Steve has the following in 2024:
Nautical Boats $100,000 loss carryover from 2017 allowed in the current year
Nautical Boats $250,000 qualified business income in the current year
Sailing Ships $50,000 qualified business loss in the current year
What is Steve’s current year qualified business income or loss?
A. $100,000 qualified business income
B. $200,000 qualified business income
C. $250,000 qualified business income
D. $150,000 qualified business loss
B. 200,000
Qualified business income (QBI) is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. Qualified items of gain or loss are taken into account to determine QBI or qualified business loss only to the extent included or allowed in the determination of taxable income for the year.
AFTER 2017
EXCEPTION: Disallowed losses or deductions allowed in the taxable year are generally taken into account for purposes of computing QBI except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from taxable years ending before January 1, 2018.
The loss carryover from 2017 (while allowed for the computation of taxable income) is excluded from the computation of qualified business income.
Steve’s current year qualified business income is $200,000 (Nautical Boats $250,000 QBI – Sailing Ships $50,000 QBI loss).
Qualified business income (QBI) is:
A. the amount of qualified items of income and gain from a qualified trade or business.
B. the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business.
C. the amount of qualified items of income and gain from a qualified trade or business, only to the extent included in taxable income.
D. the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business, only to the extent included or allowed in the determination of taxable income for the year.
D.
Qualified business income (QBI) is the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. Qualified items of gain or loss are taken into account to determine QBI or qualified business loss only to the extent included or allowed in the determination of taxable income for the year.
EXCEPTION: Disallowed losses or deductions allowed in the taxable year are generally taken into account for purposes of computing QBI except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from taxable years ending before January 1, 2018.
Bill and Eileen Jones are married and live together, but file separate Form 1040 returns for 20X1. Bill earned $18,000 during 20X1. The only other income he had for the year was $4,000 net social security benefits (box 5 of his Form SSA-1099). Is Bill’s social security benefits taxable?
A. No, social security benefits are excluded from income.
B. No, Bill’s income does not exceed the base amount for his filing status.
C. Yes, Bill has $2,000 of taxable social security benefits.
D. Yes, Bill has $3,400 of taxable social security benefits
D
MFS $0 base amount
During the tax year, Reverend Markham was provided free use of a home and free meals from his church. His income for serving as the active minister of the church was $15,000. The rental value of the home was $12,000 and the meals $4,050. The church did not withhold any taxes from his income. On what amount must he pay self-employment taxes?
A. $4,050
B. $12,000
C. $15,000
D. $31,050
D
In most cases, you must pay SE tax on salaries and other income for services you performed as a minister. You must include the rental value of a home or an allowance for a home furnished to you and the value of meals and lodging provided to you, your spouse, and your dependents. The rental value of the home or the housing allowance must be included as earnings from self-employment (on Schedule SE) if self-employment tax is applicable.
Carl’s 75-year-old mother moved in with him in June 20X1 and Carl provided more than half her support for the year. In order to determine if his mother qualifies as his dependent, Carl must calculate her gross income. For 20X1, his mother had income of $4,000 from Social Security, $1,400 of dividends, $1,200 of municipal bond interest, $4,000 of rental income, and $1,000 of rent expenses. What amount does Carl use for his mother’s gross income for dependency test purposes?
A. $6,600
B. $5,400
C. $4,400
D. $6,000
B
Social Security and municipal bond income are not taxable income to Carl’s mother and are not included in her gross income determination. The rental income is included without allowing for expenses. Carl’s mother’s gross income for dependency test purposes is $5,400 ($1,400 dividends + $4,000 rental income).
If a taxpayer has capital gains dividends, but has no other capital gain:
A
Capital gain distributions must be put on Schedule B
B
No Schedule D is required and the amount is put directly on Form 1040
C
Dividends and capital gains dividends may be added together on Schedule B
D
It must be combined with interest on Schedule B
B
Schedule D is not required when the only capital gains are from dividends.
Martha Moyes is married, but has separated from her husband. She will appropriately file her income tax return as married, filing separately. She had the following stock transactions: capital gain on sale of stock (short-term) of $23,050 and capital loss on sale of stock (long-term) of $27,500. What is the treatment of capital gains on her tax return?
A
She can deduct the net $4,450 capital loss against her ordinary income.
B
She can deduct $3,000 of the capital loss this year against her ordinary income.
