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ATP 105 Ethics study materials
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ATP 105 Ethics practice questions

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Question 1Personal Income Taxation

Which filing status generally allows a taxpayer to use the lowest tax rates and the largest standard deduction among the five statuses?

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

Explanation

Married filing jointly combines both spouses' income on one return and provides the most favorable rate brackets and the largest standard deduction of the five statuses. Head of household is favorable but still less generous than MFJ. Qualifying surviving spouse uses MFJ rates but requires a dependent child and a recent deceased spouse.

Question 2Personal Income Taxation

A taxpayer who is unmarried, pays more than half the cost of maintaining a home, and has a qualifying dependent living with them for more than half the year may file using which status?

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

Explanation

Head of household requires the taxpayer to be unmarried (or treated as unmarried) at year end, to furnish more than half the cost of maintaining a household, and to have a qualifying person live there for more than half the year. It offers a larger standard deduction than single status.

Question 3Personal Income Taxation

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

  1. Workers' compensation benefits
  2. Life insurance proceeds paid because of the insured's death
  3. Compensation received for services performed Correct answer.
  4. Child support payments received

Explanation

Gross income includes all income from whatever source derived unless a specific exclusion applies. Compensation for services is the classic example of includible income. Death benefits, child support, and workers' compensation are all statutorily excluded.

Question 4Personal Income Taxation

An individual taxpayer's standard deduction is generally determined by which combination of factors?

  1. Filing status and state of residence
  2. Number of dependents and itemized deductions
  3. Adjusted gross income and filing status
  4. Filing status and age or blindness Correct answer.

Explanation

The standard deduction amount is set by filing status, with an additional amount for taxpayers who are age 65 or older or blind. Income level and state of residence do not change the base amount.

Question 5Personal Income Taxation

Which of the following best describes an above-the-line deduction?

  1. A deduction limited to self-employed taxpayers
  2. A credit that directly reduces the tax liability dollar for dollar
  3. A deduction taken only if the taxpayer itemizes on Schedule A
  4. A deduction that reduces adjusted gross income before the standard or itemized deduction is applied Correct answer.

Explanation

Above-the-line deductions are subtracted from gross income to arrive at adjusted gross income. They benefit taxpayers whether or not they itemize. Below-the-line deductions, by contrast, are taken after AGI is determined.

Question 6Personal Income Taxation

A taxpayer is claimed as a dependent on another person's return. Which statement about the taxpayer's own filing requirement is correct?

  1. The dependent never has to file a return
  2. The dependent may still have to file if unearned or earned income exceeds the applicable threshold Correct answer.
  3. The dependent must always file regardless of income
  4. The dependent may file only as head of household

Explanation

Being claimed as a dependent does not eliminate the filing requirement. A dependent must file if income exceeds the special threshold for dependents, which differs for earned and unearned income. The dependent cannot claim a personal exemption for themselves on their own return.

Question 7Personal Income Taxation

Which of the following is a refundable tax credit?

  1. Adoption Credit
  2. American Opportunity Tax Credit (partially refundable) Correct answer.
  3. Lifetime Learning Credit
  4. Child and Dependent Care Credit

Explanation

A refundable credit can reduce tax liability below zero and generate a refund. The American Opportunity Tax Credit is partially refundable (up to 40 percent of the credit, subject to limits). The Lifetime Learning, Child and Dependent Care, and Adoption credits are nonrefundable.

Question 8Personal Income Taxation

Which of the following best describes the difference between a tax deduction and a tax credit?

  1. A deduction reduces taxable income, while a credit reduces tax liability dollar for dollar Correct answer.
  2. Both reduce taxable income by the same amount
  3. A deduction is always refundable, while a credit is never refundable
  4. A credit reduces taxable income, while a deduction reduces tax liability dollar for dollar

Explanation

A deduction lowers taxable income, so its value depends on the taxpayer's marginal rate. A credit reduces the tax owed directly, so a $1,000 credit saves $1,000 of tax. This makes credits generally more valuable than an equal dollar deduction.

Question 9Personal Income Taxation

An employee receives employer-provided health insurance coverage. How is the value of the employer-paid premiums treated for federal income tax purposes?

