Archive for September 2020

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?

While a C corporation's losses cannot be used by their shareholders to offset personal income, a C corporation may carry back and carry forward losses to help offset the taxable income a corporation had or will have. How are these net operating losses carried back and carried forward?


A. Carried back two years, carried forward indefinitely

B. Carried back indefinitely, carried forward two years

C. Carried back two years, carried forward five years

D. Carried back two years, carried forward twenty years

E. None of these.


Answer: d

Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?

Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan's tax basis in his Military Gear Inc. stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan's marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?


A. $0

B. $3,750

C. $7,500

D. $11,250


Answer: c

Which of the following is not an effective strategy for mitigating double taxation in a C corporation?

Which of the following is not an effective strategy for mitigating double taxation in a C corporation?


A. C corporations can shift income to shareholders via deductible payments

B. C corporations can make an S election

C. C corporations can pay dividends to their shareholders

D. None of these. All of these statements are effective strategies to mitigate or avoid double taxation.


Answer: c

Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?

Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?


A. 9.9%

B. 15.0%

C. 35.0%

D. 43.9%

E. 66.7%


Answer: d

If C corporations retain their after-tax earnings, when will their shareholders be taxed on the retained earnings?

If C corporations retain their after-tax earnings, when will their shareholders be taxed on the retained earnings?


A. Shareholders will be taxed when they sell their shares at a gain

B. Shareholders will be taxed in the year they elect to be taxed on undistributed retained earnings

C. Shareholders will be taxed on undistributed retained earnings in the year the corporation files its tax return

D. None of these


Answer: a

Which of the following is most effective in mitigating the double tax?

Which of the following is most effective in mitigating the double tax?


A. Shift income from high tax rate shareholders to low tax rate corporations

B. Shift income from low tax rate shareholders to high tax rate corporations

C. Shift income from high tax rate corporations to low tax rate shareholders

D. Shift income from low tax rate corporations to high tax rate shareholders


Answer: c

Which tax classifications can potentially apply to LLCs?

Which tax classifications can potentially apply to LLCs?


A. S corporation

B. Partnership

C. Sole proprietorship

D. S corporation and Partnership

E. S corporation and Sole proprietorship

F. Partnership and Sole proprietorship

G. All of these


Answer: g

What document must LLCs file with the state to organize their business?

What document must LLCs file with the state to organize their business?


A. Articles of incorporation

B. Certificate of LLC

C. Articles of organization

D. Partnership agreement

E. None of these. LLCs do not have to file with the state to organize their business.


Answer: c

On which form is income from a single member LLC with one corporate (C corporation) owner reported?

On which form is income from a single member LLC with one corporate (C corporation) owner reported?


A. Form 1120 used by C corporations to report their income

B. Form 1120S used by S corporations to report their income

C. Form 1065 used by partnerships to report their income

D. Form 1040, Schedule C used by sole proprietorships to report their income

E. None of these.


Answer: a

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?

Which legal entity is correctly paired with the party that bears the ultimate responsibility for paying the legal entity's liabilities?


A. LLC - LLC members

B. Corporation - Corporation

C. General Partnership - Partnership

D. Limited Partnership - General partner

E. Both Corporation - Corporation and Limited Partnership - General partner.


Answer: e

Which legal entity is generally best suited for going public?

Which legal entity is generally best suited for going public?


A. Corporation

B. LLC

C. Limited Liability Partnership

D. General Partnership

E. All of these entities are equally suited for going public.


Answer: a

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend- paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments?

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend- paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments?


A. 12%

B. 11%

C. 10%

D. 8%

E. None of these


Answer: C

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Joses marginal tax rate?

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Joses marginal tax rate?


A. 47%

B. 37%

C. 32%

D. 15%

E. None of these


Answer: C

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanitas marginal tax rate?

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanitas marginal tax rate?


A. 50%

B. 40%

C. 30%

D. 15%

E. None of these


Answer: A

Assume that Lucas marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments?

Assume that Lucas marginal tax rate is 30% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays an 8% dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments?


A. 30%

B. 15%

C. 8%

D. 6.8%

E. None of these


Answer: D

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments?

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments?


A. 15%

B. 10%

C. 9%

D. 7.65%

E. None of these


Answer: C

Assume that Shavonnes marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments?

Assume that Shavonnes marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments?


A. 6%

B. 7%

C. 10.2%

D. 15%

E. None of these


Answer: A

Which of the following is an example of the conversion strategy?

Which of the following is an example of the conversion strategy?


A. A corporation paying its shareholders a $20,000 dividend

B. A corporation paying its owner a $20,000 salary

C. A high tax rate taxpayer investing in tax exempt municipal bonds

D. A cash-basis business delaying billing its customers until after year end

E. None of these


Answer: C

Which of the following may limit the conversion strategy?

Which of the following may limit the conversion strategy?


A. implicit taxes

B. assignment of income doctrine

C. constructive receipt doctrine

D. activities with preferential tax rates

E. None of these


Answer: A

Jasons employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2014 and has his daughter, Julie, pick up his check on January 2 nd , 2015. Who reports the income and when?

Jasons employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2014 and has his daughter, Julie, pick up his check on January 2 nd , 2015. Who reports the income and when?


A. Julie in 2014

B. Julie in 2015

C. Jason in 2014

D. Jason in 2015

E. None of these


Answer: C

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?


A. A corporation paying its shareholders a $20,000 dividend

B. A parent employing her child in the family business

C. A taxpayer gifting stock to his children

D. A cash-basis business delaying billing its customers until after year end

E. None of these


Answer: B

Which of the following is an example of the income shifting strategy?

Which of the following is an example of the income shifting strategy?


A. A corporation paying its shareholders a $20,000 dividend

B. A corporation paying its owner a $20,000 salary

C. A high tax rate taxpayer investing in tax exempt municipal bonds

D. A cash-basis business delaying billing its customers until after year end

E. None of these


Answer: B

A common income shifting strategy is to:

A common income shifting strategy is to:


A. shift income from low tax rate taxpayers to high tax rate taxpayers

B. shift deductions from low tax rate taxpayers to high tax rate taxpayers

C. shift deductions from high tax rate taxpayers to low tax rate taxpayers

D. accelerate tax deductions

E. None of these


Answer: B

A taxpayer instructing her son to collect rent checks for the taxpayers property and to report this as taxable income on the sons tax return violates which doctrine?

A taxpayer instructing her son to collect rent checks for the taxpayers property and to report this as taxable income on the sons tax return violates which doctrine?


A. constructive receipt doctrine

B. implicit tax doctrine

C. assignment of income doctrine

D. step-transaction doctrine

E. None of these


Answer: C

Which of the following is an example of the timing strategy?

Which of the following is an example of the timing strategy?


A. A cash basis taxpayer paying all outstanding bills by year end

B. A parent employing her child in the family business

C. A business paying its owner a $30,000 salary

D. A taxpayer investing in a tax preferred investment

E. None of these


Answer: A

Which of the following is an example of the timing strategy?

Which of the following is an example of the timing strategy?


