Individual Income Tax Test 1

Front 1

Joe and Barb are married, but Barb refuses to sign a current year joint return. On Joe's separate current year return, an exemption may be claimed for Barb if...

Back 1

Barb had no gross income and was not claimed as another person's dependent in the current year.

Front 2

Al and Mary Lew are married and filed a joint 2013 income tax return in which they validly claimed the $3,900 personal exemption for their dependent 17-year-old daughter, Doris. Since Doris earned $7,400 from a part-time job at the college she attended full-time, Doris also was equired to file an income tax return. What amount was Doris entitled to claim as a personal exemption in her individual income tax return?

Back 2

$0

No personal exemption is allowable on the return of an individual who is eligible to be claimed as a dependent on another taxpayer's return.

Front 3

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's widowed parent, Grant. Dale, a 19-year-old full-time college student, earned $4,500 as a baby-sitter. Kim, a 23-year-old bank teller, earned $12,000. Grant received $5,000 in dividend income and $4,000 in nontaxable social security benefits. Grant, Dale, and Kim are U.S. citizens and were over one-half supported by Jim and Kay. How many exemptions can Jim and Kay claim on their current year joint income tax return?

Back 3

Three

Jim and Kay each may claim an exemption for themselves under §151(a). Dale fails the gross income test ; however, he meets an exception: he is a child of the taxpayer and is full-time student under the age of 24. No exemption is allowed on Jim and Kay's joint return for Kim. Kim fails the gross income test and does not meet an exception to it. She is not a full-time student and she is not under age 19. Neither is an exemption allowed for Grant because he fails the gross income test. There is no exception from the gross income test for a taxpayer's parent. Thus, Jim and Kay may claim three exemptions on their joint return.

Front 4

Sarah Hance, who is single and lives alone in Idaho, has no income of her own and is supported infull by the following persons:

Amount Percent
of support of total
Alan (an unrelated friend) $14,400 48
Barbara (Sarah's sister) 12,900 43
Chris (Sarah's son) 2,700 9
$ 30,000 100

Under a multiple support agreement, Sarah's dependency exemption can be claimed by

Back 4

Barbara

Alan fails the relationship or member of household test. Chris provides less than 10% of Sarah’s support. Barbara passes both the relationship and the 10% test.

Front 5

Sam Gow's wife died in Year 1. Sam did not remarry, and he contributed more than 50% of maintaining the home for his dependent infant child during Year 2 and Year 3, providing full support for himself and his child during these years. For Year 1, Sam properly filed a joint return. For Year 3, Sam's filing status is

Back 5

Qualifying widower with dependent child

Because Sam did not remarry, was able to file a joint return in the year his wife died, and contributed more than 50% of maintaining a home for a dependent child, he meets the definition of a qualifying widower under IRC Section 2(a). This status allows Sam to use the married filing joint tax rates for two years after the year of death.

Front 6

For head of household filing status, which of the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household?

1. Food consumed
in the home

2. Value of services rendered in
the home by the taxpayer

Back 6

1. Yes 2.No

The cost of maintaining the household must be an actual cash expenditure. Therefore, the cost of food is included, but the value of the services rendered is not included for purposes of determining whether the taxpayer has contributed more than one-half of the cost of maintaining the household.

Front 7

While Emma and John were married, John died on July 1, Year 3. With regard to John's and Emma's filing status for Year 3, Emma should file...

Back 7

A joint return, including John, as married taxpayers

A joint return may be filed when one or both spouses died during the tax year. A joint return may not be filed with the deceased spouse if the surviving spouse remarries before the end of the year in which the deceased spouse died.

Front 8

A couple filed a joint return in prior tax years. During the current tax year, one spouse died. The couple has no dependent children. What is the filing status available to the surviving spouse for the first subsequent tax year?

Back 8

Single

The surviving spouse status and the head of household status involve paying more than 50% to maintain a household that is the principal place of residence for the entire year of the taxpayer's child. Without such a child, an unmarried taxpayer's status is single. A spouse may file either married filing jointly or married filing separately in the year of the deceased spouse's death, but not in subsequent years.

Front 9

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount should Perle include in taxable income as a result of this transaction?

Back 9

$550

Perle must include $550 in taxable income. The $200 cash is included and the $350 fair market value of the bookcase also must be included [§61(a)(2)]. Reg. §1.61-2(d)(1) states "...if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation." Therefore, Perle must include the fair market value of what he received, not what he billed.

Front 10

Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the...

Back 10

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with her or his spouse).

