1.

Question ID: 94850116 (Topic: Use of Prior Returns)

Layla is self-employed and expects to owe $2,500 of taxes for the year. Her tax liability
for the prior tax year was zero because her Schedule C business had a loss in the prior
year. Which of the following statements is correct?

 A. Layla is required to pay the full amount due before December 31 or she will be
subject to an estimated tax penalty.wrong
 B. Layla is required to pay estimated taxes.
 C. Layla is not required to pay estimated taxes.correct
 D. Layla must pay at least $1,500 of estimated tax during the year, so she can be under
the safe harbor threshold of $1,000 for the year.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

Since Layla had zero tax liability on her prior-year return, she is not required to pay any
estimated tax in the current year (as long as she pays the tax due by the unextended
due date of her return). A taxpayer must pay estimated tax if both of the following apply:

 The taxpayer expects to owe at least $1,000 in tax after subtracting withholding
and credits.
 The taxpayer expects the amount owed after withholding and credits to be less
than the smaller of:

1. 90% of the tax to be shown on the current year tax return, or

2. 100% of the tax shown on the prior-year tax return.
Note: There is a higher “safe harbor” threshold for higher-income taxpayers. For
taxpayers with adjusted gross income of over $150,000 ($75,000 if married filing
separately), the threshold for the amount owed would be 110% of the previous year's
tax liability rather than 100%. See the dedicated IRS page for estimated taxes for more
information.

2. Question ID: 95850119 (Topic: Use of Prior Returns)

A tax preparer has discovered a significant error on their client's prior-year return, but
the client does not want to pay for an amended tax return. What is the preparer's
responsibility, in this scenario?

 A. If the client refuses to correct the error, the preparer must report the error to
the IRS anonymously.wrong
 B. If the client refuses to correct the error, the preparer must always disengage from the
client.
 C. The preparer must inform the taxpayer of the error and its potential consequences.
However, the preparer is not obligated to correct the error.correct
 D. Tax practitioners are obligated to fix any errors they discover on a prior-year return.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Incorrect Answer Explanation for A:

If any errors or omissions are discovered on a prior-year return, the preparer is required
by law to inform the taxpayer of the mistake and explain the potential consequences if it
is not corrected. Tax practitioners have a legal duty to promptly disclose to a client
errors they discover in the client's previously filed tax returns. However, the preparer is
not obligated to fix the error.

Correct Answer Explanation for C:

If any errors or omissions are discovered on a prior-year return, the preparer is required
by law to inform the taxpayer of the mistake and explain the potential consequences if it
is not corrected. Tax practitioners have a legal duty to promptly disclose to a client
errors they discover in the client's previously filed tax returns. However, the preparer is
not obligated to fix the error.

Show Other Explanations

3. Question ID: 95850117 (Topic: Use of Prior Returns)

Which of the following situations might require a preparer to review a taxpayer's
previous year’s tax return?

 A. The taxpayer received a scholarship in the current year.wrong

 B. The taxpayer owns a rental property with prior-year depreciation.correct
 C. The taxpayer was a full-time student.
 D. The taxpayer’s income was below the filing threshold.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for A:

When preparing tax returns for clients, tax professionals must diligently gather and
verify all necessary taxpayer information. This includes reviewing prior-year tax returns
for accuracy, completeness, and compliance with tax laws. During this review process,
the preparer must consider items from previous years that may affect the current year’s
 return, such as: credit carryovers, net operating losses, and prior-year depreciation and
asset basis.

Correct Answer Explanation for B:

When preparing tax returns for clients, tax professionals must diligently gather and
verify all necessary taxpayer information. This includes reviewing prior-year tax returns
for accuracy, completeness, and compliance with tax laws. During this review process,
the preparer must consider items from previous years that may affect the current year’s
return, such as: credit carryovers, net operating losses, and prior-year depreciation and
asset basis.

Show Other Explanations

5. Question ID: 94815879 (Topic: Use of Prior Returns)

Which of the following items would "carryforward" on a taxpayer's return, requiring a
preparer to see the prior-year return?

 A. Hobby expenses in excess of hobby incomewrong

 B. State income tax deduction that was limited by the SALT cap
 C. Gambling losses in excess of gambling winnings
 D. Suspended passive lossescorrect
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for D:

Suspended passive losses can be carried forward indefinitely until you either use them
to offset passive income or dispose of the investment. A tax "carryforward" or
"carryover" is when a taxpayer can apply some unused tax deductions, credits, or
losses to a future tax year. Other examples include: a capital loss carryforward and a
net operating loss carryforward. The other choices listed cannot be carried forward to
future tax years.

7. Question ID: 94815853 (Topic: Taxpayer Personal Information)

Penny was the victim of identity theft last year. She received an IP PIN from the IRS this
year. She plans to use a paid preparer to file her return. How should the IP PIN be
used?

 A. The preparer should enter Penny's IP PIN on the tax return in the PTIN
section.wrong
 B. The preparer should enter Penny's IP PIN on the tax return next to her signature
block.correct
 C. The preparer does not need to enter Penny's IP PIN on the tax return. It is for her
records only.
 D. The preparer should enter Penny's IP PIN on the tax return in the third-party
designee area.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for B:

The preparer should enter Penny's IP PIN on the tax return next to her signature block.
An Identity Protection PIN is a six-digit number assigned to eligible taxpayers to help
prevent their Social Security number from being used to file fraudulent federal income
tax returns. This number helps the IRS verify a taxpayer's identity and accept their tax
return. An IP PIN can be entered on a paper filed return or an efiled return. A return that
does not include an IP PIN (but where one is required, because the taxpayer was a
victim of ID theft) will still be processed, but it must be mailed, and it will have an
increased processing time.

8. Question ID: 94815945 (Topic: Taxpayer Personal Information)

To prepare an accurate tax return, a tax preparer needs all of the following information
about a client except:

 A. Social Security number or taxpayer identification number.wrong

 B. Prior-year AGIcorrect
 C. Date of birth.
 D. Citizenship or residency.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

To prepare an accurate return, a tax preparer must gather biographical information

including a client’s legal name, date of birth, marital status, citizenship or residency,
dependents, and SSN or other TIN. A preparer does not need to know the prior year
AGI to file a taxpayer's return.

9. Question ID: 94815994 (Topic: Taxpayer Personal Information)

What is an ATIN, and who needs to request one?

 A. An ATIN is a permanent taxpayer identification number for an adopted

child.wrong
 B. An ATIN is a permanent taxpayer identification number for a foreign child, when the
parents are nonresident aliens.
 C. An ATIN is a permanent taxpayer identification number for a child in a domestic
adoption where the parents do not want to apply for a Social Security Number (SSN).
 D. An ATIN is a temporary taxpayer identification number for a child in a domestic
adoption where the parents are unable to obtain the child's Social Security Number
(SSN).correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

An ATIN is a temporary taxpayer identification number for a child in a domestic adoption

where the parents are unable to obtain the child's Social Security Number (SSN).

If an adoptive parent is unable to secure a Social Security number for a child until the
adoption is final, the adoptive parent can request an ATIN while the adoption process is
pending. The adoption must be a valid domestic adoption or a foreign adoption in which
the child has a permanent resident alien card or certificate of citizenship.

An ATIN cannot be used to claim the Earned Income Tax Credit, or the Child Tax
Credit. See the dedicated IRS page for Adoption Taxpayer Identification Numbers for
more information.

10. Question ID: 94815948 (Topic: Taxpayer Personal Information)

 The IRS has created a system of IP PINs as a step toward combating:

 A. Taxpayer abuse of the Earned Income Tax Credit.wrong

 B. Unenrolled preparer fraud.
 C. Identity theft.correct
 D. Practitioner fraud.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for C:

Identity fraud is a growing problem for the IRS, which issues identity protection personal
identity numbers (IP PINs) to taxpayers who have reported they have been victims of
identity theft; have given the IRS information that verifies their identity; and had an
identity theft indicator applied to their accounts. An IP PIN is good for only one year. It is
designed to protect a taxpayer’s Social Security Number. If a taxpayer with an IP PIN
attempts to file a tax return without using it, the return will be rejected.

11. Question ID: 95850112 (Topic: Taxpayer Personal Information)

What consequences could a tax preparer face if they wrongfully disclose a taxpayer's
personal biometric information?

 A. A warning letter from the IRS.wrong

 B. No consequences.
 C. Civil and criminal charges.correct
 D. Mandatory ethics training.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Incorrect Answer Explanation for A:

A preparer who wrongfully discloses a taxpayer’s information could face civil and
criminal charges. The personal and financial information of taxpayers is considered
highly sensitive and confidential. Tax preparers must understand the importance of
protecting this information and take all necessary precautions to ensure it remains
secure.

Correct Answer Explanation for C:

A preparer who wrongfully discloses a taxpayer’s information could face civil and
criminal charges. The personal and financial information of taxpayers is considered
 highly sensitive and confidential. Tax preparers must understand the importance of
protecting this information and take all necessary precautions to ensure it remains
secure.

Show Other Explanations

13. Question ID: 94815955 (Topic: Taxpayer Personal Information)

The issuance of an ITIN does not:

 A. Entitle the recipient to Social Security benefits or the Earned Income Tax
Credit.wrong
 B. Give the individual the right to work in the United States.
 C. Create a presumption regarding the individual's immigration status.
 D. All of the above.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

An ITIN is used for IRS reporting purposes only and does not entitle the taxpayer to the
Earned Income Tax Credit or to Social Security benefits. An ITIN also does not create a
presumption about the taxpayer’s immigration or work status. The Individual Taxpayer
Identification Number (ITIN) is a tax processing number the IRS issues to people who
cannot get a social security number so they can comply with U.S. tax laws. To learn
more about ITINs, see the dedicated IRS page about Individual Taxpayer Identification
Numbers.

14. Question ID: 95850113 (Topic: Taxpayer Personal Information)

Why is collecting accurate biographical data from a client so important for tax
preparation?

 A. Accurate client information helps prevent errors on tax returns.correct

 B. It ensures much faster tax refunds.wrong
 C. Accurate client information reduces the need for IRS audits.
 D. Biographical information prevents future IRS enforcement.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Incorrect Answer Explanation for B:

 Certain biographical information about the client is required when filing tax returns. Tax
preparers must also verify social security cards, ITIN letters, and other documents to
ensure that the correct TINs are used for the taxpayer, their spouse, and any
dependents listed on the return. Collecting accurate biographical information from
clients helps prevent errors on tax returns.

Correct Answer Explanation for A:

Certain biographical information about the client is required when filing tax returns. Tax
preparers must also verify social security cards, ITIN letters, and other documents to
ensure that the correct TINs are used for the taxpayer, their spouse, and any
dependents listed on the return. Collecting accurate biographical information from
clients helps prevent errors on tax returns.

Show Other Explanations

15. Question ID: 94815892 (Topic: Taxpayer Personal Information)

Jamila is a nonresident alien that owns a rental property in the US that she inherited
from her brother, who was a green-card holder. Jamila must file a U.S. tax return, but
she is not eligible for a Social Security Number. What must she do?

 A. She must fill out a W-7 form for an ATIN, and submit it to the IRS along with a
completed tax return.wrong
 B. She must fill out a W-7 application form for an EIN, and submit it to the IRS along
with a completed tax return.
 C. She must fill out a W-9 application form for an ITIN, and submit it to the IRS along
with a completed tax return.
 D. She must fill out a W-7 application form for an ITIN, and submit it to the IRS along
with a completed tax return.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for D:

She must fill out a W-7 application form to request an ITIN, and submit it to the IRS
along with a completed tax return. A W-7 Form is used to apply for an individual
taxpayer identification number, or ITIN, for nonresidents who are not eligible to receive
a Social Security Number. It takes approximately 12 weeks for the IRS to process and
issue an ITIN, which will be sent to the taxpayer by mail.

16. Question ID: 94815913 (Topic: Filing Requirements and Due Date)
Which of the following statements is correct about individual extensions?

 A. Form 4868 must be filed by October 15 in order to be a valid extension.wrong

 B. As long as Form 4868 is filed by April 15, a taxpayer will not owe interest on any
taxes due.
 C. Form 4868 provides a taxpayer an additional six months to file and pay his individual
income tax return.
 D. A taxpayer must estimate his tax liability when requesting an automatic six-month
extension.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

If a taxpayer cannot file his tax return by the due date, he can request an extension by
filing Form 4868, Application for Automatic Extension of Time to File, which may be filed
electronically. An extension grants a taxpayer an additional six months to file his
individual tax return, but does not extend the time to pay any tax due. A taxpayer should
estimate his yearly tax liability, as he will owe interest on any amount that is not paid by
the filing deadline plus a late payment penalty if he has not paid at least 90% of his total
tax due by that date.

17. Question ID: 94850171 (Topic: Filing Requirements and Due Date)
A taxpayer should file Form 1040X only after:

 A. They have filed their original return.correct

 B. They have filed a protest.wrong
 C. They have filed an innocent spouse request.
 D. They have filed a request for abatement.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for A:

A taxpayer should file Form 1040X only AFTER they have filed their original return.
Form 1040X is an amended return, it is used to correct errors on an original return that
has already been filed. For more information, see the Instructions for Form 1040X as
well as IRS Topic No. 308 Amended Returns.

20. Question ID: 94815921 (Topic: Filing Requirements and Due Date)
Which of the following taxpayers must file an individual tax return?

 A. A single taxpayer with $1,000 in interest earnings.

 B. A single taxpayer with self-employment net earnings of $400 or more.correct
 C. A single taxpayer with $900 in dividends.
 D. A single taxpayer with $2,000 in wage income.wrong
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for B:

A taxpayer with self-employment earnings of $400 or more is required to file a tax

return. In that case, filing would not be optional, it would be mandatory.

21. Question ID: 94849918 (Topic: Filing Requirements and Due Date)
Which of the following taxpayers is required to file a return in 2024?

 A. Terry, age 60, who is Single and had $300 in self-employment income and
$9,000 in wages.wrong
 B. Gary, who is 15 years old and had $800 in interest income. He is claimed as a
dependent by his parents.
 C. Paula, age 33, who is Married Filing Separate, and had $1,000 in interest income
only.correct
 D. Westin, age 45, who is Single and earned $12,500 in wages.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

Paula, age 33, who is Married Filing Separate, and had $1,000 in interest income, is
required to file a tax return in 2024. Special rules apply to MFS filers. A taxpayer filing
MFS with gross income of at least $5, must file a return regardless of their age.

22. Question ID: 94815883 (Topic: Filing Requirements and Due Date)
Greer and Jose are married and live together in Florida, which is a non-community
property state. Greer does not want to file jointly with Jose, and she files a separate
return (MFS). Greer is 67 and had a gross income of $11,000 for the tax year. Jose is
62. His gross income was only $3,000 for the year, from a small part-time job. Does
Jose need to file a return? (Choose the best answer)

 A. Greer is required to file, because her income is over the filing threshold for
MFS filers, but Jose is not required to file. wrong
 B. Both are required to file tax returns. correct
 C. Jose can amend Greer's return to a joint return without her consent, because they
are married.
 D. Neither is required to file a return.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for B:

Both Jose and Greer are required to file, because they are filing separate tax returns
(MFS). Greer did not want to file with Jose, and she filed her own separate tax return,
which will trigger a filing requirement for Jose, as well.

Note: Taxpayers of any age who use the Married Filing Separately status must file a
return if they had gross income of $5 or more.

24. Question ID: 94815922 (Topic: Filing Requirements and Due Date)
Tomas is a U.S. citizen living in Florida. He requested an extension of time to file his
individual tax return, what is his extended due date?

 A. June 15wrong
 B. August 15
 C. December 15
 D. October 15correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for D:

With the extension, Tomas will have until October 15 to file. This is an extension of time
for the taxpayer to file, not an extension of time to pay taxes that are due.

26. Question ID: 94849919 (Topic: Filing Requirements and Due Date)
If a taxpayer omits more than 25% of the gross income that should have been reported,
how long must they retain their tax records?

 A. 4 years
 B. 3 yearswrong
 C. 10 years
 D. 6 yearscorrect
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 60% of students.

 Correct Answer Explanation for D:

If a taxpayer omits more than 25% of the gross income that should have been reported,
they must retain their records for at least six years. This extended period helps ensure
that the IRS has sufficient time to review and audit the taxpayer's records if necessary.

27. Question ID: 94850152 (Topic: Filing Requirements and Due Date)
Emilio's 2021 tax return was due April 15, 2022. He filed it early, on January 23, 2022.
Later, he finds an error on the return, and wants to amend it, expecting the correction to
result in a refund. If he gets it postmarked on or before _____________ he will receive a
refund from the IRS.

 A. April 15, 2025correct

 B. January 23, 2026wrong
 C. January 23, 2025
 D. April 15, 2026
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for A:

If Emilio gets his 2021 amended return postmarked on or before April 15, 2025, it will be
within the three-year limit and the return will be accepted. But if the amended return is
postmarked after this date, it will fall outside the three-year statute of limitations, and he
will not receive a refund. There is a statute of limitations on refunds being claimed on
amended returns. In general, if a refund is expected on an amended return, taxpayers
must file the return within three years from the due date of the original return, or within
two years after the date they paid the tax, whichever is later. Returns filed before the
due date (without regard to extensions) are considered filed on the due date.

Note: There are a few exceptions to the three-year limit on the IRS Statute of
Limitations on refunds. For example, a taxpayer has a longer period of time to claim a
loss on a bad debt or worthless security, or for a foreign tax credit or deduction.

28. Question ID: 94851189 (Topic: Filing Requirements and Due Date)
A taxpayer who files Form 4868 is requesting:

 A. An extension of time to file an individual tax return.correct

 B. An abatement of collection activity.
 C. An extension of time to pay income tax due.wrong
 D. An installment agreement to pay overdue income tax.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.
 This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

A taxpayer who files Form 4868 is requesting an extension of time to file his individual
tax return. The extension gives a taxpayer six months past the normal filing deadline to
file his return. An extension of time to file is not an extension of time to pay.

29. Question ID: 94815838 (Topic: Filing Requirements and Due Date)
Bernie e-filed his 2024 tax return on April 15, 2025. Two weeks later, he received
another Form W-2 in the mail that he had forgotten about. What should Bernie do?

 A. Bernie should prepare Form 1040-X to include the additional Form W-2.correct
 B. Bernie should wait for an audit notice and an automatic bill from the IRS. wrong
 C. Bernie should contact the IRS by phone and ask them to prepare an amended return
on his behalf.
 D. Bernie should prepare another Form 1040 to include the additional Form W-2.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for A:

Bernie should prepare Form 1040-X to include the additional Form W-2. Taxpayers
should file amended returns using Form 1040-X to correct any errors or omissions on a
return they have already filed.

30. Question ID: 94815820 (Topic: Filing Requirements and Due Date)
Alesandro has a loss from worthless securities. How many years does he have to
amend his tax returns in order to take this loss?

 A. Six years.
 B. Seven years.correct
 C. Three years.wrong
 D. Two years.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for B:

A taxpayer has up to seven years to amend a return in order to take a loss from a
worthless security. This is an exception to the normal statute of limitations. In general, if
 a refund is expected on an amended return (or a delinquent return that is being filed
late), taxpayers must file the return within three years from the due date of the original
return, or within two years after the date they paid the tax, whichever is later. There are
a few other exceptions to this normal limit, such as taxpayers having ten years to
amend a return and claim the Foreign Tax Credit.

32. Question ID: 94850155 (Topic: Filing Requirements and Due Date)
Percy filed his 2021 tax return late. He didn't file it until December 1, 2024. How long
does the IRS have to audit the return and assess additional tax after Percy filed it?

 A. The IRS must assess additional tax within two years after Percy files it.wrong
 B. The IRS must assess additional tax within eighteen months from the original due
date of the return.
 C. The IRS must assess additional tax within six years from the received date of Percy's
tax return.
 D. The IRS must assess additional tax within three years from the received date of
Percy's tax return.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for D:

The IRS must assess additional tax within three years from the received date of Percy's
tax return. The general rule is that if the IRS wants to assess additional tax on a return,
the assessment of tax must be made within three years from the received date of an
original tax return or three years from the due date of the original return, whichever
is later. Since Percy's return is delinquent, the IRS will have three years from the date
they receive Percy's return to audit the return or assess additional tax.

Note: There are some instances when the IRS has a longer time period to assess
additional tax. If you omitted more than 25% of your gross income from a tax return, the
time the IRS can assess additional tax increases from three to six years from the date
your tax return was filed. On a fraudulent return, the IRS has an unlimited amount of
time to assess tax.

33. Question ID: 94816029 (Topic: Filing Requirements and Due Date)
Cyril is a U.S. citizen who is 28 years old and single. His gross income was $12,000
during the tax year. Based only on this information, which of the following would
automatically trigger a filing requirement for Cyril?

 A. He lives in Canada.wrong
 B. He had $400 in self employment income from a side-gig.correct
 C. He has a dependent parent.
 D. He sold $1,000 worth of stock at a loss.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

The $400 in self employment income would trigger a filing requirement for Cyril, even
though his gross income is under the standard deduction amount for his filing status,
which is single. None of the other items listed would automatically trigger a filing
requirement. The most common special situations when individuals are legally required
to file a return are:

 Self-employed with net earnings of $400 or more

 Taxpayers who owe special taxes, such as excise taxes from early withdrawal
from an IRA account.
 Taxpayers who received advanced payments of the premium tax credit (APTC)
for themselves, their spouse, or a dependent
34. Question ID: 94850102 (Topic: Estimated Taxes and Penalty Avoidance)
Bayard e-files his 2024 tax return on February 27, 2025. He has a balance due of $950
on the return. How long can he wait to pay the amount owed and not pay a late
payment penalty?

 A. He does not have to pay the amount due by a certain date because it is less
than the safe harbor amount of $1,000.wrong
 B. He has until the original due date of the return (including extensions) to pay the
amount owed and not pay a penalty.
 C. He has until the original due date of the return (not including extensions) to pay the
amount owed and not pay a late payment penalty.correct
 D. He should pay his taxes owed when he files his return; otherwise, he will owe a
penalty for late payment.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for C:

Bayard has until the original due date of the return (not including extensions) to pay the
amount owed and not pay a penalty. Taxpayers should submit payment of taxes due on
or before April 15 (or the next business day if April 15 falls on a Saturday, Sunday, or
legal holiday). They do not have to pay the tax when they file their tax return (as long as
 they are under the $1,000 safe harbor threshold), and as long as they pay any taxes
owed by the actual due date of the return.

