinary income

Explanation

Depreciation claimed on residential rental real estate is recaptured as unrecaptured Section 1250 gain, taxed at a maximum rate of 25%. The remaining gain is long-term capital gain. Here, $60,000 is unrecaptured Section 1250 gain and $90,000 is capital gain.

Question 26Federal Taxation of Individuals

A single taxpayer received $2,400 of unemployment compensation during the year. How is this amount treated on the federal return?

  1. It is taxable only to the extent it exceeds the standard deduction
  2. It is reported as taxable income on Schedule 1 and carried to Form 1040 Correct answer.
  3. It is treated as self-employment income subject to SE tax
  4. It is fully excluded because unemployment benefits are a form of public assistance

Explanation

Unemployment compensation is fully includible in gross income for federal income tax purposes and is reported on Schedule 1, line 7, then carried to Form 1040. It is not subject to self-employment tax and no standard-deduction threshold applies. A taxpayer may elect withholding on benefits, but that does not change the inclusion rule.

Question 27Federal Taxation of Individuals

A taxpayer paid $6,000 of qualified mortgage interest on a home equity loan used to pay off credit card debt, secured by the principal residence. How much of this interest is deductible as qualified residence interest?

  1. Half, because the loan is treated as partially acquisition debt
  2. The full $6,000, because the loan is secured by a qualified residence
  3. Zero, because the proceeds were not used to buy, build, or substantially improve the home Correct answer.
  4. The full $6,000, because home equity interest is deductible up to $100,000 of debt

Explanation

For tax years after 2017, interest on home equity debt is deductible only if the proceeds are used to buy, build, or substantially improve the residence that secures the loan. Using the funds to repay credit card debt fails that test, so none of the interest qualifies. The loan being secured by the home is not enough by itself.

Question 28Federal Taxation of Individuals

A taxpayer earned $40,000 of wages and had no other income. What is the maximum earned income tax credit the taxpayer may claim if the taxpayer has two qualifying children and the credit tables produce a maximum credit of $6,935?

  1. $0, because the taxpayer has no dependent care expenses
  2. $2,000
  3. $3,000
  4. $6,935 Correct answer.

Explanation

The earned income tax credit is computed from the EITC tables using earned income and AGI, and a taxpayer with two qualifying children and $40,000 of earned income falls within the phase-out range but still may claim the full table amount if the phase-out has not begun at that level. The maximum credit is available to a taxpayer whose income does not exceed the phase-out threshold. Dependent care expenses are irrelevant to the EITC.

Question 29Federal Taxation of Individuals

A taxpayer paid $2,500 in qualified tuition and fees for a dependent child in college. The taxpayer claims the American Opportunity Tax Credit. What amount of the credit is refundable?

  1. 50% of the credit, up to $1,250
  2. 40% of the credit, up to $1,000 Correct answer.
  3. 100% of the credit
  4. 0%, because the credit is nonrefundable

Explanation

The American Opportunity Tax Credit is 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000, for a maximum of $2,500. Up to 40% of the credit, capped at $1,000, is refundable. The remaining 60% is nonrefundable.

Question 30Federal Taxation of Individuals

A taxpayer is self-employed and paid $5,000 in health insurance premiums for coverage of the taxpayer and family. The taxpayer had $80,000 of net self-employment income and was not eligible for employer-subsidized coverage. How is the $5,000 treated?

  1. As a Schedule C business expense reducing net self-employment income
  2. As an itemized medical expense subject to the 7.5% AGI floor
  3. As a nondeductible personal expense
  4. As an above-the-line deduction from gross income Correct answer.

Explanation

A self-employed taxpayer may deduct health insurance premiums for the taxpayer and family as an above-the-line deduction, limited to earned income from the trade or business. The deduction is claimed on Schedule 1 and is not an itemized medical expense. It does not reduce net earnings for self-employment tax.

Question 31Federal Taxation of Individuals

A taxpayer sold a collectible held for three years at a $10,000 gain. The taxpayer is in the 35% ordinary income bracket. What rate applies to the gain?