Section 3105 indicates that Series EE savings bonds, brought after 1989, can be redeemed tax free if the proceeds of the bonds are used to pay tuition and fees for higher education for the taxpayer, her or his spouse or dependents. To be exempt from tax, the purchaser of the bonds must be their sole owner or jointly held with a spouse. There is no requirement that bonds must be in the name of the child. The bonds must be purchased by an individual who is at least 24 years of age. There is no requirement that the bonds be transferred to, and redeemed by, the college.

Front 11

Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no future services are expected of her as a condition of receiving the award. What amount should Joan include in her adjusted gross income in connection with this award?

Back 11

$10,000

In order for a prize or award to be excludable from income, the recipient must (1) be selected without any action on her part; (2) not be required, as a condition of receipt, to render substantial future services; and (3) assign the award to a charitable or governmental organization [§74]. Because the third condition is not met, the full $10,000 is includable in Joan's taxable income.

Front 12

Walt's employer pays 100% of the cost of all employees' group-term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Walt by his employer is...

Back 12

$50,000

Section 79(a) provides that an employer can purchase up to $50,000 of group-term life insurance for an employee without causing the amounts so expended to be included in the employee's gross income. Any amounts expended by the employer for additional life insurance coverage will be included in the employee's gross income.

Front 13

Under a $150,000 insurance policy on her deceased father's life, Mary Green is to receive $12,000 per year for 15 years. Of the $12,000 received in the current year, the amount subject to income tax is...

Back 13

$2,000

If life insurance proceeds are left on deposit with the insurance company and paid over a period of time, part of cash received is a tax-free payment of insurance proceeds and the remainder is gross income to the beneficiary. Mary's taxable portion of the annuity received from the death of her father is determined as follows.

Cash received$12,000

Portion representing cost of annuity ($150,000 / 15) (10,000)

Interest income$ 2,000

Front 14

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

*Workers' compensation$6,500

*
Reimbursement from his employer's accident and health plan for medical expenses paid by Hal and not deducted by him
4,000

*Damages for personal injuries16,000

The amount to be included in Harold's gross income for the current year is

Back 14

$0

Section 104 provides for the exclusion from gross income of certain types of compensation received for injury or sickness. The types of compensation which are excluded include amounts received under workers' compensation acts as compensation for personal injury or sickness, and the amount of any damages received on account of personal injuries or sickness. Furthermore, §105(b) generally states that ''gross income does not include... (amounts that are received by an employee through accident or health insurance plans that are attributable to employer contributions which were not includable in the gross income of the employee)...if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for...medical care...'' and for which no deduction was taken under §213. Therefore, none of the amounts received by Hal are includable in his gross income.

Front 15

Under a "cafeteria plan" maintained by an employer,...

Back 15

Participants may select their own menu of benefits.

A cafeteria plan is a benefits plan by which an employee can select qualified benefits, such as health insurance and life insurance, from the package or "menu" offered by the employer. Generally, cafeteria plans do not include deferred compensation other than 401(k) plans.

Front 16

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true?

1. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year.
2. "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income.

Back 16

Both I and II

Section 135(c)(2)(A) states that qualified higher education expenses include tuition and fees for the enrollment or attendance of the taxpayer, the taxpayer's spouse, or any dependent of the taxpayer at an eligible institution. Section 135(d)(1)(A) states that the higher education expenses are to be reduced by any qualified scholarship that is excluded from gross income under §117. Therefore, both statements are true.

Front 17

With regard to the inclusion of social security benefits in gross income, which of the following statements is correct?

Back 17

85% of the social security benefits is the maximum amount of benefits to be included in gross income.

ection 86(a) provides that the amount of social security benefits included in gross income is the lesser of one-half of the social security benefits or one-half of the excess described in §86(b)(1). Section 86(b) provides that this amount is the amount by which the sum of modified adjusted gross income plus one-half of the social security benefits exceeds a base amount. The base amount depends upon filing status as described in §86(c). This is altered for taxpayers whose modified adjusted gross income plus one-half of the social security benefits is equal to $44,000 for married taxpayers filing jointly or $34,000 for all other taxpayers. In these situations, up to 85% of Social Security benefits are taxable. Thus, 85% of social security benefits received is the maximum amount that is includible in gross income.

Front 18

Which payment(s) is (are) included in a recipient's gross income?

1. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
2. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

Back 18

Both I and II

Section 117(a) excludes from gross income amounts received as qualified scholarships by individuals who are degree candidates at a qualified educational organization. Section 117(b) defines qualified scholarships as payments for tuition, fees, books, supplies, and equipment related to the courses of instruction. However, §117(c) states that the exclusion shall not apply to payments received for teaching, research, and other services as a condition for receiving the scholarship. In substance, these payments are compensation for services, rather than bona fide scholarships.