A. A corporation paying its shareholders a $20,000 dividend

B. A parent employing her child in the family business

C. A taxpayer gifting stock to his children

D. A cash-basis business delaying billing its customers until after year end

E. None of these


Answer: D

If tax rates are decreasing:

If tax rates are decreasing:


A. taxpayers should accelerate income

B. taxpayers should defer deductions

C. taxpayers should accelerate deductions

D. taxpayers should defer deductions and accelerate income

E. None of these


Answer: C

If tax rates are increasing:

If tax rates are increasing:


A. taxpayers should accelerate income

B. taxpayers should defer deductions

C. taxpayers should defer income

D. you need more information to make a recommendation

E. None of these


Answer: D

If tax rates are decreasing:

If tax rates are decreasing:


A. taxpayers should accelerate income

B. taxpayers should defer deductions

C. taxpayers should defer income

D. taxpayers should defer deductions and accelerate income

E. None of these


Answer: C

Rolandos employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2014 and doesnt pick up his check until January 2 nd , 2015. When should Rolando report his bonus?

Rolandos employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2014 and doesnt pick up his check until January 2 nd , 2015. When should Rolando report his bonus?


A. 2015

B. 2014

C. Rolando can choose the year to report the income

D. It does not matter

E. None of these


Answer: B

Which of the following does not limit the benefits of deferring income?

Which of the following does not limit the benefits of deferring income?


A. increasing tax rates

B. a taxpayer with severe cash flow needs

C. if continuing an investment would generate a low rate of return

D. if continuing an investment would subject the taxpayer to unnecessary risk

E. None of these


Answer: E

The constructive receipt doctrine:

The constructive receipt doctrine:


A. is particularly restrictive for accrual basis taxpayers

B. causes income to be recognized before it is actually received

C. causes income to be recognized after it is actually received

D. applies equally to income and expenses

E. None of these


Answer: B

Which of the following increases the benefits of income deferral?

Which of the following increases the benefits of income deferral?


A. increasing tax rates

B. smaller after-tax rate of return

C. larger after-tax rate of return

D. smaller magnitude of transactions

E. None of these


Answer: C

Effective tax planning does not require consideration of:

Effective tax planning does not require consideration of:


A. nontax factors

B. the taxpayer's tax costs of alternative transactions

C. the other party's tax costs of alternative transactions

D. the other party's nontax costs of alternative transactions

E. None of these


Answer: E

Which is not a basic tax planning strategy?

Which is not a basic tax planning strategy?



A. income shifting

B. timing

C. conversion

D. arms length transaction

E. None of these


Answer: D

The goal of tax planning generally is to:

The goal of tax planning generally is to:


A. Minimize taxes

B. Minimize IRS scrutiny

C. Maximize after-tax wealth

D. Support the Federal government

E. None of these


Answer: C

In December 2014, Todd, a cash basis taxpayer, paid $1,200 fire insurance for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

In December 2014, Todd, a cash basis taxpayer, paid $1,200 fire insurance for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:


a. Todd should include the $500 in 2015 gross income in accordance with the tax benefit rule.

b. Todd should amend his 2014 return and claim $500 less insurance expense.

c. Todd should include the $500 in 2015 gross income in accordance with the claim of right doctrine.

d. Todd should add the $500 to his sales proceeds from the building.

e. None of these choices are correct.


Answer: a. Todd should include the $500 in 2015 gross income in accordance with the tax benefit rule.

Liam was the beneficiary of a life insurance policy on his wife. Liam had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Liam $52,000, the face amount of the policy plus $2,000 interest. Liam is not required to recognize any income from the above transactions.

Liam was the beneficiary of a life insurance policy on his wife. Liam had paid $20,000 in premiums on the policy. He collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process the claim, the insurance company paid Liam $52,000, the face amount of the policy plus $2,000 interest. Liam is not required to recognize any income from the above transactions.


a. True

b. False


Answer: b. False

Jordan is a cash basis taxpayer. In 2014, she paid state income taxes of $5,000. In early 2015, she filed her 2014 state income tax return and received a $500 refund.

Jordan is a cash basis taxpayer. In 2014, she paid state income taxes of $5,000. In early 2015, she filed her 2014 state income tax return and received a $500 refund.


a. If Jordan itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $500, she must include the $500 in her 2015 Federal gross income.

b. If Jordan took the standard deduction on her 2014 Federal income tax return, Jordan must include the $500 in her 2015 Federal gross income.

c. If Jordan itemized her deductions in 2014, she must amend her 2014 Federal income tax return to reduce her itemized deductions.

d. If Jordan took the standard deduction on her 2014 Federal income tax return, Jordan must amend her 2014 tax return.

e. None of these choices are correct.


Answer: a. If Jordan itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $500, she must include the $500 in her 2015 Federal gross income.

Jesse served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Jesse's adjusted gross income for 2014?

Jesse, age 19, is a full-time graduate student at City University. During 2014, he received the following payments:


State scholarship for 10 months (tuition and books): $4,000

Loan from college financial aid office: 2,000

Cash support from parents: 2,500

Cash award for being the outstanding resident adviser: 1,000

= $9,500


Jesse served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Jesse's adjusted gross income for 2014?

a. $5,000

b. $1,000

c. $12,000

d. $3,500

e. None of these choices are correct.


Answer: b. $1,000

Morris is the manager of a motel. As a condition of his employment, Morris is required to live in a room on the premises so that he would be there in case of emergencies. Morris considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Morris occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Morris is required to include in gross income.

Morris is the manager of a motel. As a condition of his employment, Morris is required to live in a room on the premises so that he would be there in case of emergencies. Morris considered this a fringe benefit, since he would otherwise be required to pay $600 per month rent. The room that Morris occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Morris is required to include in gross income.


a. $1,500 per month.

b. $0.

c. $1,350 ($1,500 × .90 = $1,350).

d. $600 per month.

e. None of these choices are correct.


Answer: b. $0 because it is for the convenience of the employer

The Majestic Vehicle Company manufactures automobiles. Employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, employees of Regional Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Officers of Regional Dealer are allowed to use a company vehicle (for personal use) at no cost.

The Majestic Vehicle Company manufactures automobiles. Employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, employees of Regional Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Officers of Regional Dealer are allowed to use a company vehicle (for personal use) at no cost.


a. Employees of Regional Dealer are required to recognize as gross income the gross profit Regional Dealer loses as a result of the sale to the employees.

b. None of the employees who take advantage of the fringe benefits described above are required to recognize income.

c. Regional Dealer officers must recognize gross income from the personal use of the company vehicles.

d. Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.

e. None of these choices are correct.


Answer: c. Regional Dealer officers must recognize gross income from the personal use of the company vehicles.

Diamond Company was experiencing financial difficulties, but was not bankrupt or insolvent. The American Bank, which held a mortgage on other real estate owned by Diamond, reduced the principal from $110,000 to $85,000. The bank had made the loan to Diamond when it purchased the real estate from Aquamarine, Inc. Indigo, Inc., the holder of a mortgage on Diamond's building, agreed to accept $40,000 in full payment of the $55,000 due. Indigo had sold the building to Diamond for $150,000 that was to be paid in installments over 8 years. As a result of the above, Diamond must:

Diamond Company was experiencing financial difficulties, but was not bankrupt or insolvent. The American Bank, which held a mortgage on other real estate owned by Diamond, reduced the principal from $110,000 to $85,000. The bank had made the loan to Diamond when it purchased the real estate from Aquamarine, Inc. Indigo, Inc., the holder of a mortgage on Diamond's building, agreed to accept $40,000 in full payment of the $55,000 due. Indigo had sold the building to Diamond for $150,000 that was to be paid in installments over 8 years. As a result of the above, Diamond must:


a. include $25,000 in gross income and reduce its basis in its assets by $15,000.

b. include $40,000 in gross income.

c. include $15,000 in gross income and reduce its basis in the building by $25,000.

d. reduce the basis in its assets by $40,000.

e. None of these choices are correct.