37. Question ID: 94815909 (Topic: Estimated Taxes and Penalty Avoidance)
Which of the following payments may be subject to backup withholding?

 A. Canceled debts.
 B. Unemployment compensation.
 C. Real estate transactions.wrong
 D. Dividend payments.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for D:

Backup withholding occurs when certain payers, such as banks or other businesses,
are required to withhold and pay to the IRS a specified percentage of those payments.
The current backup withholding tax is 24% for U.S. citizens and U.S residents. Backup
withholding can apply to most kinds of payments that are reported on Form 1099. These
include:

 Interest payments
 Dividends
 Rents, profits, other gains (Form 1099-MISC)
 Commissions, fees, or other payments for work done by independent contractors
 Payments by brokers/barter exchanges
 Royalty payments
Payments that are excluded from backup withholding include real estate transactions,
foreclosures, canceled debts, long-term care benefits, distributions from retirement
plans, unemployment compensation, and state or local income tax refunds. Backup
withholding applies in a number of instances, including when a payee fails to furnish her
correct taxpayer identification number or when the IRS notifies a payer to start
withholding on interest or dividends because the taxpayer has underreported them. See
the IRS detail page on Backup Withholding.

38. Question ID: 94850133 (Topic: Estimated Taxes and Penalty Avoidance)
Cruz is single with no dependents. After adding up all his income and deductions,
Cruz’s federal tax liability is $1,657 for the current year. He had $417 of income tax
withholding from his wages on his Form W-2. His prior-year tax liability was $2,400. He
files his tax return on time. Is Cruz likely to owe a penalty, and if so, which one?
 A. Trust fund recovery penalty.wrong
 B. Penalty for substantial understatement.
 C. Penalty for late filing.
 D. Underpayment of estimated tax penalty.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Cruz will likely be charged an estimated tax penalty. The answer is figured as follows:

 Cruz’s total tax: $1,657

 Cruz’s withholding: $417
 Therefore, after withholding, Cruz still owes: $1,240
Because the amount he owes is over $1,000 and his withholding and credits are less
than 90% of his current year tax and 100% of his prior year tax, he will not qualify for
applicable safe harbors and will likely owe an estimated tax penalty. This penalty can be
abated for reasonable cause (for example, if Cruz's home or business was located in a
disaster area, or if he had a serious illness). See more about this topic on the IRS page
for Underpayment of Estimated Tax by Individuals Penalty.

39. Question ID: 94815985 (Topic: Estimated Taxes and Penalty Avoidance)
Which form should individual taxpayers use to figure their estimated tax?

 A. Schedule SE.
 B. Form 1040-SR.wrong
 C. Form 1040-ES.correct
 D. Form 1040-V.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Individuals can use Form 1040-ES to figure estimated tax. See the dedicated IRS page
for estimated taxes for more information.

40. Question ID: 94816019 (Topic: Estimated Taxes and Penalty Avoidance)
Jaime expects to owe $1,500 in tax for 2024. Her tax liability for the prior year was $0,
because she did not work at all that year. Is Jaime required to pay estimated taxes in
2024?
 A. Jaime is required to pay at least $500 in estimated tax for the year.wrong
 B. Jaime is required to pay estimated tax for the year.
 C. Jaime is required to pay at least $1,000 in estimated tax for the year.
 D. Jaime is not required to pay estimated tax for the year.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

Jaime is not required to pay estimated tax for the year. That is because she had $0 tax
liability in the prior year. As long as Jaime files her return and pays what she owes by
the unextended filing deadline, she will not be liable for any estimated tax penalties.
Note: If you expect to owe less than $1,000 in income tax, after applying federal income
tax withholding, you generally do not have to make any estimated tax payments.
However, you also do not have to make estimated tax payments if you're a U.S. citizen
or U.S. resident alien and you had no tax liability for the previous year.

42. Question ID: 94815984 (Topic: Estimated Taxes and Penalty Avoidance)
Fatima has a full-time job, and she is also self-employed as a part time Uber driver,
which she does on weekends. She doesn't want to pay estimated payments, so she
increases her withholding at her regular job. She always files her return on time. How
much tax must she pay, in order to avoid an estimated tax penalty when she files her
return?

 A. She will avoid the estimated tax penalty if she owes less than $5,000 in tax
after subtracting her withholding and credits, or if she paid at least 90% of the tax
for the current year, or 100% of the tax shown on the return for the prior year,
(whichever is smaller).wrong
 B. She will avoid the estimated tax penalty if she owes less than $2,500 in tax after
subtracting her withholding and credits, or if she paid at least 90% of the tax for the
current year, or 100% of the tax shown on the return for the prior year, (whichever is
smaller).
 C. She will avoid the estimated tax penalty if she owes less than $500 in tax after
subtracting her withholding and credits, or if she paid at least 90% of the tax for the
current year, or 100% of the tax shown on the return for the prior year, (whichever is
smaller).
 D. She will avoid the estimated tax penalty if she owes less than $1,000 in tax after
subtracting her withholding and credits, or if she paid at least 90% of the tax for the
current year, or 100% of the tax shown on the return for the prior year, (whichever is
smaller).correct
 Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Most taxpayers will avoid the estimated tax penalty if they owe less than $1,000 in tax
after subtracting their withholding and credits, or if they paid at least 90% of the tax for
the current year, or 100% of the tax shown on the return for the prior year, whichever is
smaller.

Note: Many taxpayers can avoid the requirement of making estimated tax payments by
increasing their withholding from other sources, including regular wages. Taxpayers are
required to prepay their taxes for the year through withholding OR by paying estimated
tax payments. It is not mandatory for a taxpayer to make estimated tax payments if they
increase their withholding enough to cover their tax liability. See the dedicated IRS page
for estimated taxes for more information.

43. Question ID: 94850108 (Topic: Estimated Taxes and Penalty Avoidance)
Kyle and Jenna are married and file jointly. They both work full time for a department
store. They have a $1,500 balance due on their joint return and want advice on how to
prevent a balance due next year. What would help them avoid balance due in future
years?

 A. One of them can quit their jobs.wrong

 B. They can ask for fewer hours through their employer.
 C. They should adjust their withholding by filing a Form W-4 with the IRS.
 D. They need to adjust their withholding using Form W-4, then give the form to their
employer.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for D:

Kyle and Jenna need to adjust their withholding. They can use the Tax Withholding
Estimator at IRS.gov and then adjust their withholding with their employer. Taxpayers
who need to change the amount of tax withheld from their paychecks need to complete
a Form W-4 and give it to their employer. The Form W-4 is not filed with the IRS.

45. Question ID: 94850098 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Miranda was married to Reese, but divorced him in 2024. They filed joint returns in prior
years and now the IRS is attempting to collect the tax from Miranda. She believes that
 she might qualify for equitable relief. Which is NOT a factor for the IRS to consider in
determining whether to grant equitable relief to Miranda?

 A. Poor mental or physical health on the date Miranda signed the return.wrong
 B. Miranda's prior-year AGI was significantly higher than her current year's
income.correct
 C. Whether Miranda would suffer significant economic hardship if the relief were not
granted.
 D. Spousal abuse that Miranda suffered during the marriage.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for B:

Prior-year AGI would not be a factor if Miranda was to request equitable relief. It is rare
for the IRS to grant equitable relief to a taxpayer. Equitable relief is a type of relief from
joint and several liability. Factors the IRS may consider include: the mental or physical
health of the taxpayer, spousal abuse, and potential economic hardship. A taxpayer
applying for equitable relief has up to ten years to request relief.

46. Question ID: 94850130 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
According to the IRS, which of the following factors do NOT weigh in favor of the IRS
approving equitable relief?

 A. Abuse by the spouse or former spouse.wrong

 B. The taxpayer requesting relief still living with his or her spouse.correct
 C. Poor mental or physical health on the date the taxpayer signed the return or
requested relief.
 D. None of the above.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for B:

If the taxpayer requesting relief still lives with his or her spouse, it would be unfavorable,
rather than favorable. “Equitable relief” is designed to provide tax relief from spousal
liability (if a taxpayer can't get tax relief under innocent spouse relief or separation of
liability). Equitable relief is offered by the IRS to those taxpayers that don't qualify for
innocent spouse relief or relief by separation of liability. With equitable relief cases, the
 IRS looks to see if it would be unfair to hold the taxpayer liable for the taxes even if the
taxpayer does not qualify for the other two forms of relief.

47. Question ID: 94850159 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Thomas and Hailey live in Wisconsin, which is a community property state. Both of them
work full-time. They want to file separately. They do not have a marital agreement for
the provision of separate property. If they file separate returns, how should their income
be reported?

 A. Community property laws state that each spouse is entitled to 100% of total
community income and expenses, so they must report 100% of each spouse's
income on each separate return.wrong
 B. They can report only their own income on their own separate returns.
 C. They can just file single if it is easier for them.
 D. Community property laws state that each spouse is entitled to 50% of total
community income and expenses, so they must divide their income equally on their
separate returns.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for D:

Community property laws state that each spouse is entitled to 50% of total community
income and expenses, so they must divide their income equally on their separate
returns. If a taxpayer in a community property state files a Married Filing Separate
(MFS) return, they must fill out the MFS allocation for Community Property states using
Form 8958.

Note: Community property rules are complex and can vary from state to state. This
question is based on an example in Publication 555, Community Property. According to
Publication 555, in Idaho, Louisiana, Texas, and Wisconsin, income from most separate
property is treated as community income. Couples can also choose to have a legal
agreement that provides that no community property will be created during the
marriage (such as a Prenuptial Agreement between the spouses).

48. Question ID: 94850118 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Rebekah filed a joint tax return with her new husband, Noah, and the entire refund was
applied to Noah’s overdue student loans. What form should Rebekah file, in order to
receive her portion of the refund?

 A. CP 2000.wrong
 B. Form 656.
 C. Form 8379.correct
 D. Form 8857.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

Rebekah can request injured spouse relief in order to recover her portion of the refund.
If a taxpayer files a joint return and is not responsible for the debt, but is entitled to a
portion of the refund, the injured spouse may request their portion of the refund by filing
Form 8379, Injured Spouse Allocation. For more information, refer to Topic No. 203,
Reduced Refund, and the Instructions for Form 8379, Injured Spouse Allocation

49. Question ID: 94850131 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Narissa is legally separated from her husband, Travis. She filed joint returns with him in
the past. Travis had a business that was audited, and he was assessed a large amount
of additional tax. Since they filed jointly, Narissa is also jointly and severally liable for the
tax. Narissa knew about the possible understatement, but didn't question the items on
the return because of fear of retaliation. She now wants to apply for equitable relief. In
order to do so, what must be true?

 A. Narissa must be mentally incapable of signing a joint tax return.wrong

 B. Narissa cannot have enough assets to pay the debt.
 C. Narissa must prove that her ex-spouse committed tax fraud.
 D. Narissa must show that it would be unfair to hold her liable for the understatement of
tax.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

Narissa must show that it would be unfair to hold her liable for the understatement of
tax. "Equitable relief" is when the IRS agrees that it would be unfair to hold the taxpayer
responsible for their spouse or former spouse's tax debt on a joint return. Equitable
relief is offered by the IRS to those taxpayers that don't qualify for innocent spouse relief
or relief by separation of liability.

You generally can't get equitable relief for taxes on your own income and assets, with
these exceptions:
  You're only responsible for the item because of community property laws
 Your spouse used funds set aside for taxes for their own benefit without your
knowledge
 You were the victim of spouse abuse before signing the return
 You didn't question the items on the return because of fear of retaliation
 Your spouse's fraud led to the unpaid or understated tax
You may be eligible for equitable relief if:

 You aren't eligible for innocent spouse relief or separation of liability relief
 You filed a joint return with your spouse
 You and your spouse didn't transfer assets to commit fraud or avoid taxes
 You didn't knowingly file a fraudulent return
 Based on all the facts and circumstances, it would be unfair to hold you liable for
the unpaid or understated tax
See the IRS page for Equitable Relief to learn more.

50. Question ID: 94850166 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Aimee is a freelance editor who makes estimated tax payments on her self-employment
income. She and her husband, Enrique, have two children. This year, they claimed the
Child Tax Credit on their joint return. Enrique owes past-due spousal and child support,
so the IRS took the couple’s entire tax refund to pay his past-due debts. Aimee is not
responsible for any of Enrique's debt. As their tax preparer, what would you advise
Aimee to do?

 A. Aimee can amend the joint return to married filing separately.wrong

 B. Aimee can file a request for injured spouse relief.correct
 C. Aimee can file a request for innocent spouse relief.
 D. Aimee can file a request for an appeal.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

Aimee is likely eligible for injured spouse relief (not innocent spouse relief), and she
does not need to wait to request the relief. She can request her portion of the refund by
filing Form 8379, Injured Spouse Allocation. The form can be filed with a couple’s joint
tax return or by itself when a taxpayer is notified of an offset of a debt. To be considered
 an injured spouse, a taxpayer must have made and reported tax payments, such as
federal income tax withheld from wages or estimated tax payments, or claimed a
refundable tax credit. To learn more about Injured Spouse Relief, see the IRS FAQ
page.

51. Question ID: 94850113 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
All of the following are types of relief from joint and several liability for spouses who file
joint returns except:

 A. Separation of liability reliefwrong

 B. Common-law reliefcorrect
 C. Innocent spouse relief
 D. Equitable relief
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

There are three types of relief from the joint and several liability of a joint return:
Innocent Spouse Relief, Equitable Relief, and Separation of Liability Relief. "Common-
law relief" does not exist.

52. Question ID: 94849889 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Yolanda and Orville were married on November 1, 2024. Unknown to Orville, Yolanda
had delinquent student loans totaling more than $80,000. They filed their joint tax return
on March 1, 2025, and their entire refund was offset to pay Yolanda's delinquent student
loan debt. Does Orville have any recourse in this case?

 A. Orville may request a Collection Due Process (CDP) hearing.

 B. Orville may request innocent spouse relief.
 C. Orville may request equitable spouse relief.wrong
 D. Orville may request injured spouse relief.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Orville may request injured spouse relief to recover his portion of the refund. If a
taxpayer files a joint return and all or part of their share of the refund is applied against
 the other spouse’s past-due federal tax, state income tax, child or spousal support, or
federal nontax debt, such as a student loan, the "injured" spouse may be entitled to
relief by filing Form 8379, Injured Spouse Allocation.

53. Question ID: 94850128 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
"Separation of liability” relief does NOT apply to taxpayers who are:

 A. Living apart for the 12 months prior to the filing of a claim.wrong

 B. Legally separated.
 C. Married taxpayers who are living in the same household.correct
 D. No longer married.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

“Separation of liability” relief does not apply if the taxpayers are married and living in the
same household. To qualify for separation of liability relief, you must have filed a joint
return and must meet one of the following requirements at the time you request relief:

 You are divorced or legally separated from the spouse with whom you filed the
joint return.
 You are widowed, or
 You have not been a member of the same household as the spouse with whom
you filed the joint return at any time during the 12-month period ending on the
date you request relief.

4. Question ID: 95850116 (Topic: Use of Prior Returns)

Why is reviewing prior-year tax returns important for tax professionals?

 A. It helps them identify potential errors and omissions.correct

 B. It ensures the taxpayer is not practicing tax evasion.
 C. It allows preparers to fix the mistakes made by the taxpayer.
 D. It provides a way to generate more revenue by amending prior-year returns.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

 Reviewing prior-year returns helps tax professionals identify potential errors and
omissions, allowing them to spot inaccuracies and address them promptly. Utilizing
prior-year returns can help identify and prevent major mathematical mistakes and alert
the preparer to any issues that may impact the current year’s return. If any errors or
omissions are discovered on a prior-year return, the preparer is required by law to
inform the taxpayer of the mistake and explain the potential consequences if it is not
corrected. However, the preparer is not obligated to fix the error.

Show Other Explanations

6. Question ID: 95850118 (Topic: Use of Prior Returns)

A tax preparer discovers an omission in a client’s prior-year return related to a tax
credit. What should the preparer do?

 A. Promptly inform the client of the omission and its potential impact.correct
 B. File an amended return without notifying the client.
 C. Ignore the omission since it’s from a previous year.
 D. Report the omission to the IRS directly.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for A:

In the event that any errors or omissions are found on a tax return from a previous year,
the preparer is required by law to notify the taxpayer of the error and explain potential
repercussions if it is not corrected. Tax professionals have an obligation to inform their
clients of any errors they come across on previously filed tax returns, but ultimately it is
up to the taxpayer whether or not to correct the error.

Show Other Explanations

12. Question ID: 94815978 (Topic: Taxpayer Personal Information)

What is IRS Form W-7 used for?

 A. It is used to apply for an ITIN.correct

 B. It is used to report backup withholding.
 C. It is used to report employee withholding.
 D. It is used to report contractor payments.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

 Correct Answer Explanation for A:

A W-7 Form is used to apply for an individual taxpayer identification number, or ITIN, for
non-citizens who aren't eligible to receive a Social Security number, but need to file a
federal tax return.

18. Question ID: 94815990 (Topic: Filing Requirements and Due Date)
Nonresident aliens who have income that is not subject to U.S. withholding are required
to file an income tax return by:

 A. April 15.
 B. March 15.
 C. June 15.correct
 D. October 15.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for C:

Nonresident aliens who have income that is not subject to U.S. withholding are required
to file an income tax return by June 15, two months after the regular filing deadline for
most individuals.

19. Question ID: 94850172 (Topic: Filing Requirements and Due Date)
A Form 1040X based on a loss from a worthless security generally must be filed within
_______ after the due date of the return for the tax year in which the security became
worthless (in order for the taxpayer to receive a refund).

 A. 3 years.
 B. 10 years.
 C. 7 years.correct
 D. 5 years.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for C:

A Form 1040X based on a loss from a bad debt or worthless security generally must be
filed within SEVEN years after the due date of the return for the tax year in which the
debt or security became worthless. This is an exception to the normal "three-year" rule.
 For more information, see the Instructions for Form 1040X as well as IRS Topic No. 308
Amended Returns.

23. Question ID: 94849591 (Topic: Filing Requirements and Due Date)
Which individual tax form is designed specifically for seniors?

 A. Form 1040-SRcorrect
 B. Form 1040-PR
 C. Form 1040
 D. Form 1040-NR
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for A:

Form 1040-SR, U.S. Tax Return for Seniors, is a tax form that is designed specifically
for taxpayers age 65 and older. The Form 1040-SR has larger text and some helpful
tips for older taxpayers.

25. Question ID: 94850154 (Topic: Filing Requirements and Due Date)
A month after Franco' filed his 2024 tax return, he received another Form W-2 in the
mail. The amount on the additional Form W-2 was not included in his original tax return,
because he’d forgotten about it. What is Franco's best course of action?

 A. Prepare Form 1040X to amend his tax return for the year and include the
additional Form W-2.correct
 B. Wait for the IRS to correct the original return.
 C. Call the IRS and submit the amount on the additional Form W-2 to the IRS Call
Center.
 D. E-file a corrected Form 1040 to amend his tax return and include the additional Form
W-2.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for A:

Franco should prepare Form 1040X to amend the return and include the additional
Form W-2. An amended return should be filed if the taxpayer:
  Received an additional Form W-2 or a corrected Form W-2 that was not reported
on the original return.
 Received an additional Form 1099 (such as unemployment compensation) or a
corrected Form 1099 that was not reported on the original return.
 Claimed his own personal exemption on the return when someone else was
entitled to claim it.
 Claimed deductions or credits he should not have claimed.
 Did not claim deductions or credits he could have claimed.
 Should have used a different filing status.
Form 1040X is not year-specific—the taxpayer must specify the year for which the
amended return is being prepared.

31. Question ID: 94815979 (Topic: Filing Requirements and Due Date)
U.S. citizens and U.S. residents compute their U.S. taxes based on their
_____________.

 A. Worldwide income.correct
 B. Passive income.
 C. Passive and non-passive income.
 D. U.S.-source income.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for A:

U.S. citizens and U.S. residents compute their U.S. taxes based on their worldwide
income.

35. Question ID: 94815987 (Topic: Estimated Taxes and Penalty Avoidance)
Beulah is self-employed and reports her income on Schedule C. She is required to
make quarterly estimated tax payments totaling $8,000 for the tax year in order to avoid
an estimated tax penalty. She makes the following payments:

 First payment: Credit of $2,000 from her previous year’s tax refund.
 Second payment: $1,000 on April 20.
 Third payment: $1,000 on May 31.
 Fourth payment: $2,000 on August 15.
 Fifth payment: $1,000 on October 15.
 Sixth payment: $1,000 on December 30.
 Which of the following statements is correct?

 A. She has made timely estimated payments.correct

 B. She has not made timely payments because her second and third payments were
not made by April 15.
 C. She has not made timely payments because her fourth payment was not made by
June 15.
 D. She has not made any timely payments because none of the payments were made
by the required IRS schedule.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

The year is divided into four payment periods for estimated taxes, each with a specific
payment due date. The schedule is as follows: first payment due: April 15; second
payment due: June 15; third payment due: September 15; fourth payment due: January
15 of the following year. In Beulah's case, she was required to pay $2,000 each quarter
by the payment due date, so she has made timely estimated payments. If a taxpayer
does not pay enough tax by the due date of each of the payment periods, she may be
charged a penalty, even if she is due a refund when she files her income tax.

36. Question ID: 94850315 (Topic: Estimated Taxes and Penalty Avoidance)
Elena is a self-employed bookkeeper. She reports her income on Schedule C. Her
business is profitable, and she is required to make estimated payments throughout the
year. When is her first estimated payment due?

 A. May 1.
 B. January 1.
 C. April 15.correct
 D. March 15.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for C:

Her first estimated payment would be due April 15. A self-employed taxpayer's first
estimated payment is generally due April 15. Estimated tax payments for individuals are
due as follows:
– January 1 to March 31 payment is due April 15.
 – April 1 to May 31 payment is due June 15.
– June 1 to August 31 payment is due September 15.
– September 1 to December 31 payment is due January 15 of the following year.

When to Pay Estimated Tax

Payment Period Due Date
January 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
January 15* of the following year. *See Chapter 2 of Publication 505, Tax Wi
September 1 – December 31
Estimated Tax
Note: There are special exceptions to the estimated tax due dates for Farmers and
Fishermen. For more information about the rules for estimated taxes, see the IRS page
for Top Frequently Asked Questions for Estimated Tax.