Front 19

Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

-Employer provided medical insurance coverage under a health plan.

-A $30,000 gift from the taxpayer's grandparents.

-The fair market value of land that the taxpayer inherited from an uncle.

-The dividend income on shares of stock that the taxpayer received for services rendered.

Back 19

The dividend income on shares of stock that the taxpayer received for services rendered.

Dividends are included in gross income and taxed as ordinary income to shareholders. Employer-provided health coverage, gifts, and inheritances generally are excluded from a taxpayer's gross income.

Front 20

DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income?

1. Kent was selected for the award by DAC without any action on Kent's part.
2. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

Back 20

Both I and II

In order for a prize or award to be excludable from income, the recipients must: (1) be selected without any action on their part; (2) not be required, as a condition of receipt, to render substantial future services; and (3) assign the award to a charitable or governmental organization.

Front 21

In the current year, Jensen had the following items:

Salary $50,000

Inheritance 25,000

Alimony from ex-spouse 12,000

Child support from ex-spouse 9,000

Capital loss on investment stock sale (6,000)

What is Jensen's AGI for the current year?

Back 21

$59,000

Salaries and alimony received are included in gross income. Up to $3,000 of a net capital loss may offset other gross income for an individual taxpayer annually; excess losses may be carried forward indefinitely. Inheritances and child support are excluded from gross income. $50,000 + $12,000 - $3,000 = $59,000

Front 22

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

Back 22

$100,414

Johnson’s coverage is for double his salary (2 × $100K = $200K). Premiums paid by an employer on up to $50,000 coverage of group term-life insurance are excluded from gross income; premiums on Johnson’s remaining $150,000 of coverage are taxable. $150,000 / $1,000/unit = 150 units of coverage; $2.76/unit × 150 units of coverage = $414. Johnson includes the salary and the premiums for the excess coverage in gross income. $100,000 + $414 = $100,414

Front 23

Dale received $1,000 in the current year for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer. In Dale's income tax return, the $1,000 jury duty fee should be

Back 23

Deducted from gross income in arriving at adjusted gross income

Jury duty pay is included in taxable income. Employees who remit jury duty pay to employers in exchange for their regular compensation during the jury service period may deduct the jury duty pay from gross income in arriving at AGI. Jury duty pay remitted to an employer is not an itemized deduction.

Front 24

Ed and Ann Ross were divorced in January of the current year. In accordance with the divorce decree, Ed transferred the title of their home to Ann. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had 20 more years to run. Monthly mortgage payments amounted to $1,000. Under the terms of settlement, Ed is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, regardless of how long Ann lives. Ed made 12 mortgage payments in the current year. What amount is taxable as alimony in Ann's current year return?

Back 24

$0

A transfer of property other than cash to a former spouse under a decree of divorce is not a taxable event. Cash payments are not taxable if under the decree the payor spouse is liable for payment after the death of the payee spouse. Therefore, none of the transferred property or payments is taxable on the former wife's return.

Front 25

Pierre, a headwaiter, received tips totaling $2,000 in December, Year 2. On January 5, Year 3, Pierre reported this tip income to his employer in the required written statement. At what amount, and in which year, should this tip income be included in Pierre's gross income?

Back 25

$2,000 in Year 3

Restaurant employees who receive in a month over $20 in cash as tips must report this tip income on a written statement to their employers in the first ten days of the month following the month of actual receipt. This requirement, per §3401(a), is so employers can withhold income taxes on the tip income. The employee is considered to have received tip income in the month he or she furnishes the written statement to his or her employer [Reg. §31.3401(f)-1(b)]. Thus, Pierre will recognize $2,000 in tip income in January when he furnishes a written statement to his employer reporting tips he actually received in December.

Front 26

If an individual taxpayer's passive losses and credits relating to rental real estate activities cannot be used in the current year, then they may be carried

Back 26

Forward indefinitely or until the property is disposed of in a taxable transaction

Passive losses and credits, if they cannot be used in the current year, are carried forward indefinitely or until the property is disposed of under §469(b).

Front 27

Jane won $6,000 in a state lottery. In the same year, Jane spent $300 for the purchase of lottery tickets. Jane elected the standard deduction on her ncome tax return. The amount of lottery winnings that should be included in Jane's taxable income is

Back 27

$6,000

Jane must include the entire $6,000 of state lottery winnings in gross income. If Jane is a nonprofessional gambler, she may take the gambling losses as an itemized deduction on Schedule A. Here, Jane decided to take the standard deduction; therefore, she cannot deduct the $300 of gambling losses.