Answer: a. include $25,000 in gross income and reduce its basis in its assets by $15,000.

The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance.

The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance.


a. If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer.

b. If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer.

c. If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer.

d. "If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer", "If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer", and "If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer".

e. None of these choices are correct.


Answer: d. "If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer", "If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer", and "If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer".

Julio owns 1,000 shares of stock in Hillside Corporation, worth $50 per share. The 2,000 shares were purchased in 2005 for $10 per share. In 2014, the corporation issues a 10% stock dividend to all common shareholders with an option of receiving either the stock worth $10,000 or $12,000 cash. Julio selects the stock. Julio's gross income from the above is:

Julio owns 1,000 shares of stock in Hillside Corporation, worth $50 per share. The 2,000 shares were purchased in 2005 for $10 per share. In 2014, the corporation issues a 10% stock dividend to all common shareholders with an option of receiving either the stock worth $10,000 or $12,000 cash. Julio selects the stock. Julio's gross income from the above is:


a. $0.

b. $10,000.

c. $12,000.

d. Julio can elect to recognize income of $12,000 or reduce his basis in the stock by $10,000.

e. None of the above.


Answer: B. $10,000

In 2012, Chad was in an automobile accident and suffered physical injuries. The accident was caused by Orville's negligence. Chad threatened to file a lawsuit against Global Trucking Company, Orville's employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages. Global's insurance company will not pay punitive damages; therefore, Global has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Chad is in the 35% marginal tax bracket. What is the after-tax difference to Chad between Chad's original claim and Global's offer?

In 2012, Chad was in an automobile accident and suffered physical injuries. The accident was caused by Orville's negligence. Chad threatened to file a lawsuit against Global Trucking Company, Orville's employer, claiming $50,000 for pain and suffering, $25,000 for loss of income, and $100,000 in punitive damages. Global's insurance company will not pay punitive damages; therefore, Global has offered to settle the case for $120,000 for pain and suffering, $25,000 for loss of income, and nothing for punitive damages. Chad is in the 35% marginal tax bracket. What is the after-tax difference to Chad between Chad's original claim and Global's offer?


a. Global's offer is $19,500 less. [$30,000(1 - .35) = $19,500].

b. Global's offer is $30,000 less. (- $100,000 punitive damages + $70,000 increased pain and suffering.)

c. Global's offer is $5,000 more. [$70,000 - (1 - .35)($100,000) = $65,000].

d. Global's offer is $10,500 less. [($30,000 × .35) = $10,500].

e. None of these choices are correct.


Answer: c. Global's offer is $5,000 more. [$70,000 - (1 - .35)($100,000) = $65,000].

Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal.

Nicholas bought land from Meredith for $150,000. Nicholas paid $50,000 cash and gave Meredith an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Meredith began having financial difficulties. To accelerate her cash inflows, Meredith agreed to accept $60,000 cash from Nicholas in final payment of the note principal.


a. Nicholas is not required to recognize gross income, since he paid the debt before it was due.

b. Nicholas must recognize $20,000 ($80,000 - $60,000) of gross income.

c. Meredith must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.

d. Nicholas is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.

e. None of these choices are correct.


Answer: d. Nicholas is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.


Section 119 excludes the value of meals from the employee's gross income:

Section 119 excludes the value of meals from the employee's gross income:


a. When the meals are provided for the employee on the employer's premises for the convenience of the employer.

b. When the meals are provided for the employee on the employer's premises as a convenience to the employee.

c. Whenever the employer pays for the meals and for the convenience of the employee.

d. All of the above.

e. None of the above.


Answer: A. When the meals are provided for the employee on the employer's premises for the convenience of the employer.

Trisha's gross income from the above is:

Trisha's income from her investments for the current year was as follows:


Interest on Albany tax return $2,000

Gain on the sale of Albany County school bonds 3,000

Interest on Albany County school bonds 5,500

Interest received during the year on U. S. Government bonds 6,500

Total $17,000


Trisha's gross income from the above is:


a. $5,000.

b. $11,500.

c. $14,000.

d. $17,000.

e.None of the above.


Answer: B. $11,500

The employer made the salary advance so that Jerome could pay his son's college tuition that was due in December 2014. The following fringe benefits were provided as part of the employer's cafeteria plan. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Jerome's gross income from the above?

Jerome, a cash basis taxpayer, received the following compensation and fringe benefits in 2014:


Salary $40,000

Advance on 2015 salary $6,000

Disability income protection $1,000

Long-term care insurance premiums $4,000


The employer made the salary advance so that Jerome could pay his son's college tuition that was due in December 2014. The following fringe benefits were provided as part of the employer's cafeteria plan. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is Jerome's gross income from the above?


a. $40,000.

b. $46,000.

c. $50,000.

d. $51,000.

e. None of the above.


Answer: C. $50,000 ($40,000 salary + $6,000 advance + $4,000 long-term care insurance premiums).

Henry is an executive for the Ravine Manufacturing Company. Henry purchased furniture from the company for $4,000, the price the company ordinarily charges a wholesaler. The retail price of the furniture was $7,000. The company also paid for Henry's parking space in a garage near the office. The parking fee was $2,600 for the year. Only highly compensated employees are allowed to buy furniture at the wholesaler's price. In addition, the company does not pay other employees' parking fees. Henry's gross income from the above is:

Henry is an executive for the Ravine Manufacturing Company. Henry purchased furniture from the company for $4,000, the price the company ordinarily charges a wholesaler. The retail price of the furniture was $7,000. The company also paid for Henry's parking space in a garage near the office. The parking fee was $2,600 for the year. Only highly compensated employees are allowed to buy furniture at the wholesaler's price. In addition, the company does not pay other employees' parking fees. Henry's gross income from the above is:


a. $0.

b. $2,600.

c. $3,000.

d. $5,600.

e. None of the above.


Answer: C. $3,000

Jenny is a full-time student at Global University and is claimed by her parents as a dependent. Her only source of income is a $23,500 scholarship ($500 for books, $15,000 for tuition, and $8,000 for room and board). Jenny's gross income for the year is:

Jenny is a full-time student at Global University and is claimed by her parents as a dependent. Her only source of income is a $23,500 scholarship ($500 for books, $15,000 for tuition, and $8,000 for room and board). Jenny's gross income for the year is:


a.$500.

b. $8,000.

c. $15,000.

d. $23,500.

e. None of the above.


Answer: B. $8,000

Gwenyth is the manager of a motel. The employer gives Gwenyth the option of living on site at the motel if she wants (value of $600 per month) or receiving an additional $500 per month. Gwenyth appreciates the rent-free housing and considers this a fringe benefit, since she would otherwise be required to pay $650 per month rent for an apartment. The room that Gwenyth occupies normally rents for $30 per night, or $900 per month. On the average, 90% of the motel rooms are occupied. As a result of this rent-free use of a room, Gwenyth is required to include in gross income:

Gwenyth is the manager of a motel. The employer gives Gwenyth the option of living on site at the motel if she wants (value of $600 per month) or receiving an additional $500 per month. Gwenyth appreciates the rent-free housing and considers this a fringe benefit, since she would otherwise be required to pay $650 per month rent for an apartment. The room that Gwenyth occupies normally rents for $30 per night, or $900 per month. On the average, 90% of the motel rooms are occupied. As a result of this rent-free use of a room, Gwenyth is required to include in gross income:


a. $500.

b. $600 per month.

c. $810 ($1,500 X .90 = $900) per month.

d. $900 per month.

e. None of the above.


