Final test

Question 1

Christopher’s wife, Sarah, died last year and he has been living alone in their home since then. What filing status should he use when filing his income tax return for this year?

A)
Single

B)
Qualifying widower (surviving spouse)

C)
Married filing jointly

D)
Head of household

Answer 1

A

Explanation
Christopher may only file as a single taxpayer. He has no dependent children or other dependents in his household and does not qualify for either qualifying widower or head of household status.

Question 2

During the current tax year, Jamie has a $13,000 short-term capital loss and a $14,000 long-term capital gain, both from the sale of securities. Jamie also has a $10,000 long-term capital gain from the sale of collectibles. Jamie, a single taxpayer, is in the 32% marginal income tax bracket. Which of these accurately describes the result of these transactions?

A)
$11,000 long-term capital gain taxed at 15%

B)
$14,000 long-term capital gain and a $3,000 net capital loss carryforward

C)
$11,000 long-term capital gain, taxed at 20%

D)
$1,000 long-term capital gain, taxed at 15%, and $10,000 collectibles gain, taxed at 28%

Answer 2

A

Explanation
The $13,000 short-term capital loss is first used against the collectibles gain—the gain that would be taxed at the highest rate (28%). This eliminates the collectibles gain. The remaining $3,000 short-term capital loss is then used against the $14,000 long-term capital gain from the sale of securities. This leaves $11,000 of long-term capital gain, taxed at 15%. We know the long-term capital gain is taxed at 15%, as the top of the 32% MITB is $250,525 (2025) for a single taxpayer, and the 20% LTCG rate doesn’t kick in until $533,400 for a single taxpayer.

LO 2.1.3

Question 3

Under Section 1221, which of the following is a noncapital asset?

An office building that is rented to others
A painting bought from the artist
Accounts receivable of a manufacturer
Flowers for sale by a florist

A)
II only

B)
I and II

C)
III only

D)
I, III, and IV

Answer 3

D

Creative works are noncapital assets in the hands of the creator, not the buyer (ACID).

• non capital assets..inventory (ie car dealer, florist).. selling inventory = ord income. Account receivable, depreciable business property
• capital assets are cap gains/loss
• non capital assets are ord income
  ** tip..if assets help run a business..not normally a capital asset

Question 4

Which of these types of audits is conducted on a random basis?

A)
Discriminant Functions System Program audit

B)
National Research Program (NRP) audit

C)
Document matching program audit

D)
Targeted program audit

Answer 4

B

Explanation
The NRP audit is the only random audit listed here that the IRS conducts. This program essentially replaced the Taxpayer Compliance Measurement Program audit.

Question 5

During the current tax year, Cassandra has a long-term capital loss of $22,000 from the sale of securities. She also has a long-term capital gain from the sale of a coin collection of $10,000 and has unrecaptured Section 1250 income of $18,000. Cassandra is in the 35% marginal income tax bracket. What is the tax result of her capital transactions?

A)
$6,000 unrecaptured Section 1250 income taxed at 25%

B)
$6,000 collectibles gain taxed at 28%

C)
$7,000 unrecaptured Section 1250 income taxed at 25%, $10,000 collectibles gain, and $19,000 long-term capital loss carryforward

D)
$18,000 unrecaptured Section 1250 income, taxed at 25%, and $12,000 long-term capital loss carryforward

Answer 5

A

Explanation
The long-term capital loss from the securities sale is netted first against the gain that would be taxed at the highest rate. After completely offsetting the collectibles gain (potential 28% rate), the remaining $12,000 is then netted against the unrecaptured Section 1250 income, leaving $6,000 unrecaptured Section 1250 income, to be taxed at 25%.

Question 6

During early 2025, Bob, an individual taxpayer, purchased a principal residence, taking out a mortgage of $600,000. In late 2025, he utilizes a home equity loan to borrow $100,000 to pay off credit card balances and an automobile note. Which of these is CORRECT with respect to the deductibility of the interest on the home equity loan?

A)
None of the interest is deductible because the interest on a home equity loan is never deductible.

B)
None of the interest is deductible because it is not considered acquisition debt.

C)
All of the interest is deductible, as the total mortgage debt is under $750,000.

D)
All of the interest is deductible because the home equity loan is $100,000 or less.

Answer 6

B

Explanation
None of the interest on the home equity loan is deductible. Only interest on acquisition debt is deductible. Acquisition debt is debt incurred to purchase, build, or renovate (remodel) the residence.

Question 7

Reese has the following items:

Prior-year passive loss carryforward amounts:

($5,000) from XYZ limited partnership (publicly traded)
($8,000) from ABC limited partnership (nonpublicly traded)
Current-year passive income and loss amounts:

$2,000 from XYZ limited partnership (publicly traded)
($3,000) from GHI limited partnership (publicly traded)
$12,000 from JKL limited partnership (nonpublicly traded)
($14,000) from RST limited partnership (nonpublicly traded)
What is the total amount of passive losses that may be deducted during the current year?

A)
$14,000

B)
$16,000

C)
$2,000

D)
$12,000

Answer 7

A

Explanation
The general rule is that passive losses may only be deducted against passive income. The rules for publicly-traded partnerships are more restrictive—the passive income from a PTP may not be offset by passive losses arising from any other source. In addition, the passive losses from PTPs are not currently deductible—they may only be used to offset future income from that same activity. Of the $5,000 passive loss carryforward from the XYZ limited partnership, only $2,000 may be used in the current year due to the $2,000 of current-year passive income from that same PTP. A total of $12,000 in losses from the RST limited partnership may be used against the $12,000 of income from the JKL limited partnership in the current year because both are nonpublicly traded. Thus, the total of passive losses allowed for the current year is $14,000