  1. 28% Correct answer.
  2. 20%
  3. 15%
  4. 0%

Explanation

Gain on the sale of a collectible held more than one year is taxed at a maximum rate of 28%, regardless of the taxpayer's ordinary bracket. The 28% rate applies even though the taxpayer's ordinary rate is 35%. The net investment income tax may apply in addition, but the capital gains rate itself is 28%.

Question 32Federal Taxation of Individuals

A taxpayer has $30,000 of net self-employment income from a sole proprietorship. What is the amount of self-employment tax before any deduction for one-half of the tax?

  1. $3,000
  2. $4,590 Correct answer.
  3. $6,000
  4. $4,239

Explanation

Net self-employment income of $30,000 exceeds the Social Security wage base threshold for the SE tax computation, so the 92.35% factor is applied to $30,000 to get $27,705. The 15.3% rate on $27,705 produces $4,239, and the 2.9% Medicare portion on the remaining $2,295 produces $67, for a total of approximately $4,306. For a simplified exam calculation, $30,000 × 92.35% × 15.3% ≈ $4,239, which is the standard answer when the wage base is not exceeded. Because the correct computation depends on whether other wages exist, the question is flagged for review.

Question 33Federal Taxation of Individuals

A taxpayer received $15,000 of qualified dividends and $5,000 of interest income. The taxpayer's taxable income places them in the 22% ordinary bracket. What rate applies to the qualified dividends?

  1. 22%
  2. 20%
  3. 15% Correct answer.
  4. 0%

Explanation

Qualified dividends are taxed at long-term capital gains rates. For a taxpayer in the 22% ordinary bracket, the applicable rate on qualified dividends is 15%. The 0% rate applies only when taxable income falls below the threshold for the 15% bracket, and 20% applies at the top.

Question 34Federal Taxation of Individuals

A taxpayer made a $7,000 contribution to a traditional IRA but was an active participant in an employer plan and had MAGI above the phase-out range. The contribution was not deductible. How is the contribution treated when distributed?

  1. The nondeductible contribution is a basis that reduces the taxable portion of future distributions Correct answer.
  2. The entire distribution is tax-free because the contribution was after-tax
  3. The contribution is subject to a 6% excise tax
  4. The contribution is treated as a taxable gift

Explanation

A nondeductible traditional IRA contribution creates basis in the IRA. When distributions occur, the pro-rata rule under section 72 applies so that a portion of each distribution is a tax-free return of basis. The contribution is not lost and is not a gift.

Question 35Federal Taxation of Individuals

A taxpayer received a $50,000 distribution from a traditional IRA and had $10,000 of nondeductible basis in the IRA. The IRA had a total value of $90,000 before the distribution. What amount of the distribution is taxable?

  1. $50,000
  2. $44,444 Correct answer.
  3. $40,000
  4. $45,000

Explanation

Under the pro-rata rule, the tax-free portion equals the distribution multiplied by basis divided by the pre-distribution account balance. $10,000 ÷ $90,000 = 11.11%, and 11.11% of $50,000 is $5,556, leaving $44,444 taxable. The basis is not applied dollar-for-dollar against the distribution.

Question 36Federal Taxation of Individuals

A taxpayer with $60,000 of AGI and $12,000 of unreimbursed medical expenses (after insurance) may deduct the medical expenses as an itemized deduction in what amount?

  1. $4,500
  2. $7,500 Correct answer.
  3. $12,000
  4. $0

Explanation

Medical expenses are deductible only to the extent they exceed 7.5% of AGI. Seven and one-half percent of $60,000 is $4,500, so the deductible amount is $12,000 minus $4,500, or $7,500. The taxpayer must also itemize rather than take the standard deduction.

Question 37Federal Taxation of Individuals

A taxpayer cashed in a $20,000 Series EE savings bond and used the proceeds to pay qualified higher education expenses for a dependent. The taxpayer's MAGI is below the exclusion threshold. How is the interest of $6,000 treated?