Answer: B. $600 per month

Zacharia, age 19, is a full-time student at Central College and a candidate for a bachelor's degree. During 2014, he received the following payments:

Zacharia, age 19, is a full-time student at Central College and a candidate for a bachelor's degree. During 2014, he received the following payments:


Wages $7,000

Central scholarship for ten months - tuition and books 5,500

Central scholarship for ten months - room and board 4,000

Loan from college financial aid office 4,500

Cash support from parents 3,000

Cash dividends 3,000

Cash prize awarded in a contest 250

$27,250


What is Zacharia's adjusted gross income for 2014?

a. $4,250.

b. $10,250.

c. $13,250.

d. $14,250.

e. None of the above.


Answer: D. $14,250 ($7,000 wages + $4,000 room and board + $3,000 dividends + $250 prize)

During the current year, Billy sustained a serious injury in the course of his employment. As a result of the injury sustained, he received the following payments during the year:

During the current year, Billy sustained a serious injury in the course of his employment. As a result of the injury sustained, he received the following payments during the year:


Compensation for loss of income $7,000

Worker's compensation $4,500

Reimbursement from his employer's accident and health plan for medical expenses paid by Billy $2,000

Damages for physical personal injuries $5,000


What is the amount to be included in Billy's gross income for the current year?


a. $-0-.

b. $6,500.

c. $7,000.d.

d. $9,000.

e. $11,500.


Answer: A. $-0-

The employees of the Alpine Airways are given free flights to the ski resorts if there are empty seats on flights. The cost of such flights would be about $300 per employee.

The employees of the Alpine Airways are given free flights to the ski resorts if there are empty seats on flights. The cost of such flights would be about $300 per employee.


a. The employees must include the value of the flights in their gross income.

b. The employees can exclude the value of the flights from their gross income because the employees were not given an option of receiving cash.

c. An employee is required to include the value of the flights in gross income only if the employee would otherwise have bought the flights.

d. The employees are not required to include the value of the flights in their gross income because this is a no-additional cost fringe benefit.

e. None of the above.


Answer: D. This is a no-additional-cost type of fringe benefit.

A tax practitioner can avoid IRS penalty relating to a tax return position:

A tax practitioner can avoid IRS penalty relating to a tax return position:


A. only if the position has a more likely than not chance of being sustained by the IRS or courts.

B. if the position has a realistic possibility of being sustained by the IRS or courts.

C. if there is not substantial authority to support the position.

D. if the position has a reasonable basis and is disclosed on the tax return.

E. None of these.


Answer: D. if the position has a reasonable basis and is disclosed on the tax return.

Which of the following is a false statement? A taxpayer filing a fraudulent tax return:

Which of the following is a false statement? A taxpayer filing a fraudulent tax return:


A. is potentially subject to criminal penalties.

B. is potentially subject to civil penalties.

C. is potentially subject to fines and a prison sentence.

D. will have an unlimited statute of limitations for the fraudulent tax return.

E. None of these.


Answer: E. None of these.

A tax practitioner can avoid IRS penalty relating to a tax return position:

A tax practitioner can avoid IRS penalty relating to a tax return position:


A. if the position is frivolous and disclosed on the tax return.

B. if the position has a realistic possibility of being sustained by the IRS or courts.

C. if there is substantial authority to support the position.

D. if the position has a reasonable basis and is not disclosed on the tax return.

E. None of these.


Answer: C. if there is substantial authority to support the position.

Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section?

Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section?


A. IRS regulations

B. U.S. Tax Court cases

C. Committee reports

D. IRS revenue rulings

E. None of these.


Answer: C. Committee reports

If the President vetoes tax legislation, Congress:

If the President vetoes tax legislation, Congress:


A. cannot override the President's veto.

B. can override the President's veto with a 50 percent positive vote in the House and Senate.

C. can override the President's veto with a 2/3rd positive vote in the House and Senate.

D. can override the President's veto with a 75 percent positive vote in the House and Senate.

E. None of these.


Answer: C. can override the President's veto with a 2/3rd positive vote in the House and Senate.

Circular 230 was issued by:

Circular 230 was issued by:


A. AICPA.

B. State Boards of Accountancy.

C. American Bar Association.

D. IRS.

E. None of these.


Answer: D. IRS.

The regulation with the lowest authoritative weight is the:

The regulation with the lowest authoritative weight is the:


A. procedural regulation

B. interpretative regulation

C. proposed regulation

D. legislative regulation

E. None of these


Answer: C. proposed regulation

Which of the following has the lowest authoritative weight?

Which of the following has the lowest authoritative weight?


A. Legislative regulation.

B. Private letter ruling.

C. Revenue ruling.

D. Interpretative regulation.

E. Revenue procedure.


Answer: B. Private letter ruling.

Which of the following has the highest authoritative weight?

Which of the following has the highest authoritative weight?


A. Legislative regulation.

B. Private letter ruling.

C. Revenue ruling.

D. Action on decision.

E. Revenue procedure.


Answer: A. Legislative regulation.

Rowanda could not settle with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the:

Rowanda could not settle with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the:


A. U.S. District Court.

B. U.S. Circuit Court of Appeals.

C. U.S. Court of Federal Claims.

D. U.S. Tax Court.

E. None of these.


Answer: D. U.S. Tax Court.

Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:

Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:


A. Tax Court only.

B. U.S. Court of Federal Claims only.

C. U.S. District Court only.

D. Tax Court or the U.S. District Court.

E. Tax Court or the U.S. Court of Federal Claims.


Answer: B. U.S. Court of Federal Claims only.

Lavonda discovered that the 5th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:

Lavonda discovered that the 5th Circuit (where Lavonda resides) has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:


A. Tax Court only.

B. U.S. Court of Federal Claims only.

C. U.S. District Court only.

D. Tax Court or the U.S. District Court.

E. Tax Court or the U.S. Court of Federal Claims.


Answer: D. Tax Court or the U.S. District Court.

Tyrone claimed a large amount of charitable contributions as a tax deduction relative to taxpayers with similar levels of income. If Tyrone's tax return is chosen for audit because of his large charitable contributions, which audit program likely identified Tyrone's tax return for audit?

Tyrone claimed a large amount of charitable contributions as a tax deduction relative to taxpayers with similar levels of income. If Tyrone's tax return is chosen for audit because of his large charitable contributions, which audit program likely identified Tyrone's tax return for audit?


A. DIF System.

B. Deduction Detective.

C. Document perfection.

D. Information matching.

E. None of these.


Answer: A. DIF System.

Martin has never filed a 2014 tax return despite earning approximately $20,000 providing landscaping work in the community. When does the statute of limitations expire for Martin's 2014 tax return?

Martin has never filed a 2014 tax return despite earning approximately $20,000 providing landscaping work in the community. When does the statute of limitations expire for Martin's 2014 tax return?


A. 2017.

B. 2018.

C. 2021.

D. 2022.

E. None of these.


Answer: E. None of these.

Allen filed his 2014 tax return on May 15th, 2015 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2014 tax return should end:

Allen filed his 2014 tax return on May 15th, 2015 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2014 tax return should end:


A. May 15th, 2017.

B. April 15th, 2017.

C. May 15th, 2018.

D. April 15th, 2018.

E. None of these.


Answer: E. None of these.

Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the:

Dan received a letter from the IRS that gave him the choice of (1) requesting a conference with an Appeals Officer or (2) agreeing to a proposed tax adjustment. Dan received the:


A. 30-day letter.

B. 90-day letter.

C. Appeals letter.

D. Tax adjustment letter.

E. None of these.


Answer: A. 30-day letter.

Which of the following taxpayers is most likely to qualify for the saver's credit?

Which of the following taxpayers is most likely to qualify for the saver's credit?


A. A low AGI taxpayer who does not contribute to any qualified retirement plan.

B. A low AGI taxpayer who contributes to her employer's 401(k) plan.

C. A high AGI self-employed taxpayer.

D. A high AGI employee who does not contribute to any qualified retirement plan.


Answer: B

Kathy is 60 years of age and self-employed. During the year she reported $400,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute this year to a simplified employee pension (SEP) IRA?

Kathy is 60 years of age and self-employed. During the year she reported $400,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute this year to a simplified employee pension (SEP) IRA?


A. $52,000

B. $56,500

C. $57,746

D. $288,933


Answer: A

Which of the following statements concerning individual 401(k)s is false?

Which of the following statements concerning individual 401(k)s is false?


A. In general, individual 401(k)s have higher administrative costs than SEP IRAs.

B. Employees cannot participate in individual 401(k)s.

C. Individual 401(k)s are available only to self-employed taxpayers with 100 or fewer employees.

D. Individual 401(k)s have contribution limitations.


Answer: C

Which of the following is true concerning SEP IRAs?

Which of the following is true concerning SEP IRAs?


A. SEP IRAs are difficult to set up and have high administrative costs

B. Taxpayers may contribute unlimited amounts to SEP IRAs

C. Employees of the taxpayer cannot be included in SEP IRAs

D. Taxpayers with a SEP IRA must contribute for their employees


Answer: D

Which of the following statements regarding self-employed retirement accounts is true?

Which of the following statements regarding self-employed retirement accounts is true?


A. A self-employed taxpayer who has hired employees may not set up a SEP IRA.

B. A self-employed taxpayer who has hired employees may set up either a SEP IRA or an individual 401(k).

C. A self-employed taxpayer who has hired employees may not set up an individual 401(k).

D. All of these statements are false.


Answer: C

Which of the following statements concerning traditional IRAs and Roth IRAs is true?

Which of the following statements concerning traditional IRAs and Roth IRAs is true?


A. A taxpayer may contribute to a Roth IRA at any age but a taxpayer is not allowed to contribute to a traditional IRA after reaching 70½ years of age.

B. The annual contribution limits for a traditional IRA and Roth IRA are the same.

C. Taxpayers with high income are allowed to contribute to traditional IRAs but not to Roth IRAs.

D. All of these are true statements.


Answer: D

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Tyson's marginal tax rate is 25%. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA. He retains $12,500 to pay tax on the distribution and he contributes $37,500 to a Roth IRA. What amount of income tax and penalty must Tyson pay on this series of transactions?


A. $0 income tax; $0 penalty.

B. $12,500 income tax; $1,250 penalty.

C. $12,500 income tax; $3,000 penalty.

D. $12,500 income tax; $5,000 penalty.


Answer: B

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA and he immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is 25%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?

Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA and he immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is 25%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?


A. $0.

B. $1,250.

C. $3,750.

D. $5,000.


Answer: A

Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?

Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?


A. $0

B. $5,000

C. $30,000

D. $50,000


Answer: C

Which of the following statements regarding Roth IRAs distributions is true?

Which of the following statements regarding Roth IRAs distributions is true?


A. A distribution is not a qualifying distribution unless the distribution is at least two years after the taxpayer has opened the Roth IRA.

B. A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not subject to an early distribution penalty.

C. A Roth IRA does not have minimum distribution requirements.

D. The full amount of all nonqualifying distributions is subject to tax at the taxpayer's marginal tax rate.


Answer: C

In 2015, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable?

In 2015, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable?


A. $0

B. $5,000

C. $37,500

D. $45,000

E. $50,000


Answer: D

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?

Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?


A. $3,000 income tax; $2,000 early distribution penalty

B. $3,000 income tax; $0 early distribution penalty

C. $0 income tax; $2,000 early distribution penalty

D. $0 income tax; $0 early distribution penalty


Answer: B

Which of the following statements regarding IRAs is false?

Which of the following statements regarding IRAs is false?


A. Taxpayers who participate in an employer-sponsored retirement plan may be allowed to make deductible contributions to a traditional IRA.

B. The ability to make deductible contributions to a traditional IRA and nondeductible contributions to a Roth IRA may be subject to phase-out based on AGI.

C. A taxpayer may contribute to a traditional IRA in 2015 but deduct the contribution in 2014.

D. Taxpayers who have made nondeductible contributions to a traditional IRA are taxed on the full proceeds when they receive distributions from the IRA.


Answer: D

During 2015 Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2015 is $5,500. How much of a tax-deductible contribution can Jacob make to an IRA?

During 2015 Jacob, a 19 year old full-time student, earned $4,500 during the year and was not eligible to participate in an employer-sponsored retirement plan. The general limit for deductible contributions during 2015 is $5,500. How much of a tax-deductible contribution can Jacob make to an IRA?


A. $0 (Full-time students are not allowed to participate in IRAs)

B. $500

C. $4,500

D. $5,500


Answer: C

Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?

Which of the following statements comparing qualified defined contribution plans and nonqualified deferred compensation plans is false?


A. Employers must fund qualified defined contribution plans but not nonqualified deferred compensation plans.

B. Qualified defined contribution plans are subject to formal vesting requirements while nonqualified deferred compensation plans are not.

C. Distributions from both types of plans are taxed at ordinary income tax rates.

D. In terms of tax consequences to the employee, earnings on qualified plans (except Roth plans) are deferred until distributed to the employee but earnings on nonqualified plans are immediately taxable.


Answer: D

Which of the following statements concerning nonqualified deferred compensation plans is true?

Which of the following statements concerning nonqualified deferred compensation plans is true?


A. If an employer doesn't have the funds to pay the employee, the employee becomes an unsecured creditor of the employer.

B. These plans can be an important tax planning tool for employers if they expect their marginal tax rate to decrease over time.

C. These plans can be an important tax planning tool for employees who expect their marginal tax rate to increase over time.

D. Distributions are taxed at the same tax rate as long-term capital gains.


Answer: A

Which of the following is true concerning employer funding of nonqualified deferred compensation plans?

Which of the following is true concerning employer funding of nonqualified deferred compensation plans?


A. Employers are required to invest salary deferred by employees in investments specified by the employees.

B. Employers are required to annually fund their deferred compensation obligations to employees.

C. Employers annually deduct the amount earned by employees under the plan.

D. Employers may discriminate in terms of who they allow to participate in the plan.


Answer: D

Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year period. In 2015, when her account was worth $50,000 and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified distribution from the account. How much of the distribution will be subject to income tax and 10% penalty?

Heidi has contributed $20,000 in total to her Roth 401(k) account over a six year period. In 2015, when her account was worth $50,000 and Heidi was in desperate need of cash, Heidi received a $30,000 nonqualified distribution from the account. How much of the distribution will be subject to income tax and 10% penalty?


A. $0

B. $10,000

C. $12,000

D. $18,000

E. $30,000


Answer: D

Which of the following statements is true regarding distributions from Roth 401(k) accounts?

Which of the following statements is true regarding distributions from Roth 401(k) accounts?