41. Question ID: 95033689 (Topic: Estimated Taxes and Penalty Avoidance)
Janet is unmarried and files single. This year, Janet earned $99,800 in income from
various income sources. The total tax liability shown on Janet’s prior-year return was
$10,900. After estimating her allowable deductions and credits, her expected tax liability
for 2024 is $14,000. The tax expected to be withheld in 2024 from her wages is
$11,100. She plans to file right on April 15, 2025 the filing deadline, and pay any tax
owed at the same time. Will Janet be subject to an estimated tax penalty when she files
her return?

 A. Janet will not be subject to the estimated tax penalty because she paid at least
100% of the tax shown on her return for the prior year.correct
 B. As long as Janet files her return and pays by March 1, she will not owe an estimated
tax penalty.
 C. Janet will not be subject to the estimated tax penalty because she owes less than the
deemed personal exemption amount when she files her return.
 D. Yes, Janet will be subject to the estimated tax penalty if she does not adjust her
withholding or make estimated tax payments, because she will owe more than $1,000
when she files her return.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for A:

 Janet will not be subject to the estimated tax penalty because she paid at least 100% of
the tax shown on her return for the prior year. Most taxpayers will avoid the penalty for
underpayment of estimated tax, if they owe less than $1,000 in tax after subtracting
their withholdings and credits, or if they paid at least 90% of the tax for the current year,
or 100% of the tax shown on the return for the prior year, whichever is smaller. In
addition, taxpayers who had $0 tax liability in a prior year are not required to make
estimated tax payments in the current year. See the IRS Information page on estimated
tax payments.

44. Question ID: 94850115 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Ursula and Patrick were married three years ago and they file jointly. Both of them work.
They are owed a refund on their joint return, but this year, their entire refund is offset
against Patrick's past-due child support. Can Ursula have any recourse to recover any
of the refund?

 A. Ursula can request injured spouse relief in order to recover her portion of the
refund.correct
 B. Ursula can request innocent spouse relief to recover the entire refund.
 C. No. Since they filed jointly, her portion of the refund cannot be recovered.
 D. Ursula can request innocent spouse relief to recover half of the refund.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

Ursula can request injured spouse relief in order to recover her portion of the refund. If a
taxpayer files a joint return and is not responsible for the debt, but is entitled to a portion
of the refund, the injured spouse may request their portion of the refund by filing Form
8379, Injured Spouse Allocation.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

2. Question ID: 94815914 (Topic: Special Filing Requirements)

A taxpayer who files Form 4868 is requesting:

 A. An extension of time to pay income tax due.wrong

 B. An extension of time to file an individual tax return.correct
 C. An abatement of collection activity.
 D. An installment agreement to pay overdue income tax.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

A taxpayer who files Form 4868 is requesting an extension of time to file his or her
individual tax return. The extension gives a taxpayer six months past the normal filing
deadline to file his return. An extension of time to file is not an extension of time to pay
any taxes due—it is only an extension of time to file the return.

3. Question ID: 95850114 (Topic: Special Filing Requirements)

Under which of the following scenarios will a taxpayer be required to file a tax return,
even if their gross income is below the filing threshold?

 A. The taxpayer is a full-time student who receives a scholarship.wrong

 B. If they earned $400 or more from self-employment.correct
 C. The taxpayer receives only Social Security income.
 D. A dependent who has $100 of interest income.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Incorrect Answer Explanation for A:

If a taxpayer earns $400 or more from self-employment, they are required to file a tax
return, even if their gross income is below the filing threshold.

Correct Answer Explanation for B:

If a taxpayer earns $400 or more from self-employment, they are required to file a tax
return, even if their gross income is below the filing threshold.
 Show Other Explanations

4. Question ID: 94815890 (Topic: Special Filing Requirements)

Jianyu is a Chinese citizen who is a foreign student on an F-1 Student Visa. Jianyu is
allowed to work part-time on campus as a teaching assistant. He had Social Security
and Medicare taxes withheld on his wages in error. Jianyu is a nonresident alien to tax
purposes and must file Form 1040NR. What form can he file to request a refund of
these taxes?

 A. Jianyu may deduct the taxes that were erroneously withheld as an adjustment to
income on his Form 1040NR.
 B. Social Security and Medicare taxes cannot be refunded.wrong
 C. Jianyu may request a refund by filing a formal protest with his Form 1040NR.
 D. Jianyu may file Form 843, Claim for Refund and Request for Abatement, along with
his Form 1040NR to request a refund.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Jianyu may file Form 843, Claim for Refund and Request for Abatement, along with his
Form 1040NR to request a refund. If a taxpayer is a foreign student or exchange visitor
on an F-1, J-1, M-1, or Q visa, and social security or Medicare taxes were withheld on
their wages in error, the taxpayer may file Form 843, Claim for Refund and Request for
Abatement, to request a refund of these taxes. For more information, see Publication
519, U.S. Tax Guide for Aliens.

5. Question ID: 948159961 (Topic: Special Filing Requirements)

Sometimes, a taxpayer is required to file a tax return, even if their income does not
exceed the gross income threshold for filing a tax return. Which of the following
scenarios would always trigger a filing requirement, regardless of the taxpayer's gross
income?

 A. The taxpayer receives prize winnings from a sweepstakes.wrong

 B. The taxpayer has a health savings account through their employer.
 C. The taxpayer received advance payments of the Premium Tax Credit.correct
 D. The taxpayer receives interest income of $2,000.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 54% of students.

Incorrect Answer Explanation for A:

 Not everyone is required to file a tax return. However, if a taxpayer received advance
payments of the Premium Tax Credit (the APTC), they are required to do so. The
taxpayer should receive Form 1095-A showing the amount of the advance payments.
The other choices wouldn't necessarily trigger a filing requirement.

Correct Answer Explanation for C:

Not everyone is required to file a tax return. However, if a taxpayer received advance
payments of the Premium Tax Credit (the APTC), they are required to do so. The
taxpayer should receive Form 1095-A showing the amount of the advance payments.
The other choices wouldn't necessarily trigger a filing requirement.

Show Other Explanations

6. Question ID: 94815993 (Topic: Special Filing Requirements)

Kylie files her tax return and requests a direct deposit of her refund, which is $3,100 for
the current year. She also owes $500 in delinquent back taxes from the prior year. How
will the IRS allocate her refund in this scenario?

 A. The IRS will withhold the balance due from Kylie's refund and adjust her direct
deposit accordingly.correct
 B. Kylie must request a formal abatement before receiving her refund. wrong
 C. The IRS will not direct deposit her refund until Kylie pays the full balance from the
prior year.
 D. The IRS will withhold the balance due from Kylie's refund and send a paper check for
the balance.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

The IRS will withhold the balance due from Kylie's refund and adjust her direct deposit
accordingly. She will receive a letter from IRS explaining any adjustment(s) to her
refund amount and direct deposit.

7. Question ID: 94815954 (Topic: Taxpayer Filing Status)

Elise's husband died on May 1, 2024. She has one dependent son, aged 18. What is
the most beneficial filing status for Elise in 2024, assuming she does not remarry
before year-end?

 A. Married Filing Jointlycorrect

 B. Married Filing Separatewrong
 C. Head of Household
 D. Qualifying surviving spouse (QSS)
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for A:

In this scenario, Elise’s best filing status would be "Married Filing Jointly". Elise may file
as a surviving spouse with her deceased husband in the year that he actually died.
Then, in the following year, her filing status would be "Qualifying Surviving Spouse" if
her child was still her dependent. If a spouse dies during the year, the couple is still
considered married for the whole year. The surviving spouse can choose either married
filing jointly or married filing separately as her filing status, assuming she has not
remarried. The executor or administrator must sign the return for the deceased spouse.
If no one has been appointed as executor or administrator, the surviving spouse signs
the joint return and enters “filing as surviving spouse” on the signature line of Form
1040.

8. Question ID: 94815907 (Topic: Taxpayer Filing Status)

Dinah is legally married but has lived apart from her husband since May 1. She has not
filed for divorce or legal separation. She provided 80% of the support for her three
children who lived with her all year. Which of the following statements is correct?

 A. She must file as married filing separately.

 B. She must file as married filing jointly.
 C. She must file as married filing separately or married filing jointly.wrong
 D. She qualifies for head of household filing status.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for D:

Dinah is “considered unmarried” and can choose to file as head of household. The head
of household status is available to taxpayers who meet all three of the following
requirements:

 The taxpayer must be single, divorced, legally separated, or “considered

unmarried” on the last day of the year.
 The taxpayer must have paid more than half the cost of keeping up a home for
the year.
 The taxpayer must have had a qualifying person living in her home for more than
half the year.
 There are exceptions for temporary absences, such as school, and for a qualifying
parent, who does not have to live with the taxpayer. A taxpayer who qualifies to file as
head of household will usually have a lower tax rate than the rates for single or MFS
and will receive a higher standard deduction. To be “considered unmarried” on the last
day of the tax year, a taxpayer must meet all of the following conditions:

 File a separate return.

 Pay more than half the cost of keeping up the home for the tax year.
 Not live with her spouse in the home during the last six months of the tax year.
 Maintain the home as the main residence of a qualifying child, stepchild, or foster
child for more than half the year.
 Be able to claim an exemption for the child (although there is an exception for
divorced parents).
10. Question ID: 94815943 (Topic: Taxpayer Filing Status)
A U.S. citizen who is married to a nonresident alien can file a joint return so long as both
spouses ____________.

 A. Sign the return and agree to be taxed on their worldwide income.correct

 B. Have valid Social Security numbers.
 C. Are physically outside the United States, with a tax home in a foreign
country.wrong
 D. Are living overseas.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

A U.S. citizen who is married to a nonresident alien can file a joint return so long as both
spouses agree to file jointly and report all their worldwide income.

12. Question ID: 94816027 (Topic: Taxpayer Filing Status)

Edgar's wife moved out of their home on November 1, 2024. She has not returned to
the marital home. Edgar provides all the cost of keeping up the home for himself, and
his dependent child, who is 6 years old. Edgar's wife is noncommunicative and does not
respond to his calls. He cannot obtain a signature from her or any of her income
information. He has not filed for divorce. What filing status should Edgar use?

 A. Singlewrong
 B. Married filing separatelycorrect
 C. Head of household
 D. Married filing jointly (with a disclosure)
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for B:

Edgar does not qualify for Head of Household status because he did not live apart from
his wife for the last 6 months of the year. And he cannot file jointly with her, because
she refuses to communicate or sign a joint return with him. So Edgar is forced to file
"Married filing separately" in order to report his income for the year.

13. Question ID: 94816007 (Topic: Taxpayer Filing Status)

Angie and Gregory divorced on December 20, 2024. They have no children or other
dependents and neither of them has remarried. Their filing status should be:

 A. Married Filing Jointlywrong

 B. Singlecorrect
 C. Head of household
 D. Married Filing Separate
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for B:

Since Angie and Gregory were legally divorced before the end of the tax year, they are
both treated as "single" for federal tax purposes. For tax purposes, a taxpayer's filing
status depends on their marital status under state law on the last day of the calendar
year.

14. Question ID: 94815995 (Topic: Taxpayer Filing Status)

Ruth and Peter were married on January 9, 2024. Peter died suddenly on November
10, 2024. Ruth did not remarry during the year. She has no dependents. What filing
status is available to her?

 A. She can choose to file Single or as a Qualifying surviving spouse (QSS) wrong
 B. She can choose to file Married Filing Jointly OR Married Filing Separately.correct
 C. Married Filing Jointly.
 D. Qualifying surviving spouse (QSS)
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

 Correct Answer Explanation for B:

Ruth may choose to file as either Married Filing Jointly or Married Filing Separately. For
tax purposes, she is considered married to her deceased spouse during the entire year
because she did not remarry.

15. Question ID: 94815949 (Topic: Taxpayer Filing Status)

Pavlo's wife died in 2022. He has not remarried. During 2024, he continued to keep up a
home for himself and his seven-year-old son, Barron, who lives with him and for whom
he can claim as a dependent. What is Pavlo's most advantageous filing status for the
year?

 A. Head of Household.wrong
 B. Married Filing Jointly.
 C. Single.
 D. Qualifying surviving spouse (QSS)correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

In the year of his wife’s death, Pavlo was entitled to file a joint return for himself and his
deceased wife. For 2024, he can file as Qualifying surviving spouse (QSS). After 2024,
he can file as Head of Household if he still qualifies.

16. Question ID: 94815824 (Topic: Taxpayer Filing Status)

Camilla and Ryan are married. Ryan leaves Camilla on March 5, 2024, and moves out.
Camilla pays all of the expenses relating to their 5-year-old son, who lives with her all
year. Ryan refuses to file jointly with Camilla but also refuses to file for divorce or legal
separation. What filing status is available to Camilla?

 A. She can choose Single or Married Filing Separately.wrong

 B. She can choose Married Filing Jointly or Single.
 C. She can choose to file Married Filing Jointly or Head of household.
 D. She can choose to file Head of Household or Married Filing Separately.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

 Camilla may file as Married Filing Separately or as Head of Household. This is because
she can be "considered unmarried" for tax purposes. Married taxpayers who lived apart
from their spouse during the last six months of the year and provided for dependent
children may be “considered unmarried” and qualify to file as Head of Household.

To be "considered unmarried" at the end of a tax year, the taxpayer's spouse may not
be a member of the household for the last 6 months of the tax year and the taxpayer
must also have a qualifying dependent. In this scenario, Camilla's home must have
been the main home of a child, stepchild, or foster child for more than half the year.
Since her son lived with her all year, then she would qualify. She cannot file jointly
(MFJ) with her estranged husband because, as the question states, he refuses to file
jointly with her. In the case of an MFJ return, both spouses must agree to file jointly and
sign the return.

17. Question ID: 94815996 (Topic: Taxpayer Filing Status)

Josephine is single and has no children. Her elderly step-father, Harold, is widowed and
has no income. Harold does not live with her, but she pays 100% of his living expenses.
What filing status is available to Josephine?

 A. Qualifying surviving spouse (QSS)

 B. Head of Household.wrong
 C. Single.
 D. She may choose to file either Single or Head of Household.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for D:

Josephine can file either as Head of Household or as Single. A step-father is a

“qualifying person” for Head of Household status, if all the other requirements are met.
(Note: Although in-laws and step-parents are qualifying persons for HOH purposes, a
“foster parent” is NOT.)

20. Question ID: 94816035 (Topic: Taxpayer Filing Status)

Greta and Johnny are married. Greta is 70 and had a gross income of $12,000 in wages
for the tax year. Johnny is 75, and his gross income was $4,000 for the year, and it was
all Social Security. Johnny is also legally blind. They plan to file separate tax returns
(MFS). Do they have a filing requirement?

 A. Only Johnny must file a return. Greta is not required to file, because her only income
is from wages.
 B. Yes, both must file, because they have chosen to file separate returns (MFS).correct
 C. Neither has to file a return, because they are both senior citizens.wrong
 D. Only Greta must file a return. Johnny is not required to file.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for B:

Both taxpayers must file a return, because they have chosen to file MFS, and the filing
threshold for MFS filers is only $5. Married filing separately is a tax status for couples
who choose to record their incomes, exemptions, and deductions on separate tax
returns.

23. Question ID: 94816043 (Topic: Taxpayer Filing Status)

Tammy and Hector are married and have always filed jointly. They have no children or
other dependents. Tammy dies on March 4. Hector remarries on November 30, to
Jennifer. Jennifer and Hector plan to file jointly. Before Tammy's death on March 4, she
had earned $27,000 in wages. What is Tammy's filing status (the deceased spouse) on
her final Form 1040?

 A. Married Filing Jointly

 B. Qualifying Surviving Spousewrong
 C. Single
 D. Married Filing Separatecorrect
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for D:

Tammy is required to use the "Married Filing Separate" filing status on her final return.
That is the only filing status permitted in this scenario. Taxpayers whose spouses died
during the tax year are considered married for the entire year, provided they did not
remarry. Since Hector remarried in the same year that his previous wife died, then the
deceased spouse’s filing status becomes Married Filing Separately. The executor of
Tammy's estate (whether it is her surviving spouse or someone else named in her final
will) would be responsible for Tammy's final return.

26. Question ID: 94815938 (Topic: Taxpayer Filing Status)

For the purpose of determining filing status, which of the following taxpayers would be
treated as an unmarried individual for the entire tax year?

 A. Halle, who is married and lives apart from her spouse.

 B. Opal, whose marriage was annulled, but not until January 1 of the following tax
year. correct
 C. Thomas, whose spouse died in March of the tax year.wrong
 D. Paula, who got married to Danny on December 31 of the current tax year.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for B:

Marital status is typically determined as of the last day of the tax year. However, in the
case of an annulment, the marriage is considered to never have happened. An
annulment legally nullifies the marriage and return the parties to their prior single status,
as if they never married. A taxpayer is considered unmarried (for tax purposes) for the
entire Tax Year if, on December 31, any of the following applies:

 The taxpayer has never been married.

 A taxpayer is legally separated (but not under an interlocutory decree of divorce).
 A taxpayer is divorced and the divorce decree was finalized on or before
December 31.
 The taxpayer's marriage was annulled with an official court decree of annulment.
 The taxpayer is still legally married, but was "considered unmarried" for the
purpose of qualifying for the Head of Household filing status.
28. Question ID: 94816044 (Topic: Taxpayer Filing Status)
Ginny is age 48 and legally divorced. Ginny's unmarried 21-year-old son, Denny, lived
with her all year. Denny is not a student and worked a part time job, earning $5,400 in
wages, but he did not provide more than one half of his own support. What is Ginny's
most favorable filing status?

 A. Singlecorrect
 B. Married Filing Separately
 C. Head of Householdwrong
 D. Married Filing Jointly
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

Ginny can only file Single. Denny is 21 and was not a full-time student during the tax
year, so he cannot be his mother's qualifying child. Although Denny only worked part-
 time, he earned too much for Ginny to claim him as a qualifying relative dependent.
Therefore, Ginny must file Single. She cannot file Head of Household because she does
not have a qualifying dependent.

30. Question ID: 94850001 (Topic: Taxpayer Filing Status)

Rhett and Molly are married, but they separated on December 20, 2024. They do not
have any dependents. Molly was planning to file for divorce, but Rhett dies on January
13, 2025, before Molly can file any legal paperwork. What is Molly's filing status for
2024?

 A. Single wrong
 B. Married filing joint or Married filing separatelycorrect
 C. Qualifying Surviving Spouse
 D. Married filing joint or Single
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

Since Rhett was still alive in 2024 and they were married for the entire taxable year,
Molly's filing status for 2024 would be Married filing jointly or Married Filing Separately.
She could choose either filing status if she elected to file with her deceased husband.
Since Rhett actually died in 2025, Molly would also file as MFS or MFJ for 2025.
Taxpayers can file jointly in the year of a spouse's death.

31. Question ID: 97091963 (Topic: Taxpayer Filing Status)

Daniel is divorced and earns $70,000 in wages. He has several relatives which he
supports. These relatives do not all live with him, but none earn any income. Which
dependent relative may qualify Daniel for head of household filing status?

 A. A foster child who lived with Daniel for 3 months of the tax year.wrong
 B. An adult stepdaughter who lives in her own apartment who is supported by Daniel.
 C. A cousin who lives with Daniel all year.
 D. A parent who lives in a retirement home, and not with Daniel.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for D:

A parent is the only dependent relative who does not have to live with Daniel for him to
claim “head of household” status. In order to file for head of household, the “qualifying
 person” must be one of the following: a birth child, adopted child, grandchild, stepchild,
foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a
descendant of any of those, or a parent. The qualifying person must also LIVE WITH
the taxpayer (unless the absence is temporary). The only exception to the “residency
test” is a parent, who does not have to live with the taxpayer. A cousin does not qualify
because they do not meet the relationship test. The adopted child does not qualify
because the child lived with the taxpayer for less than one-half of the year.

32. Question ID: 94815966 (Topic: Taxpayer Filing Status)

Alexander is married but has lived apart from his wife, Angela, for two years. He is not
legally separated or divorced from his wife. Angela refuses to file jointly with him.
Alexander pays all the costs of keeping up his home for himself and his dependent 14-
year-old son, who lives with him. Does his marital status prevent him from using the
Head of Household filing status?

 A. Yes, he may file only as MFS or MFJ. wrong

 B. He can only file MFS.
 C. He may not file as head of household, but he can file Single.
 D. No, he may file as head of household. correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

Alexander can choose to file as Head of Household for the tax year because he meets
the definition of "considered unmarried." Taxpayers can be considered unmarried if
they file a separate return and:

 Are legally separated under a divorce or separate maintenance decree on the

last day of the tax year or
 Lived apart from their spouse for the last 6 months of the year and paid more
than half of the cost of providing a home that was also the main home of the
qualifying person for more than half the year.
33. Question ID: 94815918 (Topic: Taxpayer Filing Status)
Sarah and Daria are registered domestic partners (RDPs) living in California. What is
their filing status for federal tax purposes?

 A. Single, married filing jointly, or married filing separately.

 B. Married filing jointly.wrong
 C. Married filing jointly or married filing separately.
 D. Single.correct
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 42% of students.

Correct Answer Explanation for D:

For federal tax purposes, civil unions and registered domestic partnerships are not
recognized as legal marriages. The taxpayers must file as single. If Sarah and Daria
were to get married at a later date, they would be required to file MFS or MFJ. To see
more information about how Registered Domestic Partnerships and Civil Unions are
treated for federal tax purposes, see the official IRS FAQ page.

35. Question ID: 94815992 (Topic: Taxpayer Filing Status)

Choose the answer that correctly reflects the five filing statuses that taxpayers can
choose in 2024.

 A. Single, Married filing jointly, Married filing separately, Head of household, Qualifying
surviving spouse (QSS)correct
 B. Single, Common-law Married, Married filing separately, Head of household,
Qualifying surviving spouse (QSS)
 C. Single, Married filing jointly, Married filing separately, Related Party
Household, Qualifying surviving spouse (QSS)wrong
 D. Married filing jointly, Married filing separately, Head of household, Unmarried
taxpayer, Qualifying surviving spouse (QSS)
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 98% of students.

Correct Answer Explanation for A:

There are five filing statuses: Single, Married filing jointly, Married filing separately,
Head of household, and Qualifying surviving spouse (QSS) with dependent child.

36. Question ID: 94815842 (Topic: Taxpayer Filing Status)

Lacie and Grant are married and live together all year. They have no dependents. They
have always kept their finances separate and choose to file as Married Filing
Separately. Grant will be itemizing his deductions this year. What must Lacie do on her
MFS tax return?