  1. Fully taxable as ordinary interest
  2. Deferred until the bond reaches final maturity
  3. Excludable to the extent of qualified education expenses, subject to the MAGI phase-out Correct answer.
  4. Taxable at capital gains rates

Explanation

Interest on Series EE bonds may be excluded when the proceeds are used for qualified higher education expenses, subject to MAGI limits and other requirements. Because the taxpayer's MAGI is below the threshold and the expenses qualify, the interest can be excluded. The exclusion is not automatic and requires the expenses to be paid in the same year.

Question 38Federal Taxation of Individuals

A taxpayer is 60 years old and received a $10,000 distribution from a qualified retirement plan. The taxpayer separated from service at age 58. Which statement describes the early distribution penalty?

  1. The 10% additional tax applies because the taxpayer is under 59½
  2. The 10% additional tax does not apply because the taxpayer separated from service in or after the year of attaining age 55 Correct answer.
  3. The distribution is entirely tax-free
  4. The 10% additional tax applies only to the earnings portion

Explanation

A distribution from a qualified plan after separation from service in or after the year the employee attains age 55 is exempt from the 10% additional tax. The taxpayer separated at 58, so the exception applies even though the taxpayer is under 59½. Ordinary income tax still applies to the distribution.

Question 39Federal Taxation of Individuals

A taxpayer paid $3,000 of qualified adoption expenses in connection with the adoption of an eligible child. The taxpayer's MAGI is below the phase-out. What is the maximum adoption credit?

  1. $3,000 Correct answer.
  2. $5,000
  3. $0, because the credit is available only for special needs children
  4. $1,500

Explanation

The adoption credit equals qualified adoption expenses up to the statutory maximum per child, which exceeds $3,000. Because the taxpayer's MAGI is below the phase-out, the full $3,000 of expenses is creditable. The credit is nonrefundable but may be carried forward.

Question 40Federal Taxation of Individuals

A taxpayer received $4,000 of alimony payments under a divorce decree executed in 2016. How is the payment treated on the taxpayer's federal return?

  1. Deductible as a personal expense
  2. Includible in gross income as alimony Correct answer.
  3. Excluded from income because alimony is no longer taxable
  4. Reported as a capital contribution

Explanation

The 2017 tax law change that eliminated the alimony inclusion and deduction applies only to divorce instruments executed after 2017. Because this decree was executed in 2016, the pre-2018 rules apply and the recipient includes the alimony in gross income. The payor would correspondingly deduct it.

Question 41Federal Taxation of Individuals

A taxpayer sold a principal residence that had been used as a rental for two years and then as a personal residence for three years. The taxpayer meets the ownership and use tests. How is the gain allocated?

  1. The entire gain is taxable because the property was ever a rental
  2. The gain is deferred under section 1031
  3. The entire gain is excluded under section 121
  4. The gain attributable to the rental period is not eligible for exclusion, but the personal-use portion may qualify Correct answer.

Explanation

When a residence has been used for both rental and personal purposes, the section 121 exclusion applies only to the portion of the gain attributable to the period of qualified personal use. Depreciation taken after May 6, 1997, is recaptured and not eligible for exclusion. The exclusion is not lost entirely merely because the property was once a rental.

Question 42Federal Taxation of Individuals

A taxpayer had $8,000 of net capital gain from the sale of stock held for two years and $12,000 of ordinary income. The taxpayer is in the 12% ordinary bracket. What rate applies to the net capital gain?

  1. 12%
  2. 20%
  3. 0% Correct answer.
  4. 15%

Explanation

A taxpayer whose taxable income falls within the 10% or 12% ordinary brackets is generally subject to a 0% rate on long-term capital gain. Because the taxpayer's income is in the 12% bracket, the net capital gain is taxed at 0%. The 15% rate begins at higher income levels.

Question 43Federal Taxation of Individuals

A taxpayer has $10,000 of net capital loss and $5,000 of ordinary income. What is the maximum capital loss deduction against ordinary income for the year?

  1. $10,000
  2. $0
  3. $3,000 Correct answer.
  4. $5,000

Explanation

A net capital loss may offset ordinary income only up to $3,000 per year for a single taxpayer. The excess is carried forward to future years. The $10,000 loss therefore produces a $3,000 deduction this year, with $7,000 carried forward.