A. There are no minimum distribution requirements for distributions from Roth 401(k) accounts.

B. Qualified distributions are subject to taxation.

C. A taxpayer receiving a nonqualified distribution from a Roth 401(k) account may be taxed on a portion but not all of the distribution.

D. None of these is a true statement.


Answer: C

Which of the following statements regarding Roth 401(k) accounts is false?

Which of the following statements regarding Roth 401(k) accounts is false?


A. Employees can make contributions to a Roth 401(k).

B. Employers can make contributions to Roth accounts on behalf of their employees.

C. Contributions to Roth 401(k) plans are not deductible.

D. Qualified distributions from Roth 401(k) plans are not taxable.


Answer: B

Which of the following statements is true regarding taxpayers receiving distributions from traditional defined contribution plans?

Which of the following statements is true regarding taxpayers receiving distributions from traditional defined contribution plans?


A. A taxpayer who retires at age 71 in 2015 is required to pay a minimum distribution penalty if she does not receive a distribution in 2015.

B. The minimum distribution penalty is 30% of the amount required to have been distributed.

C. A taxpayer who receives a distribution from a retirement account before she is 55 years old is subject to a 10% penalty on both the distributed and undistributed portions of her retirement account.

D. Taxpayers are not allowed to deduct either early distribution penalties or minimum distribution penalties.


Answer: D

Riley participates in his employer's 401(k) plan. He turns 69 years of age on February 15, 2015, and he plans on retiring on July 1, 2015. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

Riley participates in his employer's 401(k) plan. He turns 69 years of age on February 15, 2015, and he plans on retiring on July 1, 2015. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?


A. by April 1, 2015

B. by April 1, 2016

C. by April 1, 2017

D. by April 1, 2018


Answer: C

Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2013 and he plans on retiring on July 1, 2015. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?

Riley participates in his employer's 401(k) plan. He turns 70 years of age on February 15, 2013 and he plans on retiring on July 1, 2015. When must Riley receive his first distribution from the plan to avoid minimum distribution penalties?


A. by April 1, 2013

B. by April 1, 2014

C. by April 1, 2015

D. by April 1, 2016


Answer: D

Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna's marginal tax rate is 25%, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59th birthday and she has not yet retired?

Shauna received a $100,000 distribution from her 401(k) account this year. Assuming Shauna's marginal tax rate is 25%, what is the total amount of tax and penalty Shauna will be required to pay if she receives the distribution on her 59th birthday and she has not yet retired?


A. $0.

B. $10,000.

C. $25,000.

D. $35,000.

E. None of these.


Answer: D

Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?

Shauna received a distribution from her 401(k) account this year. In which of the following situations will Shauna be subject to an early distribution penalty?


A. Shauna is 60 years of age but not yet retired when she receives the distribution.

B. Shauna is 58 years of age but not yet retired when she receives the distribution.

C. Shauna is 56 years of age and retired when she receives the distribution.

D. Shauna is 69 years of age but not yet retired when she receives the distribution.


Answer: B

Which of the following best describes distributions from a traditional defined contribution plan?

Which of the following best describes distributions from a traditional defined contribution plan?


A. Distributions from defined contribution plans are fully taxable as ordinary income.

B. Distributions from defined contribution plans are partially taxable as ordinary income and partially nontaxable as a return of capital.

C. Distributions from defined contribution plans are fully taxable as capital gains.

D. Distributions from defined contribution plans are partially taxable as capital gains and partially nontaxable as a return of capital.


Answer: A

Which of the following statements regarding contributions to defined contribution plans is true?

Which of the following statements regarding contributions to defined contribution plans is true?


A. Employer contributions to a defined contribution plan are not limited by the tax law.

B. Employee contributions to a defined contribution plan are not limited by the tax law.

C. An employee who is at least 60 years of age as of the end of the year may contribute more to a defined contribution plan than an employee who has not reached age 60 by year end.

D. The tax laws limit the sum of the employer and employee contributions to a defined contribution plan.


Answer: D

Which of the following statements regarding defined contribution plans is false?

Which of the following statements regarding defined contribution plans is false?


A. Employers bear investment risk relating to the plan.

B. Employees immediately vest in their contributions to the plan.

C. Employers typically match employee contributions to the plan to some extent.

D. An employer's vesting schedule is used for employers' contributions in determining the amount of the plan benefits the employee is entitled to receive on retirement.


Answer: A

Which of the following describes a defined contribution plan?

Which of the following describes a defined contribution plan?


A. Provides guaranteed income on retirement to plan participants.

B. Employers and employees generally may contribute to the plan.

C. Generally set up to defer income for executives and highly compensated employees but not other employees.

D. Retirement account set up to provide an individual a fixed amount of income on retirement.


Answer: B

Which of the following best describes distributions from a defined benefit plan?

Which of the following best describes distributions from a defined benefit plan?


A. Distributions from defined benefit plans are fully taxable as ordinary income.

B. Distributions from defined benefit plans are partially taxable as ordinary income and partially nontaxable as a return of capital.

C. Distributions from defined benefit plans are fully taxable as capital gains.

D. Distributions from defined benefit plans are partially taxable as capital gains and partially nontaxable as a return of capital.


Answer: A

Dean has earned $70,000 annually for the past 4½ years working as an architect for MWC. Under MWC's defined benefit plan (which uses a 5-year cliff vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with MWC. What is Dean's vested benefit (or annual benefit he has earned so far)?

Dean has earned $70,000 annually for the past 4½ years working as an architect for MWC. Under MWC's defined benefit plan (which uses a 5-year cliff vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with MWC. What is Dean's vested benefit (or annual benefit he has earned so far)?


A. $12,250

B. $42,000

C. $7,350

D. $0


Answer: D

Dean has earned $70,000 annually for the past five years working as an architect for MWC Inc. Under MWC's defined benefit plan (which uses a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with MWC. Dean has worked for five full years for MWC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?

Dean has earned $70,000 annually for the past five years working as an architect for MWC Inc. Under MWC's defined benefit plan (which uses a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with MWC. Dean has worked for five full years for MWC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?


A. $12,250

B. $42,000

C. $7,350

D. $0


Answer: C

Which of the following statements regarding vesting in a defined benefit plan is correct?

Which of the following statements regarding vesting in a defined benefit plan is correct?


A. Under a cliff vesting schedule, a portion of an employee's benefits vest each year.

B. Under a graded vesting schedule, an employee's entire benefit vests all at the same time.

C. When an employee's benefits vest, she is entitled to participate in the employer's defined benefit plan.

D. When an employee's benefits vest, she is legally entitled to receive the benefits.


Answer: D

Which of the following statements regarding defined benefit plans is false?

Which of the following statements regarding defined benefit plans is false?


A. The benefits are based on a fixed formula

B. The vesting period can be based on a graded or cliff schedule

C. Employees bear the investment risks of the plan

D. Employers are generally required to make annual contributions to meet expected future liabilities


Answer: C

Which of the following describes a defined benefit plan?

Which of the following describes a defined benefit plan?


A. Provides fixed income to the plan participants based on a formula

B. Distribution amounts determined by employee and employer contributions

C. Allows executives to defer income for a period of years

D. Retirement account set up by an individual


Answer: A

Which of the following statements is true regarding employer-provided qualified retirement plans?

Which of the following statements is true regarding employer-provided qualified retirement plans?


A. May discriminate against rank and file employees.

B. Deductible contributions are generally phased-out based on AGI.

C. Executives are generally ineligible to participate in these plans.

D. They are generally referred to as defined benefit plans or defined contribution plans.


Answer: D

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?

Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?


A. Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

B. Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor.

C. Deductible home office expenses are for AGI deductions limited to gross income from the business minus non home office related expenses.

D. Deductible home office expenses are for AGI deductions and may be deducted without limitation.


Answer: C

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?

Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?


A. Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.

B. Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor.

C. Deductible home office expenses of employees are for AGI deductions limited to gross income from the business.

D. Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.


Answer: A

Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct?

Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct?


A. Depreciation expense, other expenses, property taxes and interest expense

B. Other expenses, depreciation expense, property taxes and interest expense

C. Property taxes and interest expense, depreciation expense, other expenses

D. Other expenses, property taxes and interest expense, depreciation expense

E. None of these statements is correct.


Answer: E

Ilene rents her second home. During 2015, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2015?

Ilene rents her second home. During 2015, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2015?


A. $15,000

B. $10,000

C. $5,000

D. $0


Answer: C

Harvey rents his second home. During 2015, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2015?

Harvey rents his second home. During 2015, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2015?


A. $35,000

B. $25,000

C. $5,000

D. $0


Answer: B

When a taxpayer experiences a net loss from a nonresidence (rental property)

When a taxpayer experiences a net loss from a nonresidence (rental property)


A. The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.

B. The loss is fully deductible against the taxpayer's ordinary income no matter the circumstances.

C. If the taxpayer is not an active participant in the rental, the taxpayer may be allowed to deduct the loss even if the taxpayer does not have any sources of passive income.

D. If the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.


Answer: D

For a home to be considered a rental (nonresidence) property, a taxpayer must

For a home to be considered a rental (nonresidence) property, a taxpayer must


A. Rent the property for 15 days or more during the year.

B. Use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

C. Use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.

D. Rent the property for 15 days or more during the year and use the property for personal purposes for no more than the greater of (a) 14 days or (b) 10 percent of the total days rented.

E. Rent the property for 15 days or more during the year and use the property for personal purposes for no more than the lesser of (a) 14 days or (b) 10 percent of the total days rented.


Answer: D

Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?

Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?


A. Harriet's deductible expenses are not limited to the amount of gross rental income from the property.

B. Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.

C. Harriet is required to include all of the rental receipts in gross income.

D. Harriet is required to allocate all expenses associated with the home to rental use or personal use.


Answer: B

Braxton owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?

Braxton owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?


A. Depreciation expense, other expenses, property taxes and interest expense.

B. Other expenses, depreciation expense, property taxes and interest expense.

C. Property taxes and interest expense, depreciation expense, other expenses.

D. Other expenses, property taxes and interest expense, depreciation expense.

E. None of these statements is correct.


Answer: E

Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any?

Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady's net income from the property and what type and amount of expenses will he carry forward to next year, if any?


A. $0 net income. $1,000 depreciation expense carried forward to next year.

B. ($1,000) net loss. $0 expenses carried over to next year.

C. $0 net income. $1,000 of other expense carried over to next year.

D. $0 net income. $1,000 of interest expense and property taxes carried over to next year.


Answer: A

Katy owns a second home. During 2015, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?

Katy owns a second home. During 2015, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy's income and expenses from the home?


A. Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.

B. Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.

C. Assuming Katy's rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy's deductible expenses for 2015 may not exceed the amount of her rental receipts (she may not report a loss from the rental property).

D. All of these statements are correct.


Answer: D

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?


A. Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.

B. Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.

C. Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year.

D. Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.


Answer: D

Which of the following statements regarding personal and/or rental use of a home is false?

Which of the following statements regarding personal and/or rental use of a home is false?


A. A day for which a taxpayer rents a home to an unrelated party for less than the property's fair market value is considered to be a personal use day.

B. A day for which a taxpayer rents a home to a relative for full fair market value is considered to be a rental use day.

C. A day for which an unrelated non-owner stays in the home under a vacation exchange arrangement is considered to be a personal use day.

D. A day for which the home is available for rent but is not occupied does not count as a personal use or a rental use day.


Answer: B

Which of the following statements regarding the first time home buyer credit is correct?

Which of the following statements regarding the first time home buyer credit is correct?


A. Taxpayers who acquired a home in 2009 and claimed the credit are required to pay the credit back if they live in the home for less than 15 years.

B. Taxpayers who acquired a home in 2010 and claimed the credit are required to pay the credit back if they live in the home for less than 5 years.

C. Taxpayers who acquire a home in 2015 are not eligible for the credit.

D. None of these


Answer: C

On July 1 of 2015, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for 2015?

On July 1 of 2015, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for 2015?


A. $0

B. $4,000

C. $4,500

D. $5,000

E. $9,000


Answer: C

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?

Which of the following statements best describes the deductibility of real property taxes when a taxpayer sells real property during a year?


A. The owner of the property at the time the property taxes are due is responsible for paying all of the real property taxes on the property for the year. Consequently, this person is allowed to deduct all of the property taxes for the year.

B. Taxpayers are allowed to deduct the real property taxes they actually pay for the year.

C. Taxpayers are allowed to deduct the property taxes allocated to the portion of the year that they owned the property.

D. None of these statements is correct.


Answer: C

Which of the following statements regarding deductions for real property taxes is incorrect?

Which of the following statements regarding deductions for real property taxes is incorrect?


A. A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.

B. Taxpayers are not allowed to deduct payments made for setting up water and sewer services.

C. An individual deducts real property taxes on her principal residence as a for AGI deduction.

D. Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.


Answer: C

On March 31, 2015, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. How much can Mary deduct in 2015 for her points paid?

On March 31, 2015, Mary borrowed $200,000 to refinance the original mortgage on her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. How much can Mary deduct in 2015 for her points paid?


A. $200

B. $150

C. $4,500

D. $6,000


Answer: B

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?

Which of the following statements regarding the tax deductibility of points related to a home mortgage is correct?


A. Points paid in the form of a loan origination fee on an original home loan are deductible over the life of the loan.

B. Points paid in the form of prepaid interest on an original home loan are deductible over the life of the loan.

C. Points paid in the form of prepaid interest on a refinance are deductible over the life of the loan.

D. None of these statements is correct.


Answer: C

On March 31, 2015, Mary borrowed $200,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's 2015 deduction for her points paid?

On March 31, 2015, Mary borrowed $200,000 to buy her principal residence. Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's 2015 deduction for her points paid?


A. $50

B. $150

C. $4,500

D. $6,000


Answer: D

Amanda purchased a home for $1,000,000 in 2002 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2015 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing. What is her total amount of qualifying home-related debt for tax purposes?

Amanda purchased a home for $1,000,000 in 2002 She paid $200,000 cash and borrowed the remaining $800,000. This is Amanda's only residence. Assume that in 2015 when the home had appreciated to $1,500,000 and the remaining mortgage was $600,000, interest rates declined and Amanda refinanced her home. She borrowed $1,000,000 at the time of the refinancing. What is her total amount of qualifying home-related debt for tax purposes?


A. $600,000

B. $700,000

C. $1,000,000

D. $1,100,000


Answer: B

Which of the following statements regarding qualified home equity indebtedness is correct?

Which of the following statements regarding qualified home equity indebtedness is correct?


A. The limit on qualified home equity indebtedness depends on filing status.

B. Limits on qualified home equity indebtedness and qualified acquisition indebtedness do not apply to the same loan.

C. If the value of a home drops, the amount of qualified home equity indebtedness on an existing home equity loan also drops.