 A. Lacie's itemized deductions must be zero.

 B. Lacie must use the standard deduction; she cannot itemize her deductions.
 C. Lacie may use the standard deduction or she may itemize her
deductions.wrong
 D. Lacie cannot use the standard deduction; she must itemize her deductions.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for D:

Lacie cannot use the standard deduction; she must itemize her deductions. This is
because the spouses are both filing MFS. If one spouse itemizes deductions, the other
spouse is also forced to itemize. This rule only applies if both spouses are filing MFS.

39. Question ID: 94816006 (Topic: Taxpayer Filing Status)

Torie's husband died on January 5, 2023. She has not remarried during 2024, but she
has a 15-year-old dependent daughter. Torie's filing status in 2024 should be:

 A. Qualifying surviving spouse (QSS)correct

 B. Head of household
 C. Married filing jointlywrong
 D. Single
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

Torie qualifies for Qualifying surviving spouse (QSS) as her filing status. The federal
Qualifying surviving spouse (QSS) filing status is available for two years after the year
of death of the deceased spouse. It is available to widows and widowers (surviving
spouses) with a qualifying dependent.

40. Question ID: 94816045 (Topic: Taxpayer Filing Status)

Since her husband died four years ago, Juniper has lived with her best friend, Marnie,
who is also a widow. Juniper is a U.S. citizen and lived with Marnie all year. Juniper had
no income and received all of her support from Marnie. Juniper is Marnie's dependent
because she lived with Marnie all year as a member of her household. Marnie earned
$47,000 in wages during the year. What is Marnie's filing status?

 A. Qualifying Surviving Spouse

 B. Married Filing Jointlywrong
 C. Head of Household
 D. Singlecorrect
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.
 This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

Marnie can only file Single. Juniper is Marnie's qualifying relative dependent, only
because she lived with Marnie all year as a member of her household. This means that
Marnie can claim Juniper as a dependent on her return. However, Juniper is not a
qualifying person for Head of Household filing status because she is not related to
Marnie in one of the ways that is required for Head of Household status (i.e., is one of
the following: a child, stepchild, foster child, or a descendant of any of them; your
sibling, half-sibling, or a son or daughter of any of them; an ancestor or sibling of your
father or mother; or stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter
in-law, father-in-law, mother-in-law, brother-in law or sister-in-law). See guidance in
Publication 4491, Who Is a Qualifying Person Qualifying You To File as Head of
Household?

41. Question ID: 94815823 (Topic: Taxpayer Filing Status)

Ceasar and Helga were married and their divorce was finalized on March 2, 2024.
Neither of them has any dependents. What filing status is available to them for 2024?

 A. They can choose to file Married Filing Jointly OR Married Filing Separately.
 B. Single.correct
 C. Married Filing Separately.wrong
 D. Married Filing Jointly.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for B:

Both must file as Single. No other status is available, because they are both unmarried
at the end of the year and have no dependents.

42. Question ID: 94815894 (Topic: Taxpayer Filing Status)

For the purpose of determining filing status, which of the following taxpayers would be
considered unmarried for the entire tax year and must file SINGLE in 2024? (None of
the taxpayers listed below have any dependents).

 A. Gregory, who got married on June 1, 2024 to a nonresident alien.

 B. Terrance, whose spouse died on February 1, 2024.
 C. Halton, whose annulment was finalized on January 10, 2025.correct
 D. Crystal, who got married on December 25, 2024.wrong
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.
 This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Halton, whose annulment was finalized on January 10, 2025 would be considered
UNMARRIED for all of 2024 as well as any prior years. Unlike divorce, which is the
dissolution of a valid marriage, an annulment is retroactive and nullifies the marriage
contract. If you obtain a court decree of annulment, which holds that no valid marriage
ever existed, you are considered unmarried even if you filed joint returns for earlier
years.

43. Question ID: 95404924 (Topic: Taxpayer Filing Status)

Nadine is 42 and married. She legally separated from her husband last year, and has
lived apart from him the entire year. She and her husband do not have any contact and
she does not know where he is living now. Nadine provides all of the support for her
father, Jonas, who is 75 years old and lives independently in his separate home. Nadine
plans to claim her father as a dependent. Which of the following filing statuses is Nadine
allowed to use when filing and generally will be the most advantageous for her to use?

 A. Head of Householdcorrect
 B. Married Filing Jointly
 C. Married Filing Separately
 D. Singlewrong
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for A:

Nadine can use the Head of Household filing status. In certain situations, a taxpayer
can claim a parent as a dependent and file as head of household (HOH). There is no
requirement for a dependent parent to actually live in the same household as the
taxpayer, but the taxpayer must pay over half of their parent's support for the parent to
be treated as a dependent.

45. Question ID: 94815885 (Topic: Taxpayer Filing Status)

Jackie and Keoni are divorced and their 10-year-old daughter lives with Jackie. Keoni
pays child support to Jackie. Jackie is trying to decide if she qualifies to file as Head of
Household. What expense should she NOT include when calculating if she pays more
than half the cost of keeping up the home?

 A. Food eaten at home.

 B. The cost of textbooks for her daughter.correct
 C. Mortgage interest.wrong
 D. Property taxes on the home.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

Jackie cannot include the cost of textbooks for her daughter's education as part of her
expenses, because it is not a cost for “keeping up the home”. She may include the rest
of the expenses, however.

1. Question ID: 94816011 (Topic: Special Filing Requirements)

Harlan is a taxpayer who has a filing requirement. Harlan's regular tax preparer,
Jenessa, is located in an area that recently experienced a federal disaster. With regards
to IRS disaster relief provisions, do those provisions apply if the tax preparer is located
in a disaster area but the taxpayer is not?

 A. Yes, disaster relief provisions apply, but Harlan may have to contact the IRS to
request relief.correct
 B. No, Harlan must still file his returns on time.
 C. Yes, disaster relief provisions apply and no further action is needed.
 D. None of the answers are correct.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 34% of students.

Correct Answer Explanation for A:

Disaster relief also applies to tax preparers who are unable to file returns or make
payments on behalf of the client because of a FEMA disaster. For the purposes of this
tax relief, affected taxpayers include individuals and businesses located in the disaster
area, those whose tax records are located in the disaster area, and relief workers. To
get the postponement for filing or payment, the taxpayer must:

 Call the IRS Disaster Assistance Hotline.

 Explain that their necessary records are located in a covered disaster area.
 Provide the FEMA Disaster Number of the county where the tax preparer or their
records are located.
To learn more about this topic, see the dedicated IRS page about Tax Relief for
Presidentially-Declared Disaster Areas.

9. Question ID: 94816040 (Topic: Taxpayer Filing Status)

 Jenna and Paul are married and have always filed jointly. They do not have any
dependents. On June 10, Jenna has a major disagreement with Paul and moves out of
the home. They are still legally married on December 31 and Jenna does not file for
divorce, but she refuses to file jointly with Paul. What filing status can Paul use?

 A. Married filing jointly or Married filing separately

 B. Single
 C. Married filing separatelycorrect
 D. Head of household
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Paul must file as "Married filing separately." If you are still legally married on December
31st of the year, the only filing statuses available are “Married Filing Jointly” or “Married
Filing Separate” (unless the taxpayer qualifies for Head of Household status). Since
Paul's wife refuses to file jointly, then he must file a separate return.

11. Question ID: 94815895 (Topic: Taxpayer Filing Status)

Married Filing Jointly means that the spouses _____.

 A. Report their own incomes and deductions on separate returns.

 B. Combine their income (but not their deductions) on a joint return.
 C. Combine their assets and liabilities on the same return.
 D. Combine their income and deductions on the same return.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

Married Filing Jointly means that both spouses complete and sign the same tax return
and are both responsible for any tax owed on the return.

18. Question ID: 94815950 (Topic: Taxpayer Filing Status)

Jillian and Olden were married on February 20, 2024 and lived together all year. On
January 2, 2025, Jillian moves out of the marital home and files for an annulment on the
basis of fraud. Her annulment is granted on February 28, 2025. Neither taxpayer has
any dependents. What is Jillian’s filing status for 2024?
 A. Married filing separately.
 B. Single.correct
 C. Married filing jointly.
 D. Head of household.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

Jillian must file as single. Unlike a divorce, an annulment is retroactive. A court decree
of annulment holds that no valid marriage ever existed. Therefore, the taxpayer is
considered unmarried even if she filed joint returns for earlier years. The taxpayer must
file amended tax returns claiming single or HOH status (if applicable) for each tax year
affected by the annulment that is not closed by the statute of limitations for filing a tax
return. The statute of limitations generally does not end until three years after the
original return was filed.

19. Question ID: 94816034 (Topic: Taxpayer Filing Status)

Anthony is 62. His wife, Marie, died on January 3. Anthony meets someone new and
remarries on December 31, to Donatella, age 61. Anthony plans to file a joint return with
his new wife, Donatella. What is the filing status for Marie (the deceased spouse)?

 A. Single
 B. Married filing jointly
 C. Married filing separatelycorrect
 D. Qualifying Surviving Spouse (QSS)
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for C:

Marie's filing status is married filing separately. If your spouse died during the year, you
are considered married for the whole year for filing status purposes. If you didn’t
remarry before the end of the year, you can file a joint return for yourself and your
deceased spouse. If you remarried before the end of the tax year, you can file a joint
return with your new spouse. In that case, your deceased spouse’s filing status is
married filing separately for that year.

21. Question ID: 94815819 (Topic: Taxpayer Filing Status)

 Which of the following is not a valid expense used to calculate whether a taxpayer is
paying more than half the cost of maintaining a home to qualify for the Head of
Household filing status?

 A. Property taxes.
 B. Food eaten in the home.
 C. Medical treatments paid for a dependent.correct
 D. Home mortgage payment.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for C:

To qualify for head of household filing status, a taxpayer must have paid more than half
the cost of maintaining a home. In making the calculation, valid expenses include rent,
mortgage payments, property taxes, utilities, home insurance, home repairs, and food
eaten in the home. Valid expenses do not include clothing, education, medical
treatment, vacations, life insurance, or transportation.

22. Question ID: 94815958 (Topic: Taxpayer Filing Status)

Clement's wife died on May 1, 2022. He has a dependent child who is 16 years old. As
of 2024, Clement has not remarried. What is the best filing status for him for 2024?

 A. Head of household.
 B. Single.
 C. Qualifying Surviving Spousecorrect
 D. Married filing jointly.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

Clement can file a joint return in the year of his wife’s death. In the two years following
his wife's death, he can file as a Qualifying Surviving Spouse (QSS). After 2024, he can
file as head of household, assuming he meets the requisite tests and still has a
qualifying child.

24. Question ID: 95405078 (Topic: Taxpayer Filing Status)

Jennie's husband, Odin, died on January 30, 2023 (last year). Jennie filed jointly with
her deceased husband in 2023, the year of his death. Jennie has one dependent son,
 age 15. Jennie did not remarry in 2024. What is her most beneficial filing status in
2024?

 A. Qualifying Surviving Spouse (QSS)correct

 B. Head of Household
 C. Single
 D. Married Filing Separate
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for A:

Jennie qualifies for the "Qualifying Surviving Spouse" filing status. A surviving spouse
may be eligible to use "Qualifying Surviving Spouse” with dependent child as their filing
status for two years following the year of death of their spouse.

Filing Status After Death of Spouse

Tax Year Filing Status

Year of death MFJ or MFS

First year after death QSS

Second year after death QSS

Third and subsequent years after death HOH or single

See the IRS tutorial page on filing status.

25. Question ID: 94816030 (Topic: Taxpayer Filing Status)

Dominique's divorce became final on November 7, 2024. She has sole custody of her
two children, who lived with her the entire year. The children are both under the age of
18. She provided more than half of the cost of keeping up the home. What is the best
filing status for her for tax year 2024?

 A. Single.
 B. Married filing jointly.
 C. Head of household.correct
 D. Married filing separately.
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for C:

The most advantageous filing status for Dominique is Head of Household. Because she
is legally divorced, she could file as Single. However, because she has children and
meets the requirements for Head of Household, she should use HOH as her filing status
because it will result in a lower tax.

27. Question ID: 94815911 (Topic: Taxpayer Filing Status)

Wyatt, age 32, is divorced and has no children. He lived with his girlfriend, Florinda, age
31, all year, and was the sole source of her support. Wyatt should file as:

 A. Married filing separately.

 B. Head of household.
 C. Single.correct
 D. Either single or head of household.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Even though Wyatt provided all of Florinda's financial support and she lived with him all
year, he does not qualify for head of household because Florinda is not a qualifying
person for purposes of the HOH status. For HOH filing status, the qualifying person
generally must be related to the taxpayer either by blood, adoption, or marriage (with an
exception for foster children legally placed in a home). Florinda is an unrelated person
(his girlfriend) so she is not a qualifying individual for Wyatt to file as head of household,
even if he provides all of her support.

29. Question ID: 94816023 (Topic: Taxpayer Filing Status)

Manny is recently divorced. He provided all the costs of keeping up his home for the
year. Manny's son, Franklin, lived with him the entire year. Franklin is 23 years old and
was not a full-time student during the tax year. Franklin earned $5,600 from a part-time
job during the year. Based on these facts, what is the BEST filing status for Manny?

 A. Head of Household.
 B. Married Filing Jointly.
 C. Single.correct
 D. Married Filing Separately.
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

Manny must file "Single". He cannot file as Head of Household and claim his son,
Franklin, as a dependent, because Franklin is 23 and was not a full-time student during
the tax year, so he cannot be Manny's qualifying child. Although Franklin only worked
part-time, he earned too much for his father to claim him as a "qualifying relative"
dependent. Therefore, Manny cannot file Head of Household because he does not have
a qualifying person. (Question modified from an example in Publication 4491).

34. Question ID: 94816039 (Topic: Taxpayer Filing Status)

Gilberto and Astrid are married and currently live together. They are experiencing
marital difficulties caused by Astrid's delinquent student loans and prior-year tax
liabilities. Gilberto wants to be responsible for his own taxes, but he doesn't want to
have anything to do with Astrid's tax troubles. They have one 9-month old son, named
Inigo. Which filing status should Gilberto and Astrid use?

 A. They should file Married filing jointly

 B. They can each file Married filing separatelycorrect
 C. Gilberto can use Head of Household and Astrid can use Single
 D. Both can file Single
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

A married taxpayer who does not want to be responsible for his or her spouse's tax
liability can use the married filing separately filing status.

37. Question ID: 94816005 (Topic: Taxpayer Filing Status)

Anabelle's husband moved out of their home on January 30, 2024 and has not returned
to the marital home. Anabelle provides all the cost of keeping up the home for herself
and her son, who is 11 years old and her dependent. Anabelle refuses to file a joint
return with her estranged husband. What filing status should she use?

 A. Single.
 B. Married filing separate.
 C. Head of household.correct
 D. Married filing jointly.
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

Anabelle has a qualifying dependent, and qualifies for Head of Household filing status.
Her husband moved out of the home in January, so she lived apart from her spouse for
at least the last six months of the year. For tax law purposes, she is "considered
unmarried". The HOH filing status applies to unmarried individuals (or married
individuals considered unmarried) who provide a home for a qualified dependent.

38. Question ID: 94850173 (Topic: Taxpayer Filing Status)

Patsy and Owen live in Texas, which is common-law state and a community property
state. The couple lives together, own a house together, and tell family and friends that
they are married. They have two children together. They do not have a formal marriage
license, however. What is their filing status?

 A. Since they do not have a formal marriage license, they are each considered "single"
for tax purposes.
 B. They are considered to be partners in a civil union.
 C. Since Texas is a common-law state, they are likely considered married under
state law, and must file either MFJ or MFS. correct
 D. They are considered unmarried, and each would be able to file as "head of
household" by claiming one of their children.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

Since Texas is a common-law state, they are likely considered married under state law,
and must file either MFJ or MFS. A common law marriage is a legally recognized
marriage between two people who have not purchased a marriage license, or had a
formal ceremony. Taxpayers who live together in a common-law state may have a
marriage recognized by the state, even without a formal license. Currently, the
common-law states are: Alabama, Colorado, District of Columbia, Iowa, Kansas,
Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Texas. See
the IRS tutorial page about married couples that live in common-law states.

44. Question ID: 94816017 (Topic: Taxpayer Filing Status)

Which of the following is not a requirement a taxpayer must meet in order to claim head
of household filing status?
 A. The taxpayer paid more than half of the cost of keeping up the home for the entire
year.
 B. The taxpayer is unmarried or considered unmarried on the last day of the year.
 C. The taxpayer's spouse did not live in the home during the last 6 months of the tax
year.
 D. The taxpayer's home was the main home of a foster child for more than half the
year.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for D:

In order to claim head of household, the taxpayer must have a qualifying dependent, but
it does not have to be a foster child. It can be a child, step-child, or other qualifying
dependent. All of the other choices are true.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94815944 (Topic: Residency Status and/or Citizenship)

Darren is a citizen of Canada who entered the U.S. on March 4, 2024 on a valid scholar
visa. He is doing research inside the U.S. for Yale University. He earns $59,000 in
wages from the university in 2024. How should this income be reported?

 A. It does not need to be reported in the U.S., instead, it should be reported on his
Canadian tax returns.
 B. On Form 1040-SRwrong
 C. On Form 1040
 D. On Form 1040-NRcorrect
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

Darren would report the income on Form 1040-NR. Nonresident alien students and/or
scholars are considered to be engaged in a U.S. "trade or business" if they are
studying, teaching, or doing research. Income from such activities is "effectively
connected" and must be reported on Form 1040-NR. This income is taxed at the same
rates applicable to U.S. citizens and resident aliens. To learn more about how to
determine U.S. residency for tax purposes, see the IRS page on Determining an
Individual’s Tax Residency Status.

2. Question ID: 94815929 (Topic: Residency Status and/or Citizenship)

Minjun is a citizen of China, working as foreign embassy employee in the U.S. He is
treated as a nonresident alien for tax purposes. Which of the following can he deduct
when he files his Form 1040NR?

 A. A $25,000 mortgage interest deduction on his residence in Washington.wrong

 B. Donations to a qualified charity in the United States.correct
 C. Donations to a charity in his home country of China.
 D. The standard deduction.

Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 42% of students.

Correct Answer Explanation for B:

 Specific limitations on deductions apply to nonresident aliens who are required to file
Form 1040NR. They cannot claim the standard deduction. Further, except for personal
exemptions and certain itemized deductions, they can claim deductions only to the
extent they are connected with income related to their U.S. trade or business. The
following itemized deductions are allowed:

 State and local income taxes.

 Qualifying charitable contributions to U.S. charities.
 Casualty and theft losses incurred in a federally declared disaster area.
 Miscellaneous itemized deductions (only the deductions that are still allowable
under the Tax Cuts and Jobs Act).
Itemized deductions related to mortgage interest are not allowed; nor are charitable
donations to a charity in a foreign country. To review more information on this topic, see
the IRS page on figuring taxes for nonresident aliens.

3. Question ID: 94815932 (Topic: Residency Status and/or Citizenship)

An individual is considered to be a "U.S. resident" for tax purposes if he or she meets
which of the following tests?

 A. Legal Visa Test.wrong

 B. Substantial Presence Test or Legal Residency Test.
 C. The Green Card Test or the Substantial Presence Test.correct
 D. The International Student Test or U.S. Resident Test.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

An individual is considered to be a U.S. resident for tax purposes if he or she meets the
Green Card Test or the Substantial Presence Test. To learn more about how to
determine U.S. residency for tax purposes, see the IRS page on Determining an
Individual’s Tax Residency Status.

4. Question ID: 94815933 (Topic: Residency Status and/or Citizenship)

A foreign student on a temporary student visa is exempt from the “substantial presence”
test for how many years?

 A. Two.
 B. One.wrong
 C. Ten.
 D. Five.correct
 Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

A student on a temporary visa who does not intend to reside in the United States is
exempt from the substantial presence requirements for five years. During that time, the
student would file Form 1040NR (not Form 1040) to report any U.S. income. To learn
more about how to determine U.S. residency for tax purposes, see the IRS page
on Determining an Individual’s Tax Residency Status.

5. Question ID: 94815969 (Topic: Residency Status and/or Citizenship)

Ramon is a Mexican citizen and the owner of an import-export trade business located in
Juarez, Mexico, near the Texas border. He frequently enters the United States on an E-
1 visa, but he does not live in the United States and never remains in Texas overnight.
He only comes into the U.S. for business. The days on which Ramon commutes for
work into the United States from his residence in Mexico is not counted in the
________________.

 A. Residency Test.wrong
 B. Substantial Presence Test.correct
 C. Green Card Test.
 D. Working Period.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

The days on which Ramon commutes to work in the United States from his residence in
Mexico are not counted in the substantial presence test. Ramon would be considered a
nonresident alien for U.S. tax purposes. If Ramon has U.S. source income, he would file
Form 1040-NR, not Form 1040.

Note: An E-1 visa allows foreign nationals to come to the U.S. and participate in
substantial trade that is principally between the U.S. and Mexico or Canada. To learn
more about this topic, see the dedicated IRS page about the Substantial Presence Test.

7. Question ID: 94815937 (Topic: Residency Status and/or Citizenship)

With regards to determining residency for tax purposes under the Substantial Presence
Test, which of the following days would be counted as an "official day" within the United
States?
 A. Any day that an individual is in transit between two places outside the United States,
such as waiting in an airport for a connecting flight.
 B. Any day that an individual regularly commutes from Canada or Mexico to work
in the United States from a residence in Canada or Mexico.wrong
 C. Any day that an individual is in the United States as an official crew member of a
foreign vessel.
 D. Presence in the territorial waters of the United States.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for D:

Presence in the territorial waters of the United States would count as “physical
presence” in the U.S. for the purposes of determining tax residency. A taxpayer is
treated as “physically present” in the U.S. on any day you are physically present in the
country, at any time during the day. This includes the following:

 Days present in all 50 states and the District of Columbia (Washington, DC).
 Presence in the territorial waters of the United States.
 The seabed and subsoil of those submarine areas that are adjacent to U.S.
territorial waters and over which the United States has exclusive rights under
international law to explore and exploit natural resources.
However, there are exceptions to this rule. Do not count the following as days of
presence in the U.S. for the substantial presence test.

 Days you commute to work in the U.S. from a residence in Canada or Mexico, if
you regularly commute from Canada or Mexico.
 Days you are in the U.S. for less than 24 hours, when you are in transit between
two places outside the United States.
 Days you are in the U.S. as a crew member of a foreign vessel.
 Days you are unable to leave the U.S. because of a medical condition that
develops while you are in the United States.
For details on days excluded from the substantial presence test, see the dedicated IRS
page about the Substantial Presence Test.