  1. Excluded from the employee's gross income Correct answer.
  2. Taxable only to highly compensated employees
  3. Fully includible in the employee's gross income
  4. Includible only if the employee itemizes deductions

Explanation

Employer contributions to accident and health plans for employees and their dependents are excluded from the employee's gross income. This exclusion applies regardless of whether the employee itemizes.

Question 10Personal Income Taxation

A taxpayer sells stock held for eight months at a gain. How is the gain characterized?

  1. Short-term capital gain taxed at ordinary income rates Correct answer.
  2. Long-term capital gain taxed at preferential rates
  3. Nontaxable because the holding period is under one year
  4. Ordinary income reported as wages

Explanation

Property held for one year or less produces short-term capital gain or loss, which is taxed at ordinary income rates. Only property held more than one year qualifies for long-term capital gain treatment.

Question 11Personal Income Taxation

An individual taxpayer has a net capital loss of $9,000 for the year. What is the maximum amount of the loss that may be deducted against ordinary income in that year?

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

Explanation

An individual may deduct up to $3,000 of net capital loss against ordinary income each year ($1,500 for married filing separately). Any excess is carried forward to later years.

Question 12Personal Income Taxation

A taxpayer receives $2,000 of taxable interest from a savings account and $500 of tax-exempt municipal bond interest. What amount is included in gross income?

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

Explanation

Taxable interest is included in gross income, while interest on state and local municipal bonds is excluded. Only the $2,000 of taxable interest is includible.

Question 13Personal Income Taxation

Which of the following expenses is generally deductible as a medical expense on Schedule A?

  1. Nonprescription vitamins taken for general well-being
  2. Prescription medicines Correct answer.
  3. Gym membership fees for general health
  4. Cosmetic surgery performed for personal appearance

Explanation

Prescription medicines are deductible medical expenses, subject to the AGI floor. Expenses that are merely beneficial to general health, and cosmetic procedures not for medical purposes, are not deductible.

Question 14Personal Income Taxation

A taxpayer pays $4,000 of mortgage interest on a qualified residence and $1,200 of mortgage interest on a personal credit card. How much of this interest is deductible as qualified residence interest?

  1. $5,200
  2. $0
  3. $4,000 Correct answer.
  4. $1,200

Explanation

Only interest on acquisition indebtedness secured by a qualified residence is deductible as home mortgage interest. Personal credit card interest is nondeductible personal interest.

Question 15Personal Income Taxation

Which of the following is a requirement for a qualifying child for the child tax credit?

  1. The child must have gross income below a specified threshold
  2. The child must live in the taxpayer's home for the entire year
  3. The child must be a full-time student
  4. The child must be under age 17 at the end of the year Correct answer.

Explanation

A qualifying child for the child tax credit must be under age 17 at the close of the year, among other requirements such as relationship, support, and residency. The gross income test applies to qualifying relatives, not qualifying children.

Question 16Personal Income Taxation

A taxpayer who is self-employed pays estimated taxes during the year. What is the primary purpose of the estimated tax payment system?

  1. To fund only Social Security benefits
  2. To claim a credit for overpayment in advance
  3. To prepay income and self-employment tax liability as income is earned Correct answer.
  4. To replace the annual filing requirement

Explanation

Estimated tax payments ensure that tax is paid throughout the year on income not subject to withholding. Underpayment can trigger a penalty. Filing an annual return is still required.

Question 17Personal Income Taxation

A taxpayer receives a $5,000 gift from a friend. How is the gift treated for the recipient's federal income tax purposes?

  1. Includible in gross income as miscellaneous income
  2. Excluded from gross income Correct answer.
  3. Taxable only if the donor files a gift tax return
  4. Deductible as a charitable contribution

Explanation

Gifts and inheritances are excluded from the recipient's gross income. The donor may have a gift tax obligation, but the recipient does not report the gift as income.

Question 18Personal Income Taxation

A taxpayer's adjusted gross income is $60,000 and the taxpayer has $9,000 of unreimbursed medical expenses. If the AGI floor for medical expenses is 7.5 percent, what amount is deductible before any other limits?

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

Explanation

Only medical expenses exceeding 7.5 percent of AGI are deductible. Seven and one-half percent of $60,000 is $4,500, so $9,000 minus $4,500 equals $4,500 deductible.