D. In order to deduct interest on home equity indebtedness, taxpayers must use the proceeds of a home equity loan to improve the home.


Answer: A

Jessica purchased a home on January 1, 2014 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 and 2015, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2014, when her home was worth $500,000 Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2014, she made interest-only payments on this loan in the amount of $5,000. During 2015, she made interest only payments in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2015 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home, landscape the yard, and add a home theater room in the basement of the home?

Jessica purchased a home on January 1, 2014 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 and 2015, Jessica made interest-only payments on the loan of $18,000 (each year). On July 1, 2014, when her home was worth $500,000 Jessica borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2014, she made interest-only payments on this loan in the amount of $5,000. During 2015, she made interest only payments in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Jessica paid during 2015 that she may deduct as an itemized deduction if she used the proceeds of the second loan to finish the basement in her home, landscape the yard, and add a home theater room in the basement of the home?


A. $0

B. $10,000

C. $26,353

D. $26,000

E. $28,000


Answer: E

Kimberly purchased a home on January 1, 2014 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 and 2015 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2014, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2014, she made interest-only payments on this loan in the amount of $5,000 and during 2015 she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Kimberly paid during 2015 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?

Kimberly purchased a home on January 1, 2014 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 and 2015 Kimberly made interest-only payments on the loan in the amount of $18,000 each year. On July 1, 2014, when her home was worth $500,000, Kimberly borrowed an additional $125,000 secured by the home at an interest rate of 8 percent. During 2014, she made interest-only payments on this loan in the amount of $5,000 and during 2015 she made interest only payments on the loan in the amount of $10,000. What is the maximum amount of the $28,000 interest expense Kimberly paid during 2015 that she may deduct as an itemized deduction, if she used the proceeds of the second loan to pay off student loans from law school?


A. $0

B. $5,000

C. $18,000

D. $26,000

E. $26,353


Answer: E

Lauren purchased a home on January 1, 2015 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence. During 2015, Lauren made interest-only payments on the loan. On July 1, 2015, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2015, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)?

Lauren purchased a home on January 1, 2015 for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a 30-year loan, secured by the residence. During 2015, Lauren made interest-only payments on the loan. On July 1, 2015, when her home was valued at $500,000, she borrowed an additional $150,000, secured by the residence. During 2015, she made interest-only payments on the second loan. Which of the following statements regarding the deductibility of the interest Lauren paid is correct (assume she uses the chronological order of the loans to determine deductible interest expense if a limitation applies)?


A. Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan unless she uses the loan proceeds to substantially improve the home.

B. Lauren may deduct all of the interest on the first loan but she may deduct only two-thirds of the interest on the second loan no matter what she does with the proceeds of the second loan.

C. Lauren may deduct all of the interest on the first loan or all of the interest on the second loan.

D. Lauren may deduct all of the interest on the first loan and all of the interest on the second loan no matter what she does with the loan proceeds.


Answer: A

Which of the following statements regarding interest expense on home-related debt is correct?

Which of the following statements regarding interest expense on home-related debt is correct?


A. Taxpayers may deduct interest expense on a limited amount of home equity indebtedness but they may deduct interest expense on an unlimited amount of home acquisition indebtedness.

B. Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness but an unlimited amount of home equity indebtedness.

C. Taxpayers may deduct interest expense on a limited amount of acquisition indebtedness and a limited amount of home equity indebtedness.

D. None of these statements is correct.


Answer: C

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?

Which of the following best describes a qualified residence for purposes of determining a taxpayer's deductible home mortgage interest expense?


A. Only the taxpayer's principal residence.

B. The taxpayer's principal residence and two other residences (chosen by the taxpayer).

C. The taxpayer's principal residence and one other residence (chosen by the taxpayer).

D. Any two residences chosen by the taxpayer.


Answer: C

When a taxpayer rents a residence for part of the year, the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's

When a taxpayer rents a residence for part of the year, the residence is not eligible as a qualified residence for the home mortgage interest expense deduction unless the taxpayer's


A. Personal use of the home exceeds the taxpayer's rental use of the home.

B. Personal use of the home exceeds half of the taxpayer's rental use of the home.

C. Personal use of the home exceeds the lesser of 14 days or 10 percent of the taxpayer's rental use of the home.

D. Personal use of the home exceeds the greater of 14 days or 10 percent of the taxpayer's rental use of the home.


Answer: D

Ethan (single) purchased his home on July 1, 2004. On July 1, 2012 he moved out of the home. He rented the home until July 1, 2014 when he moved back into the home. On July 1, 2015 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2015 gross income?

Ethan (single) purchased his home on July 1, 2004. On July 1, 2012 he moved out of the home. He rented the home until July 1, 2014 when he moved back into the home. On July 1, 2015 he sold the home and realized a $210,000 gain. What amount of the gain is Ethan allowed to exclude from his 2015 gross income?


A. $0

B. $168,000

C. $200,000

D. $210,000


Answer: B

Michael (single) purchased his home on July 1, 2004. On July 1, 2013 he moved out of the home. He rented out the home until July 1, 2013 when he moved back into the home. On July 1, 2015 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2015 gross income?

Michael (single) purchased his home on July 1, 2004. On July 1, 2013 he moved out of the home. He rented out the home until July 1, 2013 when he moved back into the home. On July 1, 2015 he sold the home and realized a $300,000 gain. What amount of the gain is Michael allowed to exclude from his 2015 gross income?


A. $0

B. $225,000

C. $250,000

D. $300,000


Answer: C

Dawn (single) purchased her home on July 1, 2005. On July 1, 2014 Dawn moved out of the home. She rented out the home until July 1, 2015 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2015 gross income?

Dawn (single) purchased her home on July 1, 2005. On July 1, 2014 Dawn moved out of the home. She rented out the home until July 1, 2015 when she sold the home and realized a $230,000 gain (assume none of the gain was attributable to depreciation). What amount of the gain is Dawn allowed to exclude from her 2015 gross income?


A. $0

B. $207,000

C. $225,000

D. $230,000


Answer: D

Cameron (single) purchased and moved into his principal residence on July 1, 2014. On June 1, 2015, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, 2015 in order to move into some apartments across the street. On the sale of his principal residence, Cameron realized a $50,000 gain. How much of the gain is Cameron allowed to exclude from his 2015 gross income?

Cameron (single) purchased and moved into his principal residence on July 1, 2014. On June 1, 2015, Cameron lost his job. Because he couldn't afford the payments on his new home, he sold it on July 1, 2015 in order to move into some apartments across the street. On the sale of his principal residence, Cameron realized a $50,000 gain. How much of the gain is Cameron allowed to exclude from his 2015 gross income?


A. $0

B. $2,500

C. $25,000

D. $50,000


Answer: A

On November 1, 2014, Jamie (who is single) purchased and moved into her principal residence. In early 2015, Jamie was laid off from her job. On February 1, 2015, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in 2015?

On November 1, 2014, Jamie (who is single) purchased and moved into her principal residence. In early 2015, Jamie was laid off from her job. On February 1, 2015, Jamie sold the home at a $35,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in 2015?


A. $0

B. $3,125

C. $31,250

D. $35,000


Answer: C

Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude?

Shantel owned and lived in a home for five years before marrying Daron. Shantel and Daron lived in the home for two years before selling it at a $700,000 gain. Shantel was the sole owner of the residence until it was sold. How much of the gain may Shantel and Daron exclude?


A. $0

B. $250,000

C. $500,000

D. $700,000


Answer: C

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