8. Question ID: 94815975 (Topic: Residency Status and/or Citizenship)

Lorenzo is an international student and a junior at San Diego State University. He is a
citizen of Spain lawfully present in the U.S. in F-1 immigration status. When he came to
the U.S. to study three years ago, his parents gave him $20,000 in cash for his living
expenses. Lorenzo applied for a scholarship while he was attending the university, and
 received $4,000 in scholarship funds, which he used to help pay his tuition. Is this
taxable income to Lorenzo, who is classified as a nonresident alien for tax purposes?

 A. The scholarship is taxable and must be reported on Form 1040, not form 1040-
NR. wrong
 B. The scholarship is not taxable and does not have to be reported on Form 1040-
NR. correct
 C. Yes, the scholarship is taxable and must be reported on Form 1040-NR.
 D. The scholarship is taxable and has to be reported on Form 1040-NR. He may offset
any income tax by claiming the American Opportunity Tax Credit.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

The scholarship is not taxable and does not have to be reported on Form 1040-NR. A
foreign student who is a candidate for a degree may be able to exclude some or all
income received under a "qualified" scholarship, if the amounts are used for tuition,
fees, books, supplies, and required equipment. Amounts used for other purposes, such
as room and board or travel, are not excludable. He would not be eligible for education
credits.

To prevent withholding, the international student must file Form W-8BEN, Certificate of
Foreign Status of Beneficial Owner for United States Tax Withholding; with the
educational institution or other provider of the scholarship (this question is based on
a VITA sample question).

9. Question ID: 94816013 (Topic: Residency Status and/or Citizenship)

Which of the following is an "exempt individual" for purposes of the substantial presence
test?

 A. A green card holder that has lived continuously overseas for over one year.
 B. A dual-status alien that arrived in the United States for the first time in the current
year.
 C. A U.S. citizen that was born overseas and lives primarily in a foreign
country.wrong
 D. An individual present in the U.S. as a foreign government-related individual under an
“A” or “G” visa.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

 Correct Answer Explanation for D:

An individual temporarily present in the U.S. as a foreign government-related individual

under an “A” or “G” visa would be exempt from the physical presence test. An example
of this would be a foreign ambassador or foreign diplomat. A foreign government-related
individual is considered temporarily present in the United States regardless of the actual
amount of time present in the United States. The term "exempt individual" does not refer
to someone exempt from U.S. tax, but to people in the following categories:

 An individual temporarily present in the U.S. as a foreign government-related

individual under an “A” or “G” visa
 A foreign teacher or trainee temporarily present in the U.S. under a "J" or "Q"
visa
 A foreign student temporarily present in the U.S. under an "F," "J," "M," or "Q"
visa
 A foreign professional athlete temporarily in the U.S. to compete in a charitable
sports event.
10. Question ID: 94815936 (Topic: Residency Status and/or Citizenship)
If a taxpayer is not a U.S. citizen or a legal resident alien (i.e. a green card holder), a tax
preparer must determine how the taxpayer should be treated for tax purposes. In order
to meet the "substantial presence” test, the taxpayer must be physically present in the
United States for at least ______ days over a three-year period, assuming that the days
are counted according to the requirements of the test.

 A. 180
 B. 183correct
 C. 365wrong
 D. 60
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

Individuals who have been physically present in the U.S. for at least 31 days in the
current year and for at least 183 days over a three-year period, including the current
year, meet the requirements of the substantial presence test. The 183 days over a
three-year period are counted as follows: all days present in the current year; 1/3 of the
days present in the first year before the current year; and 1/6 of the days present in the
second year before the current year. An individual who meets the requirements of the
substantial presence test is, for tax purposes, a resident alien of the United States. This
status applies even though the person may be an undocumented alien. To learn more
about this topic, see the dedicated IRS page about the Substantial Presence Test.
 11. Question ID: 94815976 (Topic: Residency Status and/or Citizenship)
Each of the following individuals are automatically taxed as residents of the United
States EXCEPT:

 A. A nonresident alien that marries a U.S. citizen during the year.correct

 B. A green card holder who returns to his home country before the end of the tax year.
 C. A person with a U.S. green card that lives outside the U.S.wrong
 D. An individual physically present in the United States for 365 days, but does not have
a valid visa.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for A:

A nonresident alien who is married to a U.S. citizen does not automatically get treated
as a resident for tax purposes. An election can be made by both spouses to treat a
nonresident spouse as a U.S. resident for tax purposes. Both spouses must agree to
the election. Green card holders are always treated as residents of the United States for
tax purposes, no matter where they reside. To learn more about how to determine U.S.
residency for tax purposes, see the IRS page on Determining an Individual’s Tax
Residency Status.

12. Question ID: 94816012 (Topic: Residency Status and/or Citizenship)

A taxpayer is considered a "resident", for U.S. federal tax purposes, if the taxpayer is a
Lawful Permanent Resident of the United States at any time during the calendar year.
This is known as the ____________ test.

 A. The "substantial presence" test.wrong

 B. The "bona-fide resident" test.
 C. The "U.S. residency" test.
 D. The "green card" test.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for D:

A taxpayer is considered a "resident", for U.S. federal tax purposes, if the taxpayer is a
Lawful Permanent Resident of the United States at any time during the calendar year.
This is known as the "green card" test. To learn more about this topic, see the dedicated
IRS page about the Green Card Test.
 13. Question ID: 94815959 (Topic: Residency Status and/or Citizenship)
Taxpayers who are not eligible for an SSN must apply for an ITIN if they file a U.S. tax
return or are listed on a tax return as a spouse or dependent. What form must a
taxpayer use to request an ITIN?

 A. Form W-9.wrong
 B. Form W-7.correct
 C. Form W-8.
 D. Form W-8BEN.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

Taxpayers who cannot obtain an SSN must apply for an ITIN. These taxpayers must file
Form W-7, Application for Individual Taxpayer Identification Number, and supply
documentation that will establish their true identity. To learn more about ITINs, see the
dedicated IRS page about Individual Taxpayer Identification Numbers.

14. Question ID: 94816014 (Topic: Residency Status and/or Citizenship)

What is a "dual status" alien?

 A. A dual-status alien is an individual who is married to a U.S. Citizen.

 B. There is no such thing as a "dual-status" alien.wrong
 C. A dual-status alien is an individual who is considered to have been both a resident
and a nonresident in the same tax year.correct
 D. A dual-status alien is an individual who is lawfully present in the United States for at
least 5 years.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for C:

It is possible to be a U.S. resident alien and a nonresident alien in the same tax year.
This usually occurs in the year the taxpayer arrives or departs from the United States. If
so, the taxpayer may elect to be treated as a Dual Status Alien for this taxable year and
a Resident Alien for the next taxable year if they meet certain tests. Dual status aliens
determine their residency status under both the Internal Revenue Code and
international tax treaties. A taxpayer cannot file a "dual-status" return on either a Form
1040NR if the taxpayer is a resident alien at the end of the year. The taxpayer would
 need to file on Form 1040, and attach 1040NR as a statement to the back of the Form
1040. See IRS Publication 519, US Tax Guide for Aliens for more information.

15. Question ID: 94815997 (Topic: Residency Status and/or Citizenship)

The Substantial Presence Test is a test based on counting a nonimmigrant alien’s days
of physical presence in the United States using a lookback period. How many years is
this lookback period?

 A. Two years.
 B. Six years. wrong
 C. Three years.correct
 D. Five years.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

The Substantial Presence Test is a test based on counting a nonimmigrant alien’s days
of physical presence in the United States under a 3-year “look-back” formula. For
purposes of this 183-day test, any part of a day that a nonimmigrant alien is physically
present in the United States is counted as a day of presence. There are exceptions to
this rule where certain days of physical presence in the United States do not count,
including days a nonimmigrant is an “exempt individual.”

To learn more about this topic, see the dedicated IRS page about the Substantial
Presence Test.

16. Question ID: 94816033 (Topic: Residency Status and/or Citizenship)

Rodolfo is 55 years old and a nonresident alien and a citizen of Brazil. He is Single with
no dependents. Rodolfo owns U.S. investments, including stock in multiple Fortune 500
companies, as well as a rental property in Hawaii. Rodolfo needs to request an ITIN so
he can file a U.S. nonresident tax return (Form 1040-NR). What documents are
acceptable as proof of identity and foreign status on the Form W-7, Application for IRS
Individual Taxpayer Identification Number?

 A. Notarized bank statement

 B. Cellphone billwrong
 C. Passportcorrect
 D. School records
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 96% of students.

 Correct Answer Explanation for C:

The IRS streamlined the number of documents the agency accepts as proof of identity
and foreign status to obtain an ITIN (using Form W-7). Below is the list of the only
acceptable documents:

 Passport (stand-alone document)

 National identification card (must show photo, name, current address, date of
birth, and expiration date)
 U.S. driver's license Civil birth certificate (required for dependents under 18 years
of age)
 Foreign driver's license U.S. state identification card
 Foreign voter's registration card U.S. military identification card
 Foreign military identification card
 Visa U.S. Citizenship and Immigration Services (USCIS) photo identification
 Medical records (valid for dependents only - under 6)
 School records (valid for dependents only - under 14, under 18 if a student)
17. Question ID: 94816016 (Topic: Residency Status and/or Citizenship)
Nian Zhen is a citizen of China and a nonresident alien. Nian Zhen owns a commercial
rental property in the U.S., as well as several U.S. investments. He is therefore required
to file a Form 1040NR. Which of the following types of income would not be includible
on Nian Zhen's Form 1040NR?

 A. Foreign source income that was earned in China.correct

 B. Rental income earned on the U.S. commercial property.
 C. Interest income earned on U.S. investments.wrong
 D. Dividend income earned on U.S. stock.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for A:

Generally foreign-source income received by a nonresident alien is not subject to U.S.

taxation. Furthermore, income of any kind that is exempt from U.S. tax under an
international tax treaty to which the United States may also be excluded from gross
income of a nonresident.

19. Question ID: 94815941 (Topic: Residency Status and/or Citizenship)

 Hwan is a full-time international student studying at a U.S. college. She is a citizen of
South Korea and she is legally present in the United States on an F-1 Visa (Academic
Student). Hwan is exempt from the “Substantial Presence Test” for how many years?

 A. One year.
 B. International students are not exempt from the Substantial Presence
Test.wrong
 C. Five years.correct
 D. Two years.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Students on an F-1 visa are exempt from the Substantial Presence Test for 5 calendar
years. An “international student” is classified as anyone who is temporarily in the U.S.
on an F, J, M, or Q visa. To learn more about individuals who are exempt from the
substantial presence test, see the dedicated IRS page about the Substantial Presence
Test.

20. Question ID: EA1 0623 01 (Topic: Residency Status and/or Citizenship)
U.S. citizens and resident aliens must report and pay applicable U.S. taxes on:

 A. All of their income (both U.S. and foreign source) regardless of where they livecorrect
 B. Only their U.S. source incomewrong
 C. Only their foreign source income
 D. All of their income (both U.S. and foreign source) if living in the U.S.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Incorrect Answer Explanation for B:

U.S. citizens and resident aliens must report and pay applicable U.S. taxes on all of
their income (both U.S. and foreign source) regardless of where they live.

Correct Answer Explanation for A:

U.S. citizens and resident aliens must report and pay applicable U.S. taxes on all of
their income (both U.S. and foreign source) regardless of where they live.

Show Other Explanations

 21. Question ID: 94816015 (Topic: Residency Status and/or Citizenship)
Patricia is a U.S. citizen who works overseas in South Korea. During the tax year, she
marries Jeong, a citizen of South Korea. Jeong is a nonresident and does not have a
Social Security number. Patricia and Jeong choose to file jointly and treat Jeong as a
U.S. resident alien for the year. Currently, both of them live and work in South Korea.
How is this election made?

 A. They can elect to treat Jeong as a U.S. resident by going to a U.S. embassy and
requesting it.
 B. They cannot elect to treat Jeong as a U.S. resident because he does not have a
Social Security number.wrong
 C. They cannot elect to treat Jeong as a U.S. resident unless he applies for a green
card.
 D. They can make the choice to treat Jeong as a U.S. resident alien by attaching a
statement to their joint return.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for D:

They can make the choice to treat Jeong as a U.S. resident alien by attaching a
statement to their joint return. Both spouses must report their worldwide income for the
year they make the choice and for all later years unless, the choice is ended or
suspended. Although they must file a joint return for the year they make the choice, so
long as one spouse is a U.S. citizen or resident, they can file either joint or separate
returns for later years. Jeong must request an ITIN.

22. Question ID: 94815981 (Topic: Residency Status and/or Citizenship)

Jacob is a U.S. citizen and his wife Malia is a nonresident alien and a citizen of France.
They lived together all year in France. They do not have any dependents. Malia has an
ITIN, but she does not want to file jointly with Jacob. She does not have any U.S.-
source income, and she does not want to be taxed on the income she earns in France.
Based on this information, which of the following statements is correct?

 A. Jacob can file as head of household using his wife, Malia as his qualifying person for
HOH.
 B. Jacob is required to file jointly with his wife because she is automatically
treated as a resident for tax purposes.wrong
 C. Jacob can use the married filing separately filing status.correct
 D. Jacob must file jointly with his wife because she is a nonresident alien.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.
 This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for C:

Jacob can use the married filing separately filing status. If they file jointly, they will both
have to report all their worldwide income and pay tax on it, regardless of where the
income was earned.

23. Question ID: 94850334 (Topic: Residency Status and/or Citizenship)

Which of the following individuals would NOT be subject to self-employment tax?

 A. A statutory nonemployee.
 B. A nonresident alien with U.S.-source income.correct
 C. A sole proprietor.wrong
 D. A general partner in a partnership.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for B:

Nonresident aliens are not subject to SE tax. A partner in a partnership and a sole
proprietor are considered self-employed individuals and subject to SE tax. Statutory
nonemployees include real estate agents and direct sellers. Generally, they are treated
as self-employed for tax purposes.

To learn more about who is subject to the Self-Employment Tax, see the detail page
about Self Employment taxes on the IRS website.

24. Question ID: 94815886 (Topic: Residency Status and/or Citizenship)

Anna, a citizen of Greece, is temporarily in the U.S. as a graduate student in F-1
immigration status. She is unmarried and has resided continuously in the U.S. since
arriving on August 15, 2019. Her immigration status has not changed, and she is still a
foreign student. When did she become a resident alien for federal income tax
purposes?

 A. 2022
 B. 2023wrong
 C. 2024correct
 D. 2019
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 65% of students.

 Correct Answer Explanation for C:

Anna became a resident alien for federal income tax purposes in 2024. F and J visa
student visa holders are considered resident aliens after five calendar years in the U.S.
J visa researchers and professors are considered U.S. resident aliens after two
calendar years in the U.S.

25. Question ID: 94815980 (Topic: Residency Status and/or Citizenship)

What filing statuses are available to U.S. green card holders?

 A. Green Card holders can only choose between “Married Filing Separately” or “Single”.
 B. Green Card holders can opt to be treated as unmarried nonresidents if they choose.
 C. Green Card holders are U.S. residents by default, and can use all the same filing
statuses available to U.S. citizens.correct
 D. Green Card holders use the same filing statuses as U.S. citizens, unless they
live outside the United States for more than one year. wrong
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

Green card holders are automatically treated as U.S. resident aliens, regardless of
where they actually live, and they use all the same filing statuses available to U.S.
citizens. Only NONRESIDENT aliens have restrictions on filing status. To learn more
about this topic, see the dedicated IRS page about the Green Card Test.

26. Question ID: 94815926 (Topic: Residency Status and/or Citizenship)

Mai-Lin is a citizen of China and classifies as a nonresident alien for U.S. tax purposes.
Which of the following income would not have to be reported on Mai-Lin's Form 1040-
NR?

 A. Passive income from a U.S. partnership interest.wrong

 B. Prize winnings from a U.S. lottery ticket.
 C. Income from foreign sourcescorrect
 D. Rental income earned from U.S. rental properties.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for C:

 Mai-Lin does not have to report income from foreign sources on her Form 1040-NR.
Nonresident Aliens use Form 1040NR to report only income that is sourced in the
United States, or that is effectively connected with a United States activity or business.
However, income that is not taxable because of an income tax treaty must be reported
on a U.S. income tax return, even if no tax is due.

27. Question ID: 94849760 (Topic: Residency Status and/or Citizenship)

Nonresident aliens not effectively engaged in a U.S. trade or business are taxed on
what type of income?

 A. U.S.-source gross income only.correct

 B. Worldwide income.wrong
 C. Foreign-source income only.
 D. Investment income only.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

Nonresident aliens not effectively engaged in a U.S. trade or business are taxed on U.S.
source gross income only. Generally, when a foreign person (nonresident alien)
engages in a trade or business in the United States, all income from sources WITHIN
the United States is considered to be Effectively Connected Income (ECI) and is taxable
on Form 1040-NR.

30. Question ID: 94815912 (Topic: Qualifications for Dependency)

Which of the following would not meet the "relationship test” to be considered a
dependent?

 A. Father-in-law.wrong
 B. Foster child.
 C. Step-daughter.
 D. Cousin.correct
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

For the relationship test, “family members” do not include cousins, who are treated as
unrelated persons. A cousin must live with the taxpayer for the entire year and also
meet the gross income test in order to qualify as a dependent. A family member who is
 related to the taxpayer in any of the following ways does not have to live with the
taxpayer to meet the relationship test to be a qualifying relative:

 A child, stepchild, foster child, or descendant of any of them (for example, a

grandchild).
 A sibling, stepsibling, or half-sibling.
 A parent, grandparent, stepparent, or other direct ancestor (but not a foster
parent).
 A niece or nephew, son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or sister-in-law.
Any relationship that was established by marriage is not ended by death or divorce. An
adopted child is treated the same as a natural child for the purposes of the relationships
described above. For example, an adopted brother or sister is a brother or sister of the
taxpayer. An adopted child includes a child who was lawfully placed with a person for
legal adoption. See more information about Dependency Relationships.

31. Question ID: 94815973 (Topic: Qualifications for Dependency)

Teddy is 19 years old and a full-time college student. He works part time during school
and full time during the summer. His wages from work for the year are $5,150 and his
savings account earned $175 interest income. Teddy is claimed as a dependent on his
parents’ return because they provide more than half of his support. Based on this
information, which of the following statements is true?

 A. Teddy does must file a tax return, because his gross income is more than the
gross income limit for dependents. wrong
 B. Teddy has to file a tax return to report his wages and investment income. His parents
can still claim him as a dependent.
 C. Teddy does not have to file a tax return, because his gross income is not more than
his standard deduction. He is not subject to the kiddie tax. correct
 D. Teddy does not have to file a tax return, as long as his parents can claim his wages
and investment income on their tax return.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 38% of students.

Correct Answer Explanation for C:

Teddy does not have to file a tax return, because his gross income is not more than his
standard deduction, and he is not subject to the kiddie tax. He is a full-time student
under the age of 24, so he is considered a qualifying child (not a qualifying
relative). Almost all his income is from wages, which are earned income, and are
therefore exempt from the kiddie tax rules. The kiddie tax only applies to unearned
income. Only unearned income above $2,600 in 2024 is subject to the kiddie tax and
taxed at the parent's marginal income tax rate.
 32. Question ID: 94816031 (Topic: Qualifications for Dependency)
With regard to children of divorced taxpayers, what is the most important factor for the
determination of which parent can claim a dependent?

 A. Federal tax law is what determines who may claim a child as a dependent.correct
 B. Official IRS publications determine who may claim a child as a dependent.
 C. State tax law is what determines who may claim a child as a dependent.wrong
 D. The divorce decree is what determines who may claim a child as a dependent.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 31% of students.

Correct Answer Explanation for A:

Federal tax law is what determines who may claim a child as a dependent. Even if a
state court order or a divorce decree allocates the ability to claim the child to a
noncustodial parent, the noncustodial parent must comply with the federal tax law to
claim the dependent. The noncustodial parent must attach to his or her return a copy of
the release of claim to exemption by the custodial parent (Form
8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial
Parent).

33. Question ID: 94815910 (Topic: Qualifications for Dependency)

Francine is divorced and lived with her 21-year-old unmarried son, Barron, all year.
Francine paid for all their housing costs and food. Francine provided more than half of
her son's total support. Barron earned $5,300 in wages and is not a student. What filing
status can Francine use?

 A. Head of Household
 B. Married Filing Separately
 C. Married Filing Jointlywrong
 D. Singlecorrect
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

Francine is not married, and she cannot claim her son as a dependent or use him as
her qualifying child for Head of Household. Barron does not meet the "age" test for a
qualifying child, because he is not a full-time student. And he does not meet the gross
income test for a qualifying relative, because he made more than the deemed
exemption amount of $5,050 in 2024. Therefore, she must file her return using the
"single" filing status.
 34. Question ID: 94816024 (Topic: Qualifications for Dependency)
Melanie is 65 and unmarried. Melanie works full time and earned $56,000 in wages
during the year. Melanie lives with her cousin, Anna, who is 45 and a widow. Anna is
unemployed and lived with Melanie all year. Anna received all of her support from
Melanie. Based on these facts, which of the answers below best describes Melanie's
filing status and tax filing obligations?

 A. Melanie must file "Single". She can claim Anna as her qualifying child.wrong
 B. Melanie must file "Single". She can claim Anna as her qualifying relative.correct
 C. Melanie can file "Head of Household". She can claim Anna as her qualifying relative
and claim EITC.
 D. Melanie can file "Head of Household". She can claim Anna as her qualifying child.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for B:

Melanie must file Single. She can claim Anna as her qualifying relative. Anna is not a
qualifying person for Head of Household filing status because she is not related to
Melanie in one of the ways listed on the chart in Publication 17 (i.e. "cousins" are not
considered related persons for tax purposes). Therefore, Anna is Melanie's "qualifying
relative" dependent only because she lived with Melanie all year as a member of her
household. (Question modified from an example in Publication 4491). See the IRS
chart: Who Is a Qualifying Person Qualifying You To File as Head of Household?

35. Question ID: 94815833 (Topic: Qualifications for Dependency)

Gwendolyn is a 21-year-old college student who is supported completely by her mother,
Rhiannon. Gwendolyn attends college full-time. During the summer, Gwendolyn stays in
an apartment near her college to work on campus. Gwendolyn only goes home to visit
her mother during Christmas. Does Gwendolyn still pass the residency test, and can her
mother Rhiannon still claim Gwendolyn as a qualifying child on her tax return?