Question 19Personal Income Taxation

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

  1. Excluded from gross income as a government benefit
  2. Taxable only if the taxpayer itemizes deductions
  3. Included in gross income as taxable income Correct answer.
  4. Deductible as a casualty loss

Explanation

Unemployment compensation is includible in gross income and reported on the taxpayer's return. It is not treated as an excluded government benefit.

Question 20Personal Income Taxation

A taxpayer sells a personal automobile at a loss. How is the loss treated?

  1. Deductible as a capital loss
  2. Nondeductible because the property was held for personal use Correct answer.
  3. Deductible as a miscellaneous itemized deduction
  4. Deductible only to the extent of $3,000

Explanation

Losses on the sale of personal-use property are not deductible because the property was not held for the production of income or in a trade or business. Capital loss treatment applies to investment and business property.

Question 21Personal Income Taxation

A taxpayer is a dependent of another taxpayer and has $2,000 of unearned income and no earned income. Why might the kiddie tax apply?

  1. Because the taxpayer is a dependent with unearned income above the threshold Correct answer.
  2. Because the taxpayer has any earned income
  3. Because the taxpayer filed a state return
  4. Because the taxpayer is under age 30

Explanation

The kiddie tax taxes a child's unearned income above an annual threshold at the parents' marginal rate. It applies to certain dependent children with investment income exceeding the threshold.

Question 22Personal Income Taxation

A taxpayer's employer reimburses business travel expenses under an accountable plan. How is the reimbursement treated?

  1. Excluded from gross income and not reported as a deduction Correct answer.
  2. Reported as self-employment income
  3. Included in gross income and deducted as an itemized deduction
  4. Included in gross income with no offsetting deduction

Explanation

Reimbursements under an accountable plan are excluded from the employee's gross income because they are treated as employer business expenses rather than compensation. The employee does not report them as income or as a deduction.

Question 23Personal Income Taxation

A taxpayer has $10,000 of net long-term capital gain and $4,000 of net short-term capital loss. What is the net capital gain or loss for the year?

  1. $4,000 net capital loss
  2. $14,000 net capital gain
  3. $10,000 net long-term gain and $4,000 short-term loss reported separately
  4. $6,000 net long-term capital gain Correct answer.

Explanation

Net long-term gain and net short-term loss are combined. The $4,000 short-term loss offsets the $10,000 long-term gain, leaving $6,000 of net long-term capital gain taxed at preferential rates.

Question 24Personal Income Taxation

A taxpayer claims a dependency deduction for a qualifying relative. Which test distinguishes a qualifying relative from a qualifying child?

  1. The member of household or relationship test, plus a gross income test Correct answer.
  2. The residency test, which applies only to relatives
  3. The age test, which applies only to relatives
  4. The joint return test, which applies only to relatives

Explanation

A qualifying relative must either live in the taxpayer's home for the entire year or meet a relationship test, and must have gross income below the exemption amount. Qualifying children are instead subject to age, residency, and support tests.

Question 25Personal Income Taxation

A taxpayer receives a state income tax refund of $800 in the current year from taxes paid in a prior year and deducted on Schedule A. Under what condition is the refund includible in gross income?

  1. Only if the taxpayer did not itemize in the prior year
  2. Never, because state refunds are excluded
  3. Always, because refunds are income
  4. Only to the extent the prior-year deduction reduced the taxpayer's tax liability Correct answer.

Explanation

Under the tax benefit rule, a refund of a previously deducted expense is includible only to the extent the prior deduction actually reduced tax liability. If the taxpayer took the standard deduction or the deduction provided no benefit, the refund is excluded.

Question 26Personal Income Taxation

Which filing status generally provides the most favorable tax rates and the largest standard deduction for an unmarried taxpayer who supports a qualifying dependent?

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

Explanation

Head of household status applies to an unmarried taxpayer who maintains a household for a qualifying dependent and pays more than half the household costs. It carries a larger standard deduction and wider brackets than single status. Qualifying surviving spouse requires a deceased spouse and a dependent child, which the facts do not establish.

Question 27Personal Income Taxation

A taxpayer's employer withholds too little federal income tax during the year. What is the primary consequence when the return is filed?

  1. The taxpayer forfeits the standard deduction
  2. The taxpayer receives a penalty-free extension of the filing deadline
  3. The taxpayer must amend the prior year's return
  4. The taxpayer owes the unpaid balance with the return Correct answer.