Front 28

Emily Judd received the following dividends from:

*Grainte Life Insurance Co., on Emily's life insurance policy (total dividends received have not yet exceeded accumulated premiums paid)$100

*National Bank, on bank's common stock300

*Roe Mfg. Corp., a Delaware corporation, on preferred stock500

What amount of dividend income should Emily report on her income tax return?

Back 28

$800

The term "dividend" means any distribution of property made by a corporation to its shareholders out of accumulated or current earnings and profits [§316(b)(l)]. This definition does not apply to the term 'dividend' as it is used in any case where the reference is to so-called dividends of insurance companies paid to policyholders as such.

Front 29

John and Mary were divorced in a previous year. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's income tax return?

Back 29

$ 8,000

Section 71(a) states that gross income includes alimony and that alimony is any payment made in cash and required by the divorce decree. It also states that alimony does not include payments made to support minor children. Furthermore, if any amount specified in the divorce decree will be reduced on the happening of a contingency relating to a child such as attaining a specified age or at a time which can clearly be associated with such a contingency, then an amount equal to such reduction will be considered as payments made to support minor children. Thus the $10,000 so-called alimony must be reduced by the 20 percent by which it will be reduced on their child's 18th birthday. Therefore, the alimony is considered to be $8,000. Child support payments received are not included in the gross income of the recipient. Payments made in cash to third parties on behalf of the former spouse under the terms of the divorce or separation instrument can be alimony. The fact that $3,000 of the $10,000 payment is paid to Spring College on behalf of Mary does not disqualify the $3,000 payment as alimony. Total alimony payments are the tuition payment plus the cash payment less the child support. $3,000 + $7,000 - $2,000 = $8,000

Front 30

Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year before any IRA deduction, taxable social security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in the current year from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in the current year as an offset against income from nonpassive sources?

Back 30

$0

Up to $25,000 of passive losses from rental real estate can be offset by individuals against active and portfolio income in any one year. The $25,000 maximum is reduced by 50% of the difference between the taxpayer's modified adjusted gross income (adjusted gross income before any IRA deduction, taxable social security benefits, or passive activity losses) and $100,000. When the taxpayer's modified AGI reaches $150,000, the offset is eliminated. Since Cobb's modified AGI for the current year exceeds $150,000 ($200,000 > $150,000), no amount of the loss attributable to the rental real estate can be used as an offset against income from nonpassive sources. (The rental loss could be used against nonpassive sources if Cobb was a qualified real estate professional.)

Front 31

Rich is a cash basis self-employed air-conditioning repairman with gross business receipts of $20,000. Rich's cash disbursements were as follows:

Air conditioning parts$2,500

Yellow Pages listing2,000

Estimated federal income taxes on self-employment
income1,000

Business long-distance telephone calls400

Charitable contributions200

What amount should Rich report as net self-employment income?

Back 31

$15,100

Under §1402(a) net self-employment income includes the gross income from a trade or business less trade or business expenses allowable under §162. Estimated tax payments are treated as a prepayment of income taxes rather than as a deductible business expense. Charitable contributions are deductible as an itemized deduction on Schedule A rather than as a business expense on Schedule C. The other expenses are deductible as business expenses. The net self-employment income is determined as follows:

Gross Business Receipts$20,000

Less: Air Conditioning Parts$ 2,500

Yellow Pages Listing2,000

Business Long Distance Telephone Calls 400

Total Business Expenses (4,900)

Net Self-Employment Income$15,100

The term net self-employment income implies the income is on Schedule C. The 50% of self-employment taxes (FICA) that are deductible to arrive at AGI are not deducted on Schedule C, but rather on page 1 of Form 1040, below the calculation of gross income.

Front 32

Porter was unemployed for part of the year. Porter received $35,000 of wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income?

Back 32

$41,000

All income is taxable unless specifically exempt. Whether from the state or from a supplemental benefit plan, unemployment compensation generally is not exempt. AARA ’09 excluded up to $2,400 of unem­ployment benefits received in 2009 from taxable income; that temporary exclusion lapsed after 2009.

Front 33

Which of the following should be included when determining adjusted gross income?

-Alimony received

-Compensation for injuries or sickness

-Rental value of parsonages

-Tuition scholarship

Back 33

Alimony received

Amounts received pursuant to a divorce or separate maintenance agreement are included in gross income by the recipient. Adjusted gross income is based on gross income. Compensation for injuries or sickness is excluded from gross income. The value of housing provided by religious institutions to parsons, priests, etc., is excluded from gross income. Tuition scholarships are excluded from gross income.