 A. Gwendolyn passes the residency test, but her mother cannot claim her as a
qualifying child because Gwendolyn is more than 19 years old.
 B. No, Gwendolyn does not pass the residency test for a qualifying child;
however, her mother can claim her as a qualifying relative.wrong
 C. Yes, Gwendolyn passes the residency test. Her mother can claim Gwendolyn as a
qualifying child on her tax return because college attendance is considered a temporary
absence.correct
 D. No, Gwendolyn does not pass the residency test for a qualifying child because she
did not live with her mother for at least six months of the year.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

 Correct Answer Explanation for C:

Gwendolyn passes the residency test. Her mother can claim Gwendolyn as a qualifying
child on her tax return even though she was not living with her mother for more than six
months because college attendance is considered a temporary absence.

36. Question ID: 94816002 (Topic: Qualifications for Dependency)

Vanessa is 18 years old and a full-time student. She had zero income for the year.
Vanessa was married on December 20, 2024. Vanessa's new husband, Tommy, is 26
and earned $29,000 on wages for the year. Vanessa's father, Robert, earned $90,000 in
wages and supported Vanessa the whole year in his home, and even paid for the
wedding. Vanessa wants to file jointly with her new husband. Who can claim Vanessa
as a dependent?

 A. Vanessa will not be claimed as a dependent. She would file jointly with her new
spouse.correct
 B. Vanessa's new husband should claim her as a dependent.wrong
 C. Vanessa should file her own return and claim single, since she was unmarried for the
majority of the year.
 D. Robert should claim Vanessa as a dependent because she is only 18 and is still a
qualifying child.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

Vanessa will not be claimed as a dependent. She would file jointly with her new spouse.
Her father cannot claim her as a dependent, because she is filing a joint return with her
husband.

38. Question ID: 94849883 (Topic: Qualifications for Dependency)

In most cases, a child of divorced or separated parents is the qualifying child of the
custodial parent. However, the child may be treated as the qualifying child of the
noncustodial parent if:

 A. The custodial parent provides the noncustodial parent with Form 8332 to release the
exemption for the child.correct
 B. If the noncustodial parent has a court order allowing him or her to claim the
child.wrong
 C. If the custodial parent gives verbal consent to the noncustodial parent to claim the
child.
 D. None of the answers is correct.
Study Unit 3: Dependency Relationships covers the information for this question.
 This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for A:

In most cases, a child of divorced or separated parents is the qualifying child of the
custodial parent. However, the child may be treated as the qualifying child of the
noncustodial parent if the custodial parent provides the noncustodial parent with Form
8332 to release the exemption for the child. See Publication 1819 for information about
how a custodial parent can release an exemption to a noncustodial parent.

40. Question ID: 94816025 (Topic: Qualifications for Dependency)

Angelo is the sole support of his mother, Rosalie. To claim her as a dependent on his
Form 1040, Rosalie must be a citizen or resident of which of the following countries?

 A. United States, Mexico, or India

 B. United States
 C. United States or Canadawrong
 D. United States, Mexico, or Canadacorrect
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for D:

An individual claimed as a dependent must be a citizen, national, or resident of the

United States, or a resident of Canada or Mexico.

41. Question ID: 94815878 (Topic: Qualifications for Dependency)

With respect to the determination of the “residency test” for dependent children, which
of the following does not qualify as a “temporary absence”?

 A. A dependent child who is away at college all year.

 B. A year-long sabbatical outside the country.correct
 C. Military service.wrong
 D. A long illness that results in long-term hospitalization.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for B:

All of the above are qualified as temporary absences except for the sabbatical. A
dependent is considered to have lived with the taxpayer during periods of time when
temporarily absent due to special circumstances such as:
  Illness
 Incarceration (in a juvenile facility)
 Education,
 Vacation, or
 Military service.
It must be reasonable to assume that the absent person will return to the home after the
temporary absence. This information is found in the Filing Status chapter of
IRS Publication 17, Your Federal Income Tax.

42. Question ID: 94815956 (Topic: Qualifications for Dependency)

Jeong and Rochelle had a child who was born on December 2, 2024. The child only
lived for a few hours and died before midnight. Which of the following statements is
correct?

 A. They cannot claim the child as a dependent on their tax return unless they obtain a
Social Security number for the child.
 B. They cannot claim the child as a dependent on their tax return, because the child did
not live with them for more than half the tax year.
 C. They cannot claim the child as a dependent on their tax return in the year of
birth, but they can do so for the following year, if the child is issued an SSN.wrong
 D. They can claim the child as a qualifying child on their tax return, even if they are
unable to obtain a Social Security number for the child.correct
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

They can claim the child as a qualifying child on their tax return, even if they are unable
to obtain a Social Security number for the child. If a child is born and dies in the same
tax year, a Social Security number is not required in order to claim the dependency
exemption in that tax year. The tax return must be filed on paper and the taxpayer must
enter the word “DIED” in the space normally reserved for the SSN. The rules regarding
how to claim an exemption for a deceased child are in Publication 17.

43. Question ID: 94815818 (Topic: Qualifications for Dependency)

Adelise is unmarried and files as head of household. She has four dependent children
who live with her, all of whom are under 17. Adelise's mother, Racine, also lives with
them. Racine has no income, and Adelise provides all of her mother’s financial support.
Based on this information, how many dependents can Adelise claim on her return?

 A. Two.wrong
 B. Three.
 C. Five.correct
 D. Six.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for C:

Adelise is entitled to claim five dependents. She can claim all of her children and also
Racine, her dependent parent.

44. Question ID: 94816028 (Topic: Qualifications for Dependency)

A taxpayer cannot claim a person as a dependent unless:

 A. That person must be related to the taxpayer by blood or marriage.wrong

 B. That person is under age 19, or under age 24 and a full-time student.
 C. That person is a qualifying child or qualifying relative.
correct
 D. That person lives with you all year long.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for C:

A taxpayer cannot claim a person as a dependent unless that person is a qualifying

child or qualifying relative. You can see the rules for claiming a dependent
here: Overview of the Rules for Claiming a Dependent

48. Question ID: 94815905 (Topic: Qualifications for Dependency)

Constance provided $4,000 toward her 18-year-old son's support for the year. Her son
is not a student, and has a full time job and provided $16,000 toward his own support.
Her son lived with her all year. Which of the following statements is correct?

 A. Constance can claim her son as a qualifying relative on her tax return.
 B. Constance cannot claim her son as a dependent on her tax return.correct
 C. Constance can claim her son as a qualifying child on her tax return.wrong
 D. Constance can claim her son as her business partner on her return.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for B:

 Constance’s son provided more than half of his own support for the year. Therefore, he
is not Constance’s qualifying child or her qualifying relative, and she cannot claim him
as a dependent on her tax return.

49. Question ID: 94816032 (Topic: Qualifications for Dependency)

Which of the following dependents does not have to live with the taxpayer, in order for
the taxpayer to claim head of household status?

 A. A stepchild
 B. A foster child
 C. A siblingwrong
 D. A dependent parentcorrect
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for D:

A dependent parent does not need to live with the taxpayer. If a taxpayer's qualifying
person is a dependent parent, the taxpayer can file as head of household, even if the
parent does not live with the taxpayer during the year.

50. Question ID: 94815924 (Topic: Qualifications for Dependency)

Which of the following is NOT one of the tests for a qualifying child?

 A. Residency test.
 B. Disability test.correct
 C. Relationship test.wrong
 D. Age test.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for B:

There is no disability test. The five tests for determining if somebody is a Qualifying
child are:

 Relationship test
 Age test
 Residency test
 Support test
 Tie-Breaker test
 To see more information about the rules for qualifying children, see Publication 501,
Dependents, Standard Deduction, and Filing Information.

52. Question ID: 94816000 (Topic: Qualifications for Dependency)

Which of the following can never be claimed as a dependent?

 A. A taxpayer's cousin.
 B. A taxpayer's spouse. correct
 C. A taxpayer's adult child. wrong
 D. A taxpayer's parent.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

A taxpayer’s spouse cannot be claimed as a dependent. Some examples of dependents

include a child, stepchild, brother, sister, or parent.

53. Question ID: 94816036 (Topic: Qualifications for Dependency)

Matthew is 32 years old and works full time. Matthew's 19-year old cousin, Bruno, lived
with him all year. Bruno did not work, and had no taxable income. Bruno's parents are
deceased, and no one else can claim him as a dependent. Matthew supported his
cousin completely. Would Bruno meet the tests to be Matthew's Qualifying Relative?

 A. No, because cousins are not considered "family members" for the purpose of this
rule.
 B. Bruno would meet the tests to be Matthew's Qualifying Relativecorrect
 C. Bruno must be a full-time student in order to be claimed as a dependentwrong
 D. Bruno cannot be claimed by anyone because he is a legal adult
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for B:

Bruno would meet the tests to be Matthew's Qualifying Relative. Although cousins are
not considered "family members" for the relationship test for qualifying relatives, the
question stated that Bruno lived with Matthew all year. This means that Bruno meets the
"Member of Household or Relationship Test" to be Matthew's Qualifying Relative.
Although Matthew can claim Bruno as a dependent, he cannot file as Head of
Household, because a cousin is not a qualifying relationship for HOH status.

See the IRS chart: Who Is a Qualifying Person Qualifying You To File as Head of
Household?
 55. Question ID: 94816018 (Topic: Qualifications for Dependency)
All the following qualify as a dependent except:

 A. Your 18 year old son who filed a joint return with his wife to receive a refund of all his
withholding. No tax liability would have been due even if they had filed separate returns.
All other exemption tests are met.
 B. Your deceased wife’s mother, who is 65 and lived with you for 11 months during the
tax year. She had no income and filed no tax return. You provided more than half of her
total support.
 C. Your 18 year-old niece who is a resident of Mexico but lived with you for 10
months. She earned $500 during the summer and you provided more than half of
her total support.wrong
 D. Your 23 year-old daughter who is not a student and earned $5,300. She lived with
you all year and you provided more than half of her total support.correct
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for D:

A 23 year-old daughter who is NOT a student and earned $5,300 cannot be a

dependent (unless she is disabled), because she does not meet the age test and she
earned more than the deemed exemption amount for qualifying relatives (if the
dependent is being claimed under the qualifying relative rules, the dependent's gross
income must be less than $5,050 for the year). (This question is based on a prior year
exam question)

56. Question ID: 94815965 (Topic: Qualifications for Dependency)

Yussef is 42 and single. He provided all the costs of keeping up his home for the year.
Yussef's 25-year-old son, Mohamed, lived with him the entire year. Mohamed worked
part-time and earned only $7,100 in wages. Yussef provided more than one-half of his
son's support. Can Yussef claim his son as a dependent?

 A. No, he cannot claim his son as a dependent. correct

 B. He can claim his son only if his son is a full-time student.
 C. He can claim his son as a qualifying relative, but he cannot claim head of
household. wrong
 D. Yes, he can claim his son as a dependent and also file as head of household.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for A:

 Yussef cannot claim his son as a dependent. Mohamed does not meet the "age test" to
be a qualifying child (he is 25). Furthermore, although Mohamed only worked part-time,
he earned too much for Yussef to claim him as a qualifying relative dependent. A
"qualifying relative" must satisfy the "gross income" test, which means that they cannot
earn more than $5,050 (the "deemed exemption" amount) in 2024. Therefore, Yussef
cannot claim his son as a dependent, and he also cannot file Head of Household
because he does not have a qualifying person.

57. Question ID: 94815827 (Topic: Qualifications for Dependency)

Calista is 16 years old and she has a reputation for being the best babysitter in town.
She earns $14,820 by babysitting for family and friends during the tax year, but none of
her clients file a 1099-NEC reporting her income. Her parents claim Calista as a
dependent and she does not provide more than one half of her own financial support.
What is true about Calista's tax situation?

 A. Calista is required to file a tax return to report her income and can deduct business
expenses relating to babysitting.correct
 B. Since Calista did not receive any 1099 forms, she is not required to file a tax return or
report her income.
 C. Calista is required to file a tax return to report her income, but she will be
exempt from self-employment tax.wrong
 D. Since Calista is under 18, she does not need to file a tax return or report her income.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for A:

Even though she is under 18, the amount of income Calista made exceeds the limit for
filing a return. She is required to file a Form 1040, even if she is claimed by her parents.
If Calista pursues this babysitting activity with a bona-fide "intent to make a profit", then
she is considered self-employed, and her business income would be reported on
Schedule C. Calista may also deduct any business expenses relating to her babysitting
business.

58. Question ID: 94816037 (Topic: Qualifications for Dependency)

A dependent is still considered to be living with the taxpayer during any period of time
when the child is temporarily absent. Which of the following is NOT an example of a
temporary absence?

 A. Staying in the hospital for a prolonged illness

 B. Permanent foster care placement in another home.correct
 C. Incarceration in a juvenile facilitywrong
 D. Living off campus, at a college in another state
Study Unit 3: Dependency Relationships covers the information for this question.
 This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

Examples of a temporary absence include: hospitalization, school attendance, vacation,

military service, kidnapping, and detention in a juvenile facility. Learn more about this
topic on the IRS tutorial page that covers Temporary Absences.

59. Question ID: 95414357 (Topic: Qualifications for Dependency)

Gerry is age 62 and unmarried. He has no children, but he has several relatives living
with him. All of the people listed below lived with Gerry all year long, and did not provide
more than one-half of their own financial support. Which of them can be claimed by
Gerry as a "qualifying relative" dependent on his tax return?

 A. Shawn, his cousin, who is 26 years old and earned $4,300 from a part-time job.
Shawn is not a student. correct
 B. Douglas, his 85-year-old father, who took a $3,900 distribution from his 401(k),
and also had $3,100 in capital gains. wrong
 C. Alex, his nephew, who is age 20 and not a student. Alex did not work, but won
$5,250 on a slot machine at a local casino.
 D. Karina, his 83-year-old mother, who took a $16,900 distribution from her traditional
IRA.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for A:

Only Shawn, his cousin, could be claimed as a qualifying relative. This is because all of
the other people listed have income over the "deemed exemption" amount. Shawn
earned $4,300 from a part-time job, which is under the gross income limit for qualifying
relatives. A qualifying relative dependent must have made less than $5,050 in gross
income during 2024.

Note: Alex, his nephew, does not qualify to be claimed as a "qualifying child" because
he does not meet the age test. To meet the qualifying child test, a child must be
younger than 19 years old or be a "student" younger than 24 years old as of the end of
the calendar year. Since Alex is 20 and not a student, then he can only be claimed as a
qualifying relative dependent. And since he made more than the deemed exemption
amount, he cannot be claimed at all. Learn more about the rules for dependency
in Publication 929, Tax Rules for Children and Dependents.

61. Question ID: 94815831 (Topic: Qualifications for Dependency)

Mandy and Kenneth are divorced. They share custody of two minor children. Mandy is
the custodial parent and the children live with her most of the year. Mandy will allow
Kenneth to claim both children this year, as part of their divorce agreement. If Mandy
 allows Kenneth to claim the dependency exemption, what form needs to be completed
by Mandy?

 A. Form 8832 must be completed by Kenneth and attached to Mandy's return.

 B. Form 1098-T must be completed by Mandy and attached to Kenneth's return.
 C. Form 8863 must be completed by Mandy and attached to Kenneth's
return.wrong
 D. Form 8332 must be completed by Mandy and attached to Kenneth's return.correct
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for D:

Form 8332 must be completed by Mandy and attached to Kenneth's return, because
Kenneth is the non-custodial parent and Mandy is releasing the exemption to him. Form
8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial
Parent, must be filled out and attached to the return. Attaching the divorce decree is not
sufficient.

62. Question ID: 94816042 (Topic: Qualifications for Dependency)

With regards to a child of divorced or separated parents, how does the IRS define the
"custodial parent"?

 A. The custodial parent is the parent who supports the child financially.
 B. The custodial parent is the parent who has physical custody of the child for the
greater portion of the calendar year.correct
 C. The custodial parent is the parent who is listed on the court documents with
primary custody.wrong
 D. The custodial parent is the parent who pays for the majority of the household costs
for the home in which the dependent lives.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for B:

The IRS defines a "custodial parent" as the parent who has physical custody of the child
for the greater portion of the calendar year. However, the child will be treated as the
dependent of the noncustodial parent if the custodial parent releases a claim to
exemption for a child using Form 8332.

6. Question ID: 94815988 (Topic: Residency Status and/or Citizenship)

Which filing status is NOT available to nonresident aliens on Form 1040-NR in 2024?
 A. Qualifying surviving spouse (QSS)
 B. Married Filing Jointlycorrect
 C. Single
 D. Married filing separately (MFS)
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 20% of students.

Correct Answer Explanation for B:

The only filing statuses available to nonresident aliens on the Form 1040-NR are:
Single, Married Filing Separately, and Qualifying surviving spouse (QSS).

18. Question ID: 94815939 (Topic: Residency Status and/or Citizenship)

If a taxpayer receives their permanent resident card (green card) while they are living
abroad, then their official residency starting date for tax purposes is:

 A. The first day the taxpayer's lawful residency is approved.

 B. The day the taxpayer receives his green card.
 C. The taxpayer's first day of physical presence in the United States after
receiving their green card.correct
 D. None of the above.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for C:

If a taxpayer receives their permanent resident card (green card) while they are living
abroad, then their official residency starting date for tax purposes is the taxpayer's first
day of physical presence in the United States after receiving their green card. To learn
more about this topic, see the dedicated IRS page about the Green Card Test.

28. Question ID: 94815867 (Topic: Residency Status and/or Citizenship)

Mahmood enters the United States for the first time on January 5, 2024 on an F-1 Visa.
He is an international student and has a valid F-1 employment authorization so he can
work at his University part time. He earns $14,000 during the year working as his
Chemistry professor's lab assistant. What tax return should he file, if any?

 A. He must file Form 1040-NRcorrect

 B. He must file Form 1040
 C. He does not need to file a tax return.
 D. He must file Form 1040-PR
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for A:

He is considered a nonresident alien for tax purposes, and must file Form 1040-NR.
Generally, F-1 and J-1 students are considered nonresidents for tax purposes for 5
calendar years. Many F-1 students are employed on-campus through either a service-
based award, or other student position. An F-1 student can get an SSN as an
international student after they have applied for and received an authorization to work in
the United States, but that authorization to work under an F-1 visa does not change
their residency status.

29. Question ID: 94815986 (Topic: Residency Status and/or Citizenship)

Danika, an international student from Bolivia, received a $6,000 scholarship from
Sacramento State University. She is present in the U.S. on a student visa and classifies
as a nonresident alien for U.S. tax purposes. The university applied $4,700 of it for
tuition, fees, and books. The other $1,300 was used for living expenses at the on-
campus dorms. How much must Danika report on her Form 1040-NR as taxable
income?

 A. $0
 B. $1,300correct
 C. $4,700
 D. $6,000
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for B:

Different rules apply to nonresident aliens. The University will issue Form 1042-S to her
for $1,300; Danika must report $1,300 as a taxable scholarship on Form 1040-NR. A
foreign student who is a candidate for a degree may be able to exclude some or all
income received under a "qualified" scholarship, if the amounts are used for tuition,
fees, books, supplies, and required equipment. Amounts used for other purposes, such
as room and board or travel, are not excludable. She would not be eligible for any
education credits. To prevent withholding, the international student may file Form W-
8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding; with the educational institution or other provider of the scholarship (this
question is based on a VITA sample question).
 37. Question ID: 94815830 (Topic: Qualifications for Dependency)
One of the qualifications that has to be met in order to file as Head of Household (HOH)
is that the taxpayer must have paid more than _______ the cost of keeping up a home
that a qualifying person lived in for the year.

 A. 25%
 B. 50%correct
 C. 75%
 D. 30%
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for B:

To file as head of household, the taxpayer must have paid more than half the cost of
keeping up a home for the year where a qualifying person lived with the taxpayer (an
exception exists for dependent parents who do not live with the taxpayer). See this
useful sheet on Head of Household filing status.

39. Question ID: 94816041 (Topic: Qualifications for Dependency)

Larry has been divorced from his wife, Angela, for several years. Angela has primary
physical custody of their son, according to their final court decree. Angela did not
provide any support for their son, because Larry was providing alimony and child
support to Angela. The son lived with Angela all year long, but Angela released her right
to claim the child as a dependent to Larry. What is Larry's filling status in this scenario?

 A. Married filing jointly

 B. Head of Household
 C. Singlecorrect
 D. Married filing separate
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for C:

Using the Form 8332, Angela can release the dependency exemption to Larry. Then the
father could claim the child as the noncustodial parent. But he cannot file as head of
household, because the child did not live with him. So he would claim single and also
claim his son as a dependent.

Note: If a custodial parent releases a claim to exemption for a child, the noncustodial
parent may claim the child as a dependent and as a qualifying child for the child tax
 credit or credit for other dependents. However, the noncustodial parent may not claim
the child for the purpose of claiming head of household filing status, the earned income
credit, the credit for child and dependent care expenses. See IRS FAQ on this topic
here.

45. Question ID: 94815917 (Topic: Qualifications for Dependency)

Lola and Ramirus, a married couple, have financially supported Lola's elderly mother,
Viola, for many years. They claim Viola as their dependent parent on their jointly filed
return. On January 3, 2024, Lola dies (the wife) and Ramirus becomes a widower.
Ramirus remarries before the end of the tax year, but continues to financially support
his former mother-in-law, Viola, who does not live with him. Can Ramirus continue to
claim Viola as a dependent on his tax return when he files jointly with his new wife?

 A. Yes, he can claim Viola as his dependent on his joint return.correct

 B. No, he cannot claim Viola as his dependent unless they live in the same household.
 C. No, he cannot claim Viola as his dependent because they are no longer related by
marriage.
 D. None of the answers are correct.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

Since Ramirus has continued to support Viola, he can claim her as his dependent on
the joint return, even though he has remarried. Any dependency relationships
established by marriage do not end as a result of death or divorce (for tax purposes).
For example, if a taxpayer supports a mother-in-law, he can continue to claim her as a
dependent even if he and his ex-spouse are divorced or if he becomes widowed at a
later date.

Note: Treasury Regulations section 1.152-2(d) currently provides that "the relationship if
affinity once existing will not terminate by divorce or death of spouse." So the mother-in-
law would still be considered "related" to the taxpayer for IRS purposes.

46. Question ID: 94815825 (Topic: Qualifications for Dependency)

Corban is divorced from his former wife, Sabine. They have a 5-year-old daughter
together, named Lucie. Sabine is the custodial parent, but Corban provides more than
half of his daughter's support and also takes care of his daughter on weekends. Corban
wants to claim Lucie as a dependent on his tax return. Which of the following is true?