Explanation

Withholding is a prepayment of tax; if total prepayments fall short of the tax liability, the balance is due with the return. Underpayment penalties may also apply if the shortfall is large. Underwithholding does not change deductions or extend deadlines.

Question 28Personal Income Taxation

A taxpayer uses the cash method of accounting. When is income from a paycheck generally reported?

  1. When the taxpayer actually or constructively receives the payment Correct answer.
  2. When the employer's pay period ends
  3. When the employer issues the annual wage statement
  4. When the taxpayer deposits the check at the bank

Explanation

Cash-method taxpayers report income in the year it is actually or constructively received, meaning it is made available without restriction. The date of deposit or the issuance of a wage statement does not control. The end of the pay period is not the recognition event.

Question 29Personal Income Taxation

A taxpayer has wages of $50,000 and a short-term capital gain of $3,000. What is the taxpayer's adjusted gross income before any adjustments?

  1. $53,000 Correct answer.
  2. $56,000
  3. $47,000
  4. $50,000

Explanation

Adjusted gross income starts with gross income, which includes wages and capital gains. Adding the $3,000 short-term gain to $50,000 of wages gives $53,000. Short-term gains are taxed as ordinary income but are still included in gross income.

Question 30Personal Income Taxation

How is a traditional individual retirement account contribution generally treated for federal income tax purposes?

  1. It is included in income and taxed currently
  2. It may be deductible, and earnings grow tax-deferred Correct answer.
  3. It is always deductible regardless of income or participation in a workplace plan
  4. It is never deductible but grows tax-free

Explanation

Traditional IRA contributions may be deductible subject to income limits and whether the taxpayer is covered by a workplace retirement plan. Amounts in the account grow tax-deferred until distribution. It is not always deductible, and it is not a tax-free account like a Roth IRA.

Question 31Personal Income Taxation

Which of the following correctly describes the treatment of alimony payments under a divorce agreement executed after 2018?

  1. Not deductible by the payer and not included in the recipient's income Correct answer.
  2. Deductible by the payer and included in the recipient's income
  3. Deductible by the payer but not included in the recipient's income
  4. Not deductible by the payer but included in the recipient's income

Explanation

For divorce or separation instruments executed after 2018, alimony is neither deductible by the payer nor includible by the recipient. The prior rules continue to apply to older instruments that were not modified. The treatment is symmetric, so only one option is correct.

Question 32Personal Income Taxation

A taxpayer pays $1,500 of state income tax and $2,000 of real property tax during the year and itemizes deductions. What amount of these taxes may be deducted, assuming no other state and local taxes were paid and the applicable cap is not exceeded?

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

Explanation

State and local income taxes and real property taxes are both deductible as itemized deductions, subject to the overall cap on state and local taxes. Adding the two amounts gives $3,500. Neither category is excluded merely because the other is claimed.

Question 33Personal Income Taxation

A taxpayer donates $1,000 in cash to a qualified charitable organization and itemizes deductions. What documentation generally supports the deduction?

  1. A verbal statement from a charity officer
  2. A written acknowledgment from the charity for gifts of $250 or more Correct answer.
  3. A canceled check alone for any amount
  4. No documentation is required for cash gifts

Explanation

For a charitable contribution of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the organization. For smaller cash gifts, a bank record or receipt generally suffices. A verbal statement does not satisfy the substantiation rules.

Question 34Personal Income Taxation

A taxpayer earns $80,000 of wages and contributes $6,000 to a traditional IRA, all of which is deductible. What is the taxpayer's adjusted gross income?

  1. $80,000
  2. $86,000
  3. $74,000 Correct answer.
  4. $76,000

Explanation

A deductible traditional IRA contribution is an adjustment to income that reduces AGI. Subtracting $6,000 from $80,000 of wages gives $74,000. The contribution is not added to income.

Question 35Personal Income Taxation

A taxpayer has $40,000 of wages, $2,000 of interest income, and $3,000 of deductible student loan interest. What is the taxpayer's adjusted gross income?

  1. $42,000
  2. $39,000 Correct answer.
  3. $37,000
  4. $45,000

Explanation

Student loan interest is an adjustment to income, subject to income limits. Gross income of $42,000 minus the $3,000 adjustment gives AGI of $39,000. The interest is subtracted rather than added.