C
She can deduct $1,500 of the loss this year against her ordinary income.
D
She can deduct the capital loss only to the extent of the capital gain. The remainder will be carried forward and can be deducted against capital gains that occur in the future.
C - MFS limited to $1,500
Horace Fife is a 20 percent partner of a local convenience store although he does not actively participate in its operations. This year he was allocated a loss from this business of $24,000. He also owns shares of several publicly held companies and received dividends this year of $17,000. Fife owns two rental houses. During the year, their revenues totaled to $40,000 and operating expenses were $30,000. Finally, Fife held a share of a limited partnership and reported income this year of $4,000 as a result of that ownership. What is the increase in Fife’s adjusted gross income as a result of all these investments?
A
$7,000
B
$14,000
C
$17,000
D
$31,000
C
All of these income items except for the $17,000 in dividends are passive activities. Passive activity gains and losses are netted together. A net gain is taxable. A net passive loss cannot be deducted but can be carried over into future years. Here, there is a passive activity loss of $10,000: $24,000 loss on the business where Fife is not an active participant, $10,000 income from rental property, and $4,000 income from limited partnership. That loss is not deducted but is carried forward.
Deborah Dow purchased several Series EE U.S. Savings Bonds in 20X1 and used the interest earned in 20X8 to purchase textbooks for her dependent daughter who is a sophomore at State College. Does Deborah have income from these bonds in 20X8?
Answer Choices:
A. No, because interest earned on series EE bonds is tax free
B. No, because she used the interest on qualified educational expenses
C. Yes, because she did not use the interest on qualified educational expenses
D. Yes, because she is not the student
B. No, because she used the interest on qualified educational expenses ❌
Feedback:
Qualified expenses for the Education Savings Bond Program do not include books. Only tuition and fees are qualified expenses that result in exclusion of bond interest income.
Celeste, who is single, worked recently for a telephone company in France, and earned $1,500 for which she claimed the foreign earned income exclusion. In addition, she earned $1,200 as an employee of an answering service while she was in the U.S. She also received alimony of $400 for the year from her 2006 divorce. What is her maximum amount of allowable contribution to a traditional IRA for the current year?
Choices:
A. $1,600
B. $3,100
C. $1,200
D. $2,700
Feedback:
The money earned in France is not compensation for this purpose because Celeste elects to claim the foreign earned income exclusion. Alimony paid under a pre-2019 divorce decree is compensation for purposes of IRA contributions, as is her U.S. source income. The maximum compensation for determining traditional IRA contributions is $1,600 ($1,200 earned with the answering service plus the $400 in alimony).
Joannie McKenzie is a single taxpayer who is 66 years old and has an adjusted gross income of $62,000. She incurs the following medical expenses for the current year:
medical insurance premiums of $2,000
doctors’ appointments of $800
eyeglasses of $900
handicapped ramp installation which does not increase the value of her home of $2,810
home health nurse of $16,000
dentist of $580
nonprescription medicine for heartburn and migraines of $120
liposuction of $21,000
cost of mileage for medical appointments of $60
What is the amount of her medical deduction on Schedule A of Form 1040?
Answer Choices:
A. $17,000
B. $18,500
C. $23,150
D. $38,120
B
Calculation shown:
$23,150 Total deductible expenses
– 4,650 7.5% AGI ($62,000)
$18,500 Medical deduction
Steve has the following in 2024:
Nautical Boats $100,000 loss carryover from 2017 allowed in the current year
Nautical Boats $250,000 qualified business income in the current year
Sailing Ships $50,000 qualified business loss in the current year
What is Steve’s current year qualified business income or loss?
Answer Choices:
A. $100,000 qualified business income
B. $200,000 qualified business income
C. $250,000 qualified business income
D. $150,000 qualified business loss
B
Why the 2017 loss doesn’t count
Old losses from before 2018 (like Steve’s $100,000 carryover from 2017) can still reduce taxable income. If it was a 2021 loss include it in the year so answer would BE $100k QBI
But they do not count when figuring QBI. Only current year allowed items are used.
How it works in Steve’s case
Nautical Boats current income = $250,000
Sailing Ships current loss = –$50,000
2017 loss carryover = ignored for QBI
$250,000 – $50,000 = $200,000 QBI
On which form is mortgage interest paid reported to a taxpayer by the mortgage holder?