 A. Corban can claim Lucie as a dependent if he attaches a copy of his divorce decree to
his tax return.
 B. Corban can claim Lucie as a dependent if his former wife agrees and signs
Form 8332. correct
 C. Corban cannot claim Lucie as a dependent because he is the noncustodial parent.
 D. Corban can claim Lucie as a dependent if he files jointly with his ex-wife.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for B:

Corban can claim Lucie as a dependent if his former wife agrees and signs Form 8332.
Corban is the noncustodial parent, and Sabine is the custodial parent. The Form 8332
allows the custodial parent (Sabine) to sign away the right to claim dependent children
for the current year and future years, if they wish. For more information about the
special rules that apply to divorced and separated parents, see Publication 504,
Divorced or Separated Individuals.

47. Question ID: 94815903 (Topic: Qualifications for Dependency)

Benedict is unmarried and lives alone. His mother, Rosalie, only received $5,600 of
Supplemental Security Income (SSI) and $100 of taxable interest income during the
year. Rosalie paid $4,000 for her utilities and other living expenses and also paid $400
for recreation to attend painting classes. Rosalie also put $1,300 in a savings account.
Benedict spent $5,800 of his own money on his mother’s support, which paid her rent at
a small studio apartment for the entire year. Benedict and his mother did not live
together. Which of the following statements is correct?

 A. Benedict can claim his mother as a dependent, but he cannot file as head of
household.
 B. Benedict can claim his mother as a dependent and also file as head of
household.correct
 C. Benedict cannot claim his mother as a dependent, but he can file as head of
household.
 D. Benedict cannot claim his mother as a dependent, and he cannot file as head of
household.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

Benedict can claim his mother as a dependent, and he can also file as head of
household. Even though his mother received a total of $5,700 ($5,600 + $100), she
spent only $4,400 ($4,000 + $400) for her own support. The rules for the determination
of a qualifying relative includes an income test. In general, family members must have
gross income that is less than $5,050 in 2024. However, Supplemental Security Income
(SSI) is tax-exempt, so those amounts aren’t included in the family members’ gross
income. Since Benedict paid more than half her support and no other outside support
 was received, he has passed the support test to claim his mother. Also, Benedict paid
for all her rental expenses, so he paid more than half the cost of keeping up a home that
was the main home for the entire year for his parent. Therefore, Benedict is also eligible
to file as head of household.

51. Question ID: 94850111 (Topic: Qualifications for Dependency)

Cecily is in the process of adopting an infant boy. She qualifies to claim the child as a
dependent, but she cannot obtain a Social Security number for him yet. If you were
preparing Cecily’s income tax return, what would you advise her to do?

 A. Not claim the child until the adoption is final.

 B. Apply for an ATIN in order to claim the child.correct
 C. File a tax return on paper and write “adopted” in the line for the SSN.
 D. Wait until a valid Social Security number is issued in order to claim the child.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

Cecily can request an ATIN and claim the child. An ATIN is an adoption taxpayer
identification number, issued by the IRS as a temporary taxpayer identification number
for the child in a domestic adoption when a taxpayer is unable to obtain the child’s
Social Security number. An adopting taxpayer can use the ATIN on her tax return to
identify the child while final domestic adoption is pending.

54. Question ID: 94815906 (Topic: Qualifications for Dependency)

Karlita, Melissa, Gina, and Megan are sisters who support their elderly mother
financially. Their mother is in a long-term care facility and does not have any taxable
income or live with any of her children. The four sisters paid the following amounts
toward their mother's total support of $50,000:

 Karlita: $12,500
 Melissa: $12,500
 Gina: $20,000
 Megan: $5,000
Who among the four sisters could claim their mother as a dependent under a written
multiple support agreement?

 A. Either Gina, Karlita, or Melissacorrect

 B. Only Gina
 C. Any of the four sisters could potentially claim the dependency exemption, if they are
in agreement
 D. None of the sisters can claim their mother
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 39% of students.

Correct Answer Explanation for A:

The sisters provided the following percentages of their mother’s support:

 Karlita: 25%
 Melissa: 25%
 Gina: 40%
 Megan: 10%
Under a multiple support agreement, a taxpayer must provide more than 10% support in
order to claim a dependent, so Megan is not eligible to claim her mother as a
dependent. Only one taxpayer can claim the dependent each year, so Gina, Karlita, and
Melissa must agree which one will claim their mother. Note that the rules for multiple
support agreements apply to claiming an exemption for a qualifying relative and don't
apply to claiming an exemption for a qualifying child. Taxpayers use Form 2120,
Multiple Support Declaration, to report a multiple support agreement to the IRS.

60. Question ID: 94816003 (Topic: Qualifications for Dependency)

Ginny and Arnold are U.S. citizens who live in Texas. They are married and file a joint
return. They financially supported Ginny's parents, Frank and Millie, throughout the tax
year. Ginny's parents are green card holders, and do not live with them. Instead, Frank
and Millie live in Canada. Frank and Millie do not have any taxable income. Do Ginny's
parents meet the tests in order to be claimed as dependents by Ginny and Arnold?

 A. Her parents would only meet the tests if they lived in the same household.
 B. Yes, her parents meet the tests. They may be claimed as qualifying
relatives. correct
 C. Her parents do not meet the test because they live in Canada.
 D. No, her parents do not meet the tests.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

Ginny's parents meet the tests to be claimed as dependents. Parents can be claimed as
dependents, as long as the taxpayer satisfies all of the other dependency requirements
for parents, who would be considered “qualifying relatives.” A parent does not need to
live with the taxpayer in order to be claimed as a dependent, and since her parents are
green card holders, they are considered U.S. residents by default, and also have valid
Social Security Numbers.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94849550 (Topic: Receipt of Income)

Income is also not considered to have been “constructively received” in which of the
following scenarios?

 A. A landlord receives a rent payment in late December but doesn't deposit the
check until the following year.wrong
 B. Dividends earned that are automatically reinvested in additional shares in a mutual
fund.
 C. The taxpayer declines to accept an award.correct
 D. An employee receives a bonus in late December but chooses not to deposit it until
the following year.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

The doctrine of constructive receipt deems income will be taxable when a taxpayer is
able to control or access it, even if she or he doesn’t physically possess it. However,
income is not considered to have been “constructively received” if a taxpayer declines to
accept an item, such as a prize or an award, or if the prize is not received by the
taxpayer.

"Income is constructively received when an amount is credited to your account or made

available to you without restriction. You do not need to have possession of it. If you
authorize someone to be your agent and receive income for you, you are considered to
have received it when your agent receives it. Income is not constructively received if
your control of its receipt is subject to substantial restrictions or limitations." -Publication
538

3. Question ID: 95850121 (Topic: Receipt of Income)

Under which accounting method does the "doctrine of constructive receipt" primarily
apply?

 A. The alternate method

 B. The crop methodwrong
 C. The accrual method
 D. The cash methodcorrect
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

 Incorrect Answer Explanation for B:

The doctrine of constructive receipt is particularly relevant under the cash-basis

accounting method. The doctrine of constructive receipt requires that cash-basis
taxpayers be taxed on income when it becomes available and is not subject to
substantial limitations or restrictions, regardless of whether it is in their physical
possession. Most individuals are cash-basis taxpayers who report income when it is
actually or constructively received during the tax year.

Correct Answer Explanation for D:

The doctrine of constructive receipt is particularly relevant under the cash-basis

accounting method. The doctrine of constructive receipt requires that cash-basis
taxpayers be taxed on income when it becomes available and is not subject to
substantial limitations or restrictions, regardless of whether it is in their physical
possession. Most individuals are cash-basis taxpayers who report income when it is
actually or constructively received during the tax year.

Show Other Explanations

4. Question ID: 94849634 (Topic: Receipt of Income)

How is bartering income determined for tax purposes?

 A. The fair market value of the goods and services exchanged is included in gross
income.correct
 B. The taxpayer exchanging the higher cost good or service determines the value
of the item being bartered.wrong
 C. The IRS publishes a table showing the value of various types of goods and services
that must be used when taxpayers barter. The table is updated annually for inflation.
 D. The taxpayer exchanging the lower cost good or service determines the value of the
item being bartered.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

A taxpayer must include in gross income, in the year of receipt, the fair market value of
goods and services provided under a bartering arrangement. Bartering involves the
exchange of goods or services without exchanging money, such as a plumber fixing a
leaky toilet in exchange for a dentist filling a cavity.

5. Question ID: 95820122 (Topic: Receipt of Income)

What happens if income is deemed "constructively received" by a taxpayer?

 A. It depends on the taxpayer's age and filing status.

 B. The income can usually be deferred to a later tax year, depending on the facts
and circumstances.wrong
 C. The income must be reported in the tax year it becomes available.correct
 D. It has no effect on the income tax owed.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Incorrect Answer Explanation for B:

Constructively received income must be reported in the tax year it becomes available,
regardless of when it is physically received. The doctrine of constructive receipt requires
that cash-basis taxpayers be taxed on income when it becomes available and is not
subject to substantial limitations or restrictions, regardless of whether it is in their
physical possession. Most individuals are cash-basis taxpayers who report income
when it is actually or constructively received during the tax year.

Correct Answer Explanation for C:

Constructively received income must be reported in the tax year it becomes available,
regardless of when it is physically received. The doctrine of constructive receipt requires
that cash-basis taxpayers be taxed on income when it becomes available and is not
subject to substantial limitations or restrictions, regardless of whether it is in their
physical possession. Most individuals are cash-basis taxpayers who report income
when it is actually or constructively received during the tax year.

Show Other Explanations

6. Question ID: 95850123 (Topic: Receipt of Income)

Orson owns a rental property. Orson asks his sister, Betty, to pick up a check from one
of his tenants while he is out of town on vacation. Betty picks up the check on
December 31, but Orson doesn't cash the check until a few months later. In this
scenario, when is income "constructively received" by Orson if he authorizes his sister
to receive the rental income on his behalf?

 A. The rental income is taxable when Orson returns from his vacation.wrong
 B. The rental income is taxable when Orson cashes the check.
 C. The rental income is taxable on December 31, when his sister, Betty, receives the
check.correct
 D. The rental income is taxable to Betty, because she is the one who actually accepted
the check.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Incorrect Answer Explanation for A:

 The income is taxable to Orson when his sister receives the check. In this scenario,
Orson's sister acts as his "agent," and income is deemed to be constructively received
by an individual when their authorized agent receives it.

The doctrine of constructive receipt requires that cash-basis taxpayers be taxed on

income when it becomes available and is not subject to substantial limitations or
restrictions, regardless of whether it is in their physical possession. Income received by
an agent for a taxpayer is constructively received in the year the agent receives it. Most
individuals are cash-basis taxpayers who report income when it is actually or
constructively received during the tax year.

Correct Answer Explanation for C:

The income is taxable to Orson when his sister receives the check. In this scenario,
Orson's sister acts as his "agent," and income is deemed to be constructively received
by an individual when their authorized agent receives it.

The doctrine of constructive receipt requires that cash-basis taxpayers be taxed on

income when it becomes available and is not subject to substantial limitations or
restrictions, regardless of whether it is in their physical possession. Income received by
an agent for a taxpayer is constructively received in the year the agent receives it. Most
individuals are cash-basis taxpayers who report income when it is actually or
constructively received during the tax year.

Show Other Explanations

7. Question ID: 95396180 (Topic: Self-Employed Taxpayers)

Gerry is age 32, single, and has no dependents. He is self-employed and reports his
income and loss on Schedule C. He only earned $4,000 in net self-employment income
this year. Which taxes will he likely owe?

 A. Self-employment taxes and income taxeswrong

 B. Income tax only
 C. He will not owe any taxes because his income is so low
 D. Self-employment taxescorrect
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for D:

Gerry will owe self-employment tax. His income is under the standard deduction amount
for his filing status, so he will not owe income tax. But he still has a filing requirement,
because taxpayers have to file an income tax return if their net earnings from self-
employment were $400 or more. The self-employment tax rate is 15.3%. The rate
consists of two parts: 12.4% for social security (old-age, survivors, and disability
 insurance) and 2.9% for Medicare (hospital insurance). For more information, see the
IRS Self-Employed Individuals Tax Center.

9. Question ID: 95396238 (Topic: Self-Employed Taxpayers)

Which of the following types of income would be subject to self-employment tax?

 A. Rental income.
 B. Gains on the sale of a vacation home.
 C. Notary fees earned by a notary public.wrong
 D. Income earned by a qualified farmer (filing Schedule F).correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for D:

Income earned by a sole proprietor would be subject to self-employment tax. This

includes income by a qualified fisherman. Notary fees and gains on the sale of a home
are not subject to self-employment tax. Rental income is generally not subject to self-
employment tax, unless the income is earned by a bona-fide real estate professional, or
a hotel or motel owner.

10. Question ID: 94850398 (Topic: Self-Employed Taxpayers)

Self-employed individuals generally must pay which of the following taxes? (Choose the
best answer)

 A. Unrelated business income tax and income tax.

 B. Income tax and payroll taxes.
 C. Income tax and corporate tax.wrong
 D. Self-employment tax and income tax.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for D:

Self-employed individuals generally must pay self-employment tax (SE tax) as well as
income tax. "SE tax" is a Social Security and Medicare tax primarily for individuals who
work for themselves. It is similar to the Social Security and Medicare taxes withheld
from the pay of most wage earners. In general, anytime the wording "self-employment
tax" is used, it only refers to Social Security and Medicare taxes and not any other tax
(like income tax).

11. Question ID: 95850125 (Topic: Self-Employed Taxpayers)

Which of the following individuals is considered self-employed?
 A. Employees working for a company
 B. A beneficiary of an estate that is earning income from passive sources
 C. A shareholder in an S corporation.wrong
 D. Sole proprietors and independent contractorscorrect
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 98% of students.

Incorrect Answer Explanation for C:

Sole proprietors and independent contractors are considered self-employed. They carry
on a trade or business independently, and generally report their income and loss on
Schedule C.

Correct Answer Explanation for D:

Sole proprietors and independent contractors are considered self-employed. They carry
on a trade or business independently, and generally report their income and loss on
Schedule C.

Show Other Explanations

12. Question ID: 94850318 (Topic: Self-Employed Taxpayers)

Amelie owns a catering business. She received Form 1099-NEC for $43,000 for several
large catering jobs. She also received cash payments that total $12,500 for catering a
few private weddings. How must Amelie report these payments?

 A. The $43,000 in payments reported to her on Form 1099-NEC should be

reported on Schedule C. The cash payments are not taxable.wrong
 B. The $43,000 in payments reported to her on Form 1099-NEC should be reported on
Schedule C. The remaining $12,500 should be reported as "other income" on Form
1040.
 C. All the payments are reportable as gross income on her Schedule C.correct
 D. All of the income should be reported on Schedule D.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for C:

All the payments are reportable as gross income on her Schedule C.

14. Question ID: 94850327 (Topic: Self-Employed Taxpayers)

Aimee is a self-employed computer programmer with multiple clients. She works as an
independent contractor for Dillon Fireworks, Inc. The company sent Aimee a Form
 1099-NEC that shows she received $32,000 for the work she did for them. She received
a separate check for $2,800 from Dillon Fireworks for an Accountable Plan
Reimbursement for mileage that she incurred while working at a satellite office that
Dillon Fireworks also owns. She also received cash payments of $3,500 throughout the
year for several small programming jobs. She did not receive any Forms 1099 for the
$3,500. How much income should Aimee report on her Schedule C?

 A. $38,300wrong
 B. $32,000
 C. $34,800
 D. $35,500correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for D:

Aimee must include the $3,500 cash payments on her Schedule C as self-employment
income along with the $32,000 that was reported on Form 1099-NEC. The amounts that
she received under a qualified accountable plan as a reimbursement would not be
taxable.

15. Question ID: 94850184 (Topic: Self-Employed Taxpayers)

Self-employment tax applies to which of the following taxpayers?

 A. Independent contractors reporting any amount of net earnings from self-employment.

 B. Schedule E rental activities that report more than $50,000 in gross
receipts.wrong
 C. Individuals who report only interest and dividend income.
 D. Independent Contractors reporting net earnings from self-employment of $400 or
more.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

Independent Contractors reporting net earnings from self-employment of $400 or more

typically must pay self-employment tax on their earnings and file Schedule SE to report
their self-employment tax. See Tax Topic No. 554, Self-Employment Tax, for more
information. (This question is based on an actual IRS question from a former IRS
exam).

17. Question ID: 94850372 (Topic: Self-Employed Taxpayers)

 A self-employed individual with net earnings of ______ or more from self-employment is
required to pay self-employment tax:

 A. $800
 B. $600wrong
 C. Any amount of self-employment income.
 D. $400correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for D:

A self-employed individual with net earnings of $400 or more from self-employment is

required to pay self-employment tax by filing a Schedule C as well as a Schedule SE,
Self-Employment Tax, with his Form 1040.

19. Question ID: 94815865 (Topic: Employee Compensation and Worker

Classification)
Which of the following statements regarding restaurant workers is correct?

 A. Tips received that total less than $20 a month are subject to income tax, Social
Security tax, and Medicare tax, just like regular wages.
 B. Food servers are not required to report tips as taxable income.wrong
 C. Food servers are required to report tips on their tax return, even if the amounts have
not been reported to the employer.correct
 D. Tips received that total less than $20 a month are nontaxable.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

All tips are taxable income and must be reported on the tax return, even if they have not
been reported to the employer. Tips totaling less than $20 a month are not taxable for
FICA (Social Security and Medicare) tax purposes. Tips under $20 a month do not need
to be reported to an employer, but are still subject to regular income tax. Publication
531, Reporting Tip Income, covers the tax rules for employees who receive tips.

20. Question ID: 95850128 (Topic: Employee Compensation and Worker

Classification)
What is a major difference between employees and independent contractors for tax
purposes?
 A. Employees have payroll taxes withheld by their employers, while independent
contractors do not.correct
 B. Employees pay self-employment tax, while independent contractors do not.
 C. Employees have more control over their work, while independent contractors
follow specific instructions.wrong
 D. Employees receive Forms W-2, while independent contractors receive Forms 1099-
INT.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Incorrect Answer Explanation for C:

In general, an employer must withhold and remit income taxes, Social Security and
Medicare taxes (payroll taxes), and pay unemployment tax on salaries and wages paid
to an employee. Employees have taxes withheld by their employers, while independent
contractors are responsible for their own tax payments. A business generally does not
have to withhold or pay taxes on payments to independent contractors, because the
earnings of a person working as an independent contractor are subject to self-
employment tax, which the independent contractor must calculate and report on
Schedule SE (Form 1040).

Correct Answer Explanation for A:

In general, an employer must withhold and remit income taxes, Social Security and
Medicare taxes (payroll taxes), and pay unemployment tax on salaries and wages paid
to an employee. Employees have taxes withheld by their employers, while independent
contractors are responsible for their own tax payments. A business generally does not
have to withhold or pay taxes on payments to independent contractors, because the
earnings of a person working as an independent contractor are subject to self-
employment tax, which the independent contractor must calculate and report on
Schedule SE (Form 1040).

Show Other Explanations

21. Question ID: 95850129 (Topic: Employee Compensation and Worker

Classification)
Which form do employers use to report wages paid to employees for the previous year?

 A. Form W-2correct
 B. Form 1099-NEC
 C. Form W-3
 D. Form SS-8wrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 91% of students.

Incorrect Answer Explanation for D:

Employers issue Form W-2 to employees, showing the amounts of wages paid for the
previous year. Employers are required to give each employee their Form W-2 by
January 31.

Correct Answer Explanation for A:

Employers issue Form W-2 to employees, showing the amounts of wages paid for the
previous year. Employers are required to give each employee their Form W-2 by
January 31.

Show Other Explanations

22. Question ID: 94850190 (Topic: Employee Compensation and Worker

Classification)
Which of the following is a type of employee compensation?

 A. Inheritance
 B. Taxable fringe benefitscorrect
 C. Guaranteed payments to a partner in a partnership
 D. Self-employment incomewrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

Employee compensation refers to the benefits that an employee receives in exchange

for the service they provide to their employer. Wages, salaries, bonuses, and taxable
fringe benefits are all types of compensation received by employees for services
performed.

23. Question ID: 95850130 (Topic: Employee Compensation and Worker

Classification)
If a worker receives a Form 1099-NEC but believes they are misclassified, and should
have received a Form W-2, what form can the employee file with the IRS to request a
determination of worker status?

 A. Form SS-8correct
 B. Substitute W-2
 C. Schedule Cwrong
 D. Form 1099-NEC
 Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Incorrect Answer Explanation for C:

The worker can file Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding, to seek a determination of worker
status from the IRS.

Correct Answer Explanation for A:

The worker can file Form SS-8, Determination of Worker Status for Purposes of Federal
Employment Taxes and Income Tax Withholding, to seek a determination of worker
status from the IRS.

Show Other Explanations

24. Question ID: 95850131 (Topic: Employee Compensation and Worker

Classification)
How does the IRS generally determine whether a worker is an independent contractor
or an employee?

 A. Based on the individual's job title

 B. By the location of the worker's home
 C. By assessing the level of control the employer has over the worker and their
dutiescorrect
 D. By the number of hours workedwrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Incorrect Answer Explanation for D:

The general rule is that an individual is an independent contractor if the payor has the
right to control or direct only the result of the work, but not what will be done and how it
will be done. Independent contractors are normally people in an independent trade,
business or profession in which they offer their services to the public. An employee is
generally a worker who performs services for their employer, and the business can
control what will be done and how it will be done.

Correct Answer Explanation for C:

The general rule is that an individual is an independent contractor if the payor has the
right to control or direct only the result of the work, but not what will be done and how it
will be done. Independent contractors are normally people in an independent trade,
 business or profession in which they offer their services to the public. An employee is
generally a worker who performs services for their employer, and the business can
control what will be done and how it will be done.

Show Other Explanations

26. Question ID: 94849815 (Topic: Fringe Benefits)

Penny is self-employed as a massage therapist. Some of her clients are disabled, so
she regularly travels to their homes to give them massages. She tracks the mileage
from these business-related trips, but does not keep track of her personal miles. Which
of the following is true of her mileage deduction?

 A. Penny can deduct the mileage related to these trips at the standard mileage
rate.correct
 B. Penny may not deduct the mileage related to these trips.wrong
 C. Penny cannot deduct the mileage for these trips, because she must keep track of her
personal mileage, as well.
 D. Penny can only deduct actual expenses from these trips, such as gasoline costs.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

Penny can deduct the mileage related to these trips to customers at the standard
mileage rate. To learn more about deductible automobile expenses, see IRS Topic No.
510 Business Use of Car.