Question 36Personal Income Taxation

A taxpayer receives a distribution from a traditional IRA before reaching age 59½ and has no exception. How is the distribution generally treated?

  1. Included in income with a 10% additional tax on the taxable portion Correct answer.
  2. Excluded from income but subject to a 10% tax
  3. Taxed as capital gain
  4. Entirely tax-free

Explanation

Early distributions from a traditional IRA are generally includible in income and subject to a 10% additional tax unless an exception applies. Exceptions include certain medical costs, disability, and qualified higher education expenses. The distribution is not treated as capital gain.

Question 37Personal Income Taxation

A taxpayer sells a principal residence owned and used for five years and realizes a $200,000 gain. The taxpayer is single and has not excluded a home sale gain in the prior two years. What amount may be excluded?

  1. $0
  2. $125,000
  3. $250,000
  4. $200,000 Correct answer.

Explanation

A single taxpayer who meets the ownership and use tests may exclude up to $250,000 of gain. Because the realized gain of $200,000 is below the cap, the entire gain is excluded. The exclusion is not prorated when the tests are fully met.

Question 38Personal Income Taxation

A taxpayer has $30,000 of wages and $4,000 of net self-employment income. How is the self-employment income generally treated?

  1. Subject to income tax only
  2. Subject to income tax and self-employment tax Correct answer.
  3. Subject to self-employment tax only
  4. Exempt from both income tax and self-employment tax

Explanation

Net self-employment income is included in gross income and is also subject to self-employment tax, which funds Social Security and Medicare for self-employed individuals. A deduction for one-half of the self-employment tax is allowed as an adjustment. The income is not exempt from either tax.

Question 39Personal Income Taxation

A taxpayer receives $10,000 of Social Security benefits and has no other income. How much of the benefit is generally included in gross income?

  1. $8,500
  2. $5,000
  3. $10,000
  4. $0 Correct answer.

Explanation

Social Security benefits are included in income only when provisional income exceeds certain base amounts. With no other income, provisional income is below the base threshold, so none of the benefit is taxable. The inclusion is calculated with a formula, not a flat percentage.

Question 40Personal Income Taxation

A taxpayer pays $3,000 of qualified education expenses for a dependent and claims the American Opportunity Tax Credit. What is the maximum credit available for the year?

  1. $1,000
  2. $2,000
  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. With $3,000 of expenses, the credit is $2,000 plus $250, or $2,250, which is below the cap. The maximum possible credit is therefore $2,500.

Question 41Personal Income Taxation

A taxpayer with $60,000 of AGI and no employer retirement plan contributes $5,000 to a traditional IRA. How is the contribution treated?

  1. Deductible only if the taxpayer itemizes
  2. Nondeductible regardless of income
  3. Nondeductible because the taxpayer has no employer plan
  4. Fully deductible Correct answer.

Explanation

When a taxpayer is not covered by a workplace retirement plan, the income limits on deducting traditional IRA contributions do not apply. The contribution is fully deductible up to the annual limit. Itemizing is irrelevant to an above-the-line deduction.

Question 42Personal Income Taxation

A taxpayer receives $1,000 of dividends from a domestic corporation. The taxpayer held the stock for 60 days around the ex-dividend date. How are the dividends taxed?

  1. As capital gain in the year of sale
  2. As ordinary income because the holding period is too short Correct answer.
  3. As qualified dividends at preferential rates
  4. As tax-exempt income

Explanation

Qualified dividend treatment requires the stock to be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. A 60-day holding period does not satisfy the more-than-60-days requirement, so the dividends are ordinary. Dividends are not tax-exempt merely because they are from a domestic corporation.

Question 43Personal Income Taxation

A taxpayer has $20,000 of net long-term capital gain and $8,000 of net short-term capital loss. What is the net capital gain or loss?

  1. $20,000 net long-term capital gain
  2. $28,000 net long-term capital gain
  3. $8,000 net short-term capital loss
  4. $12,000 net long-term capital gain Correct answer.

Explanation

Long-term and short-term results are netted against each other. The $8,000 short-term loss offsets the $20,000 long-term gain, leaving $12,000 of net long-term capital gain. The character of the remaining gain follows the long-term gain because the loss is fully absorbed.