Answer Choices:
A. Form W-2
B. Form W-4
C. Form 1098
D. Form 1099
Feedback:
If the taxpayer paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, the mortgage holder will send a Form 1098 or similar statement to the taxpayer. The statement for each year should be sent by January 31 of the following year. A copy of this form is also sent to the IRS.
-Paul paid the annual $500 tax imposed by his local government for the registration of his car. $300 of the tax is based on the car’s value. $200 is based on the car’s weight. How much of the tax can Paul deduct as personal property tax on Schedule A?
Answer Choices:
A. $0
B. $200
C. $300
D. $500
C
Personal property tax is deductible if it is a state or local tax that is:
Charged on personal property
Based only on the value of the personal property, and
Charged on a yearly basis, even if it is collected more or less than
Kristin picked up some odd jobs over the holiday break and made $385. This is her income for the entire year. Which of the following statements is true?
A. She has to report the income as self-employment income.
B. She should file a 1040 SE because it is considered self-employment income.
C. She should file a 1040 because it is considered regular income.
D. She does not need to report the income.
Feedback
You do not have to file an income tax return if your net earnings from self-employment were less than $400.
Karen, filing as head of household, her son, James, and her daughter, Julia, are all in graduate school. James and Julia are not dependents on Karen’s return, although they live with her and she pays all of their education expenses. Karen paid $6,000 in qualified tuition expenses for herself in January 20X2 for the term starting in January 20X2. She also paid $2,500 in qualified tuition expenses for James and another $2,500 for Julia in July 20X2 for the term starting in July 20X2. Her modified adjusted gross income is $90,000. Which of the following is correct?
Answer Choices:
A. Karen may claim no American Opportunity credit and $2,000 Lifetime Learning credit
B. Karen may claim $5,000 American Opportunity credit and $1,000 Lifetime Learning credit
C. Karen may claim neither the American Opportunity credit nor the Lifetime Learning credit
D. Karen may claim no American Opportunity credit and $1,200 Lifetime Learning credit
C
The credit is gradually reduced (phased out) if MAGI is between $80,000 and $90,000 ($160,000 and $180,000 MFJ). A taxpayer cannot claim a credit if MAGI is $90,000 or more ($180,000 or more MFJ).
Karen may claim neither the American Opportunity credit nor the Lifetime Learning credit.
Karen may not claim either education credit for her children since they are not dependents on Karen’s return.
Karen may not claim either education credit for herself because her modified adjusted gross income of $90,000 is too high for her filing status (filing as head of household). Both the American Opportunity credit and the Lifetime Learning credit phase out based on the taxpayer’s modified adjusted gross income (MAGI). The credit is gradually reduced (phased out) if MAGI is between $80,000 and $90,000 ($160,000 and $180,000 MFJ). A taxpayer cannot claim a credit if MAGI is $90,000 or more ($180,000 or more MFJ).
In addition, the American Opportunity credit is only available for the first four years of postsecondary education (not graduate school).
Ashleigh and Dino expect a $7,000 refund on their jointly-filed return. However, Dino has $45,000 in past-due taxes that he accrued before he and Ashleigh were married. Which form should they file in order to prevent Ashleigh’s share of the refund from being collected?
Options:
A. Form 8888
B. Form 4567
C. Form 8379
D. Form 9762
C - injured spouse relief
A taxpayer is an “injured spouse” if he filed a joint return and all or part of his share of the refund was, or will be, applied against the separate past-due federal tax, state tax, child support, or federal non-tax debt of his spouse with whom he filed the joint return. An injured spouse may be entitled to recoup their share of the refund. The injured spouse files Form 8379 with a jointly-filed tax return when the joint overpayment was—or is expected to be—applied to past-due obligation of the other spouse. By filing Form 8379, the injured spouse may be able to get back his or her share of the joint refund. The taxpayer may file Form 8379 with a joint return, with an amended return, or by itself at a later time.
Dr. Steve and Joyce are married and have total adjusted gross income of $190,000. Taxable income is $169,200 after claiming deductions. For 20X2 the tax on $169,200 would be $43,960. They have withholding of $36,960 during 20X2. In 20X1 they paid a total of $42,000 in taxes for the year on an adjusted gross income of $185,000. What is the requirement for estimated taxes in 20X2?