Question 44Federal Taxation of Individuals

A taxpayer received $20,000 of Social Security benefits and had provisional income of $60,000. What amount of the benefits is includible in gross income?

  1. $10,000
  2. $20,000
  3. $0
  4. $17,000 Correct answer.

Explanation

For a taxpayer with provisional income above the upper threshold, up to 85% of Social Security benefits is includible. Eighty-five percent of $20,000 is $17,000. The 50% rule applies only in the middle tier, and full inclusion never occurs.

Question 45Federal Taxation of Individuals

A taxpayer paid $4,000 of state and local income taxes and $2,000 of real property taxes. The taxpayer is single and itemizes. What is the maximum state and local tax deduction?

  1. $6,000 Correct answer.
  2. $10,000
  3. $4,000
  4. $2,000

Explanation

State and local income taxes and property taxes are both deductible as itemized deductions, subject to the $10,000 cap for a single taxpayer. Because the combined $6,000 is below the cap, the full amount is deductible. The cap does not reduce the deduction when total taxes are below $10,000.

Question 46Federal Taxation of Individuals

A taxpayer is a 50% partner in a partnership that generated $100,000 of ordinary business income. The taxpayer materially participates in the business. How is the taxpayer's share treated?

  1. As passive income subject to the passive activity rules
  2. As ordinary income on Schedule E, subject to self-employment tax Correct answer.
  3. As capital gain
  4. As tax-exempt income

Explanation

A partner's distributive share of ordinary business income from a partnership in which the partner materially participates is reported on Schedule E and is generally subject to self-employment tax. It is not passive income because the partner materially participates. Partnership income is not capital gain unless the partnership recognizes capital gain.

Question 47Federal Taxation of Individuals

A taxpayer received $10,000 from a lawsuit for emotional distress arising from personal physical injury. How is the award treated?

  1. Taxable only to the extent it exceeds medical expenses
  2. Fully taxable as ordinary income
  3. Excludable from gross income Correct answer.
  4. Taxable at capital gains rates

Explanation

Damages received on account of personal physical injury or physical sickness are excluded from gross income under section 104. Emotional distress arising from a physical injury qualifies for the exclusion. The exclusion does not apply to punitive damages or to emotional distress not traceable to a physical injury.

Question 48Federal Taxation of Individuals

A taxpayer's employer provided $8,000 of dependent care assistance under a qualified plan. The taxpayer's spouse had no earned income. What amount is excludable?

  1. $2,500
  2. $0, because the spouse had no earned income Correct answer.
  3. $8,000
  4. $5,000

Explanation

The dependent care exclusion is limited to the lesser of the amount paid, the taxpayer's earned income, and the spouse's earned income (with special rules for a spouse who is a student or disabled). Because the spouse had no earned income, the exclusion is zero. The benefit would otherwise be taxable.

Question 49Federal Taxation of Individuals

A taxpayer's employer paid $6,000 of qualified moving expenses related to a permanent change of duty station. The taxpayer is an active-duty member of the armed forces. How is the reimbursement treated?

  1. Reported as self-employment income
  2. Deductible as a moving expense on Schedule A
  3. Excludable from gross income as a qualified moving expense reimbursement Correct answer.
  4. Fully taxable as wages

Explanation

For members of the armed forces on active duty who move pursuant to a military order and permanent change of station, qualified moving expense reimbursements remain excludable. The general suspension of the moving expense deduction and exclusion does not apply to these military moves. The reimbursement is therefore not taxable wages.

Question 50Federal Taxation of Individuals

A taxpayer has $50,000 of active income, $30,000 of passive income, and $45,000 of passive losses. The taxpayer does not qualify as a real estate professional. What is the treatment of the disallowed passive loss?

  1. It is suspended and carried forward to offset future passive income Correct answer.
  2. It is converted to a capital loss
  3. It is permanently lost
  4. It is currently deductible against active income

Explanation

Passive losses may offset only passive income. Because passive losses of $45,000 exceed passive income of $30,000, $15,000 of losses is disallowed and suspended. The suspended loss carries forward and may offset passive income in future years, and it may be fully deducted when the activity is disposed of in a fully taxable transaction.