Question 44Personal Income Taxation

A taxpayer has $5,000 of net short-term capital loss and $2,000 of net long-term capital gain. What is the amount and character of the net result?

  1. $3,000 net short-term capital loss Correct answer.
  2. $7,000 net short-term capital loss
  3. $2,000 net long-term capital gain
  4. $3,000 net long-term capital loss

Explanation

The long-term gain offsets part of the short-term loss, leaving a $3,000 net short-term capital loss. The character of the remaining loss follows the short-term loss because the gain is fully absorbed. The net loss may be deducted against ordinary income up to the annual limit.

Question 45Personal Income Taxation

A taxpayer receives $3,000 of gambling winnings and incurs $5,000 of gambling losses. The taxpayer itemizes deductions. What is the tax treatment?

  1. Report $3,000 of income and deduct $3,000 of losses Correct answer.
  2. Report $3,000 of income and deduct $5,000 of losses
  3. Report $3,000 of income and deduct $0 of losses
  4. Report $0 of income and deduct $2,000 of losses

Explanation

Gambling winnings are included in gross income, and gambling losses are deductible as an itemized deduction only up to the amount of winnings. The deduction is therefore limited to $3,000. Losses cannot create a net gambling loss for tax purposes.

Question 46Personal Income Taxation

A taxpayer's employer pays $4,000 of the taxpayer's moving expenses directly to a mover for a job-related move. How is the payment treated for federal income tax purposes?

  1. Excluded only if the taxpayer itemizes
  2. Deductible by the taxpayer as a moving expense
  3. Excluded from income as a qualified moving expense reimbursement
  4. Included in the taxpayer's gross income as compensation Correct answer.

Explanation

For most employees, moving expense reimbursements are no longer excludable and are treated as taxable compensation, even when paid directly to a third party. The itemized moving expense deduction is also suspended for most taxpayers. The payment is therefore included in gross income.

Question 47Personal Income Taxation

A taxpayer receives a $10,000 distribution from a health savings account and uses $7,000 for qualified medical expenses. The taxpayer is under age 65 and no exception applies. What is the tax result?

  1. The entire distribution is tax-free
  2. $3,000 is included in income and subject to a 20% additional tax Correct answer.
  3. $3,000 is included in income with no additional tax
  4. The entire distribution is included in income and subject to a 10% additional tax

Explanation

HSA distributions used for qualified medical expenses are tax-free, but amounts not used for qualified expenses are included in income. Nonqualified distributions are also subject to a 20% additional tax unless an exception applies. Only the $3,000 nonqualified portion is taxable.

Question 48Personal Income Taxation

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

  1. As ordinary compensation income to the extent of the bargain element Correct answer.
  2. As a short-term capital loss
  3. As tax-exempt income
  4. Entirely as long-term capital gain

Explanation

A disqualifying disposition, such as selling shares in the same year the option is exercised, causes the bargain element to be treated as ordinary compensation income. Any additional gain or loss is capital. Long-term capital gain treatment requires holding the shares for the required period after exercise.

Question 49Personal Income Taxation

A taxpayer has $50,000 of wages, $5,000 of tax-exempt interest, and $2,000 of deductible IRA contributions. What is the taxpayer's adjusted gross income?

  1. $45,000
  2. $48,000 Correct answer.
  3. $53,000
  4. $55,000

Explanation

Adjusted gross income includes wages but excludes tax-exempt interest, which is not part of gross income. Subtracting the $2,000 deductible IRA contribution from $50,000 gives $48,000. Tax-exempt interest is reported for information but does not increase AGI.

Question 50Personal Income Taxation

A taxpayer has $12,000 of net long-term capital gain and $15,000 of net short-term capital loss. What is the net capital result and how much may be deducted against ordinary income this year?

  1. $27,000 net short-term capital loss; $3,000 deductible against ordinary income
  2. $3,000 net long-term capital loss; all $3,000 deductible against ordinary income
  3. $3,000 net short-term capital loss; all $3,000 deductible against ordinary income Correct answer.
  4. $3,000 net short-term capital loss; no amount deductible against ordinary income

Explanation

The long-term gain offsets part of the short-term loss, leaving a $3,000 net short-term capital loss. A net capital loss may be deducted against ordinary income up to $3,000 per year, so the full amount is deductible. Any excess would carry forward.