Options:
A. No estimated tax payments since they have withholding taxes
B. Estimated payments of $2,604
C. Estimated payments of $8,652
D. Estimated payments of $5,040
B
To avoid penalty must pay the smaller of 90% of the current year’s tax due or 100% of tax on last year’s return. For higher income taxpayers—if AGI last year was more than $150,000 ($75,000 if filing status this year is married filing separately), substitute 110% for 100%.
90% of the current year’s tax due of $43,960 is $39,564. Subtract their current year withholding of $36,960 to arrive at the required estimated tax payments of $2,604.
90% of the current year’s tax due of $39,564 is smaller than 110% (since AGI over $150,000) of tax on last year’s return ($42,000 prior year tax).
Would you like me to also break down step-by-step why the wrong answers (A, C, D) don’t apply here, similar to how I did with the first question? That could help for exam prep.
In which of the following situations can an injured spouse claim be filed?
Rob and Marie, a married couple timely filed their joint tax return for 20X1. In June of 20X2, they received an IRS notice stating that their entire 20X1 refund was applied to delinquent child support Rob owed to the state.
Stu and Cecilia, a married couple, have prepared their joint tax return for 20X1 but have not filed it because it shows a substantial refund which they fear will be applied to a delinquent student loan that Cecilia owes.
Options:
A. Neither 1 or 2
B. 1 only
C. 2 only
D. Both 1 and 2
D
A person may be an injured spouse if filing the return could impair their refund. A taxpayer may be an injured spouse if they file a joint tax return and all or part of their portion of an overpayment was, or is expected to be, applied (offset) to their spouse’s past-due obligation.
Form 8379, Injured Spouse Allocation can be filed with the joint tax return, amended tax return, or by itself after the tax return has been filed subject to the statute of limitations for claiming a refund.
Injured Spouse Relief (Form 8379)
Innocent Spouse Relief (Form 8857)
Injured = Refund stolen (protects your share of the refund).
Innocent = Tax understatement (protects you from liability for spouse’s wrongdoing).
Of the following types of IRA accounts, which is prohibited from receiving a direct deposit of a tax refund?
Options:
A. Traditional IRA
B. Roth IRA
C. SEP-IRA
D. Simple IRA
D
Refunds can be direct deposited into a Traditional IRA, Roth IRA, and SEP-IRA account. Simple IRAs are prohibited from receiving direct refund deposits.
John made the following transfers during 2024:
To his neighbor in the amount of $21,000
To his nephew in the amount of $19,000
To his uncle in the amount of $18,000
All of the transfers are gifts that qualify for the annual exclusion. What is the total annual exclusion amount for gifts listed on John’s Form 709?
A. $54,000
B. $36,000
C. $48,000
D. $4,000
B
A gift tax return, Form 709, must be filed for any reportable gift over the annual exclusion amount.
The gift to his uncle is not over the annual exclusion amount and is therefore not a reportable gift.
The gift to his neighbor and the gift to his nephew are both over the annual exclusion amount and therefore these gifts are reportable. Since each gift is made to a different person, the annual exclusion amount is allowed for each gift. The total annual exclusion amount for gifts listed on John’s Form 709 is $36,000 ($18,000 annual exclusion for 2024 × 2 reportable gifts).
Sam Waterduck’s father died at the first of the current year. However, because of interest and royalties, the estate made enough taxable income over the next few months that an estate income tax return had to be filed by Sam. What amount can be deducted on this estate income tax return as an exemption?
A. Zero
B. $600
C. $300
D. $100
B
Feedback
The federal government allows a set $600 exemption on the filing of an estate income tax return. Note that this is not an estate tax (on the value of the estate) but rather a tax on the income earned by the estate.
The final income tax return is due:
A. By the 15th day of the 4th month after the date of the decedent’s death
B. By the 15th day of the 6th month after the date of the decedent’s death
C. Within 9 months after the date of the decedent’s death
D. April 15th following the year of the decedent’s death
D
Feedback
The final income tax return is due at the same time the decedent’s return would have been due had death not occurred. A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred.
Which of the following is NOT a credit against gross estate tax in determining net estate tax?
A. Foreign death taxes
B. Qualified charitable contributions
C. Applicable credit (also called Unified credit)
D. Tax on prior transfers
B
Feedback
Credits reduce the estate tax by the credit amount. Contributions to charity are a deduction from the gross estate, not a credit against tax. The following credits reduce the tax:
The applicable credit (also called the Unified credit),
Credit for foreign death taxes paid, and
Credit for tax on prior transfers.