27. Question ID: 94849661 (Topic: Fringe Benefits)

Annabelle was offered a consulting position in another state. Her new employer
reimbursed her for $5,500 for her moving truck and expenses incurred during the move.
How should this reimbursement be treated?

 A. Because this is a reimbursement of a nondeductible expense, it is treated as wages

and must be included on Annabelle’s Form W-2.correct
 B. The reimbursement is tax-exempt because it is a qualified moving
expense.wrong
 C. The amounts are non-taxable to Annabelle.
 D. The expense is nontaxable as long as Annabelle’s employer makes the payment
directly to the moving company.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for A:

 The Tax Cuts and Jobs Act suspended the qualified moving expense exclusion and
employee deduction for moving expenses. Because this is a reimbursement of a
nondeductible expense, it is treated as paid under a nonaccountable plan and must be
included as compensation on Annabelle’s Form W-2. An employer can still reimburse
an employee for their moving expenses, but the amounts are fully taxable as wages.
The employer can then deduct the expense (as wages) but the full amount will be
subject to payroll taxes as well as income tax for Annabelle.

Note: There is an exception for active-duty members of the armed forces, who still are
entitled to claim a deduction for moving expenses. Active-duty military can also receive
non-taxable reimbursement for their qualified moving expenses.

28. Question ID: 94849522 (Topic: Fringe Benefits)

Kenan works for a construction company and the company has an important
construction deadline to meet. The construction zone is remote and it takes
considerable time for employees to go get meals at lunchtime. The employer decides to
provide meals at the work site free of charge. What is true about these meals?

 A. The meals are nontaxable to the employee in their entirety.correct

 B. The meals are taxable if work does not continue during the meal.wrong
 C. The meals are taxable to the employees because they weren't furnished at the
employer's office.
 D. The meal is nontaxable, but the drinks and desserts are taxable to the employees.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for A:

The meals are nontaxable to Kenan because they are offered as a convenience to the
employer. The meals themselves would be a non-taxable fringe benefit to the
employees.

30. Question ID: 95850134 (Topic: Fringe Benefits)

What is the tax treatment when an employee receives employer-provided life insurance
coverage that exceeds $50,000?

 A. The insurance coverage is only taxable if redeemed.

 B. The value of employer-provided life insurance coverage over $50,000 is taxable to
the employee.correct
 C. Life insurance is only taxable if the life insurance is cashed in.wrong
 D. The value of employer-provided life insurance coverage is always excluded from the
employee's wages.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 72% of students.

Incorrect Answer Explanation for C:

The value of employer-provided life insurance coverage over $50,000 is taxable to the
employee, meaning it will be included in the employee's taxable wages. Group life
insurance coverage under $50,000 is not taxable to the employee and can be offered as
a tax-free fringe benefit.

Correct Answer Explanation for B:

The value of employer-provided life insurance coverage over $50,000 is taxable to the
employee, meaning it will be included in the employee's taxable wages. Group life
insurance coverage under $50,000 is not taxable to the employee and can be offered as
a tax-free fringe benefit.

Show Other Explanations

31. Question ID: 94849696 (Topic: Fringe Benefits)

Rodney is a detective working for a private investigation firm. His employer gives all the
detectives who work for them an allowance to purchase business suits to wear while
they are on the job. The business suits are not required, but they are strongly
encouraged to be worn by the employees while they are on the job. Is any part of the
suit allowance taxable to Rodney? Choose the best answer below.

 A. An employer-provided allowance for business suits is illegal and not deductible by

either the employee or the employer in any circumstances.
 B. No, the reimbursement for business suits is not taxable to Rodney.wrong
 C. Yes. The suit allowance is fully taxable as W-2 wages, and must be included on the
employee's wages.correct
 D. Only a portion of the reimbursement is taxable to Rodney, up to the amount that he
would pay for regular uniforms.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for C:

The reimbursement of regular clothing (not uniforms) by an employer is a taxable

benefit. All of the allowance is taxable and should be included in the wages reported on
Form W-2, Wage and Tax Statement, subject to federal income tax withholding and
FICA withholding. In order for the amounts to be nontaxable, work clothes and uniform
allowances and reimbursements must meet the accountable plan rules and:

 Be specifically required as a condition of employment;

 Not be adaptable to general usage as ordinary clothing; and
  Not worn for general usage.
This means that regular business suits would not qualify. However, an employer is
allowed to give the employees an allowance that is fully taxable as wages. Then the
employer would deduct the wages as a regular business expense. (See IRS Publication
15-B, Employer's Tax Guide to Fringe Benefits).

32. Question ID: 94849523 (Topic: Fringe Benefits)

Heather works at Happy Doughnuts, Inc. Her company is very concerned about
employee morale. In order to increase morale, Happy Doughnuts gives all its
employees free soda and coffee during their shifts. They also give Heather small bags
of candy at holidays, and send her flowers on her birthday. She also occasionally
receives $20 gift cards to local stores as a reward for good work. What is the tax status
of these benefits?

 A. None of the benefits are taxable to Heather, because they are all de
minimis.wrong
 B. Heather must report the value of the soda as taxable income if she drinks more than
$25 worth during the year.
 C. All of the benefits are taxable to Heather.
 D. The gift cards are taxable to Heather, but none of the other benefits are.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for D:

The gift cards are taxable because they are considered a cash benefit. The rest are
considered de minimis benefits and are nontaxable to Heather. To learn more about
nontaxable and taxable fringe benefits, see the IRS detail page on De Minimis Fringe
Benefits.

33. Question ID: 94849643 (Topic: Fringe Benefits)

Pepe is a marketing executive for an advertising firm. He lives and works in New York
City. He is required to travel to Las Vegas for a month to work on a client's account. He
stays in an extended-stay suite that has a kitchen and laundry facilities in the room. He
is reimbursed by his employer under an accountable plan for all of his costs while in Las
Vegas. Which of his expenses qualify to be excluded from his income?

 A. Laundry supplies to do laundry in his suite are excluded, but not laundry
services.wrong
 B. Reasonable groceries to cook meals in his suite are excluded, but not restaurant
meals.
 C. His flight, lodging, restaurant meals, groceries, and laundry supplies or services are
all excluded from income, and not taxable to him.correct
 D. His flight, lodging, restaurant meals, and groceries are all excluded, but not laundry
expenses.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

The flight, lodging, restaurant meals, groceries, and laundry supplies or services are all
considered non-taxable and not counted as part of his income, because the expenses
reimbursed by an employer under an accountable plan are generally not taxable
income.

34. Question ID: 94849582 (Topic: Fringe Benefits)

Paul is a full-time employee of Carpet Warehouse. Paul frequently travels to meet with
customers. Paul's employer gives him $500 a month ($6,000 for the year) for his
business expenses. Paul does not have to provide any proof of his expenses to his
employer and he can keep any funds that he does not spend. His actual expenses for
the year were $1,000 for lodging, $600 for meals while away from home, and $2,000 for
entertainment, when he took 5 of his best vendors out to a baseball game. What
reporting is required of Paul's employer and what reporting is required of Paul?

 A. Employer adds $6,000 to wages reported on Paul's Form W-2; Paul can report
$1,600 as an adjustment to income. wrong
 B. Employer adds $6,000 to wages reported on Paul's Form W-2; Paul can report
$3,600 as a miscellaneous itemized deduction on Schedule A
 C. Employer adds $6,000 to wages reported on Paul's Form W-2; Paul cannot deduct
the expenses on his tax return. correct
 D. Employer adds $6,000 to wages reported on Paul's Form W-2; Paul can report
$1,600 as a miscellaneous itemized deduction on Schedule A
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for C:

This is a nonaccountable plan. Since Paul does not have to submit any receipts or
substantiation to his employer, this means that the employer must add $6,000 to wages
reported on Paul's Form W-2. Paul cannot deduct the expenses on his tax return.

Note: Because of the Tax Cuts and Jobs Act, employee business expenses can be
deducted as an adjustment to income only for specific employment categories. Armed
Forces reservists, qualified performing artists, fee-basis state or local government
officials, and individuals with disabilities may still deduct employee expenses on Form
2106.
 36. Question ID: 94815952 (Topic: Taxation for Clergy and Military)
Barnard is in the U.S. armed services, fighting in a combat zone. He forgot to file an
extension. Is he allowed an automatic extension of time to file?

 A. No, he must file an extension request, just like every other taxpayer. However, the
extension request will be given special consideration because he is in a combat zone.
 B. Yes, he is allowed an automatic extension from the normal filing deadline, but only
until June 15.
 C. Yes, he is allowed an automatic extension of 180 days from the normal filing
deadline.wrong
 D. Yes, he is allowed an automatic extension of 180 days after the last day he is in a
combat zone.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

A U.S. taxpayer serving in a combat zone is granted an automatic extension, Barnard is

given extra time to file his tax return, pay his taxes, and file a claim for refund. The 180-
day extension also applies to other service members performing active duty services in
support of combat zone operations. In addition, a taxpayer serving in a combat zone
qualifies for relief from IRS compliance actions, such as audits or collections, until 180
days after he has left the zone. See the IRS detail page on the Extension of Deadlines
for Combat Zone Service.

37. Question ID: 94849946 (Topic: Taxation for Clergy and Military)
Which of the following taxpayers is allowed to take a deduction for moving expenses in
2024?

 A. Paula, a police officer who is being transferred to a different precinct over 100 miles
away.
 B. Darnell, a member of the Armed Forces moving under orders to a permanent change
of station.correct
 C. Franklin, an ordained priest, who is moving to a diocese in a different state.
 D. Brandy, a taxpayer who is a U.S. citizen moving permanently overseas.wrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

Darnell may deduct his moving expenses, because he is a member of the Armed
Forces moving under orders to a permanent change of station. Under the Tax Cuts and
Jobs Act, most taxpayers cannot claim a deduction for moving expenses, but an
 exception exists for Armed Services personnel. For more information, see IRS Tax
Topic No. 455 Moving Expenses for Members of the Armed Forces.

38. Question ID: 94850097 (Topic: Taxation for Clergy and Military)
Renart is an ordained minister in the Blessed Church of Portland. He owns his own
home and his monthly house payment is $1,900. His monthly utilities are an additional
$450. Fair rental value in his neighborhood is $2,000. He receives a housing allowance
from his church in the amount of $1,950 per month. How much of his housing allowance
is subject to income tax?

 A. $100
 B. $2,000
 C. $1,900wrong
 D. $0correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for D:

Ministers may exclude from gross income the rental value of a home or a rental
allowance to the extent the allowance is used to provide a home, even if deductions are
taken for home expenses paid with the allowance. Since the allowance did not exceed
his costs, it is excludable from income tax (but not excludable from self-employment
tax). For more information about the special rules that apply to clergy, see
IRS Publication 517, Social Security and Other Information for Members of the Clergy
and Religious Workers.

39. Question ID: 94815834 (Topic: Taxation for Clergy and Military)
Combat pay earned by military servicemembers is generally nontaxable. Which type of
pay is never classified as "combat pay"?

 A. Pay for accrued leave earned in any month the taxpayer served in a combat
zone.wrong
 B. Active duty pay earned in any month the taxpayer served in a combat zone.
 C. Imminent danger pay.
 D. Retirement pay of armed forces personnel.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for D:

Retirement pay and pensions of armed forces personnel are not considered combat
pay, they are merely treated as retirement income. Nontaxable combat pay will usually
 be shown on Form W-2, Box 12 with code Q. Examples of nontaxable military pay
include; combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance
for Subsistence (BAS). An example of a Form W-2 from a military servicemember with
nontaxable combat pay is shown below:

40. Question ID: 94815893 (Topic: Taxation for Clergy and Military)
Levar is on extended active duty in the U.S. Air Force. He is currently stationed
overseas in Portugal. He is not in a Combat Zone. For U.S. tax purposes, where is
Levar deemed to have his official "tax home"?

 A. Levar's tax home is deemed to be his last official change of station.wrong

 B. Levar's tax home is deemed to be in the United States.correct
 C. Levar's tax home is deemed to be suspended.
 D. Levar's tax home is deemed to be in Portugal.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for B:

Levar's tax home is deemed to be in the United States. Members of the military on
extended active duty outside the United States are considered to have their main home
in the United States for tax purposes.

41. Question ID: 94850162 (Topic: Taxation for Clergy and Military)
Which of the following taxpayers may contribute to a Roth IRA in 2024?
 A. Harold, who is 30 and has $34,000 in nontaxable combat pay.correct
 B. Randall, who is 75 and has $19,000 in Social Security income for the
year.wrong
 C. Bobby, who is 32 and has $52,000 in passive rental income during the tax year.
 D. Pauline, who is 42 and has $15,000 in capital gains for the year, and $3,000 in
interest income.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

Only Harold is allowed to contribute because he has qualifying compensation for the
year. Members of the military are allowed to count tax-free combat pay when figuring
how much they can contribute to a Roth or traditional IRA. See IRS Topic No. 451,
Individual Retirement Arrangements (IRAs) for more information.

42. Question ID: 94815970 (Topic: Taxation for Clergy and Military)
For members of the Armed Forces, which of the following items is not taxable income?

 A. Military wages.
 B. Basic Allowance for Housing (BAH).correct
 C. Severance pay.wrong
 D. Reenlistment bonuses.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for B:

Basic Allowance for Housing (BAH) is not considered taxable income for members of
the Armed Forces. It does not need to be included in gross income on the taxpayer’s
Form 1040.

43. Question ID: 94850145 (Topic: Taxation for Clergy and Military)
Gerald is an ordained minister for the Presbyterian Church. He owns his own home. In
addition, he receives a monthly housing allowance from his church that isn’t subject to
income tax. He pays regular mortgage interest and property taxes on the home. Which
of the following is true regarding the deductibility of these expenses?

 A. Gerald can still deduct his real estate taxes and home mortgage interest. The
minister does not have to reduce their deductions by the nontaxable amount of the
housing allowance.correct
 B. Gerald can still deduct his real estate taxes and home mortgage interest, but
the housing allowance becomes taxable by the amount of deductible expenses
that are reportable on Schedule A.wrong
 C. The mortgage interest and property taxes are not deductible by Gerald, because he
receives a nontaxable housing allowance.
 D. Gerald can still deduct his real estate taxes and home mortgage interest. However,
he must reduce his allowable deductions by the nontaxable amount of the housing
allowance.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 27% of students.

Correct Answer Explanation for A:

If a minister receives a housing allowance that isn’t taxable, the minister can still deduct
their real estate taxes and home mortgage interest. The minister does not have to
reduce their deductions by the nontaxable amount of the housing allowance. For more
information about the special rules that apply to clergy, see Publication 517, Social
Security and Other Information for Members of the Clergy and Religious Workers.

44. Question ID: 94816009 (Topic: Taxation for Clergy and Military)
Which income is not subject to federal income tax?

 A. Social Security Income

 B. Combat pay.correct
 C. Interest income.wrong
 D. Wage income.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

Combat pay is excluded from federal income tax, for every month that a military
servicemember is present in a combat zone (however, it is still subject to Social Security
tax and Medicare tax). Combat pay must still be reported on the taxpayer's return, but it
is not taxable.

45. Question ID: 94850147 (Topic: Taxation for Clergy and Military)
Father Lucian is a Catholic priest who receives a salary plus a housing allowance for
rent and utilities. He has not taken a vow of poverty. Which of the following statements
is correct?
 A. He must report his entire salary and housing allowance on his tax return. The salary
is subject to income tax and self-employment tax, but his housing allowance is subject
to income tax only.
 B. He does not have to report any income received from the church because the
Catholic Church is a tax-exempt organization.
 C. He must pay self-employment tax on both his salary and the housing
allowance. Neither is subject to income tax.wrong
 D. He must pay both income tax and self-employment tax on his salary, but only self-
employment tax for the housing allowance. The housing allowance is not subject to
income tax.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

Father Lucian must pay both income tax and self-employment tax on his salary, but only
self-employment tax for the housing allowance. The housing allowance is not subject to
income tax. A clergy member’s salary is reported on Form W-2 and is taxable. Offerings
and fees received for performing marriages, baptisms, and funerals must also be
reported as self-employment income on Schedule C. For purposes of determining self-
employment tax for a clergy member, salary, other fees, and housing allowances are
included. However, housing allowances are not subject to income tax.

For more information about the special rules that apply to clergy, see Publication 517,
Social Security and Other Information for Members of the Clergy and Religious
Workers.

48. Question ID: 94815849 (Topic: Taxation for Clergy and Military)
Franklin is an ordained minister with the United Episcopal Church, and he receives
various types of income from the church. Which of the following types of income would
be subject to self-employment tax for Franklin?

 A. Minister's housing allowance. correct

 B. Reimbursements for mileage made under an accountable plan. wrong
 C. Commuter transit passes provided by the minister's employer.
 D. Group plan medical insurance benefits.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for A:

Ministers or other members of a religious order may have net earnings from self-
employment. The rental value of a home or a housing allowance provided to a minister
 as part of the minister's pay generally is not subject to income tax but is included in net
earnings from self-employment. For more information, refer to Publication 517, Social
Security and Other Information for Members of the Clergy and Religious Workers.

50. Question ID: 94850188 (Topic: Taxation for Clergy and Military)
Combat pay is exempt from income taxes, but is subject to:

 A. Payroll taxes.correct
 B. Net investment income tax.
 C. Excise taxes.wrong
 D. Capital gains taxes.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for A:

Combat pay is generally not subject to federal income tax. However, the recipient must
still pay Social Security and Medicare taxes (payroll taxes) on the combat pay. To learn
more about this topic, see the IRS page for Tax Exclusions for Combat Pay.

51. Question ID: 95394520 (Topic: Taxation for Clergy and Military)
Todd is an ordained minister that wants to request an exemption from Social Security
and Medicare Taxes. How is this done?

 A. Todd must file a Form 8275 with each tax return and disclose his position.
 B. Todd must file Form 4029.correct
 C. Todd must make a formal vow of poverty.
 D. Todd cannot get an exemption from paying these taxes, even if he is a
minister.wrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 38% of students.

Correct Answer Explanation for B:

Todd must file Form 4029, Application for Exemption From Social Security and
Medicare Taxes and Waiver of Benefits. To be exempt from Social Security and
Medicare taxes, a minister, priest, or other clergy, must obtain a Social Security number
and file Form 4029, Application for Exemption from Social Security and Medicare Taxes
and Waiver of Benefits. The exemption from Social Security and Medicare taxes is
applicable for self‐employment income and wages.

52. Question ID: 95394566 (Topic: Taxation for Clergy and Military)
 Reverend Gerald Jones is a full-time minister for Kensington Church, a qualified
religious organization. The church allows Gerald to use a home that has an annual fair
rental value of $24,000. The church also pays him an annual salary of $67,000, of which
$7,500 is designated for utility costs. Gerald's actual utility costs during the year were
$7,000, for which he has receipts. What is Gerald's income for income tax purposes?
And what is his income for self-employment tax purposes?

 A. For income tax purposes, Gerald will report $60,000. His income for SE tax
purposes, is $74,000.
 B. For income tax purposes, Gerald will report $66,500. His income for SE tax
purposes, is $84,000.
 C. For income tax purposes, Gerald will report $67,000. His income for SE tax
purposes, is $91,500.wrong
 D. For income tax purposes, Gerald will report $60,000. His income for SE tax
purposes, is $91,000.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 43% of students.

Correct Answer Explanation for D:

For income tax purposes, Reverend Gerald Jones excludes $31,000 from gross income
($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility
costs). Therefore, for income tax purposes, Gerald will report $60,000 ($59,500 salary
plus $500 of his unused utility allowance). His income for SE tax purposes, is $91,000
($67,000 salary + $24,000 fair rental value of the parsonage). This example is taken
directly from Publication 517, Social Security and Other Information for Members of the
Clergy and Religious Workers.

54. Question ID: 95850140 (Topic: Medicare Waiver and Disability Payments)
What is the tax treatment for veterans' disability benefits if the veteran was discharged
under honorable conditions?

 A. Exempt from taxationcorrect

 B. Fully taxable as wageswrong
 C. Partially taxable as pension income
 D. Partially taxable
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for B:

Veterans’ disability benefits are fully exempt from taxation if the veteran was discharged
under honorable conditions. Veterans’ disability benefits (also called VA Disability
 Compensation) are a type of disability benefit paid specifically to a veteran for
disabilities that are service-connected, which means the injury or disease is linked to
their military service. The VA typically does not issue Form W-2, Form 1099-R, or any
other tax-related document for veterans’ disability benefits.

Correct Answer Explanation for A:

Veterans’ disability benefits are fully exempt from taxation if the veteran was discharged
under honorable conditions. Veterans’ disability benefits (also called VA Disability
Compensation) are a type of disability benefit paid specifically to a veteran for
disabilities that are service-connected, which means the injury or disease is linked to
their military service. The VA typically does not issue Form W-2, Form 1099-R, or any
other tax-related document for veterans’ disability benefits.

Show Other Explanations

55. Question ID: 95850136 (Topic: Medicare Waiver and Disability Payments)
Which type of payments can be excluded from a taxpayer’s gross income if they are for
in-home-care services provided to a disabled individual who resides in the same home?

 A. Unemployment compensationwrong
 B. Medicare waiver paymentscorrect
 C. Vacation pay provided by an employer
 D. Sick pay
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for A:

Medicare waiver payments can be excluded from income when used for in-home-care
services for a disabled individual residing in the same home.

Correct Answer Explanation for B:

Medicare waiver payments can be excluded from income when used for in-home-care
services for a disabled individual residing in the same home.

Show Other Explanations

56. Question ID: 95850145 (Topic: Medicare Waiver and Disability Payments)
Kolby is a disabled veteran who receives VA disability compensation due to an injury
that he sustained while he was in the Army. Which tax-related documents may Kolby
receive from the VA regarding his veterans’ disability benefits?
 A. The VA typically issues a Form 1099-MISC for veterans' disability
compensation.wrong
 B. The VA typically issues a Form W-2 for veterans' disability compensation.
 C. The VA typically issues a Form 1099-NEC for veterans' disability compensation.
 D. None. The VA typically does not issue tax-related documents for veterans' disability
compensation.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Incorrect Answer Explanation for A:

None, the VA (i.e., the United States Department of Veterans Affairs) typically does not
issue Form W-2 or other tax-related documents for veterans’ disability benefits.
Veterans’ disability benefits (also called VA Disability Compensation) are a type of
disability benefit paid specifically to a veteran for service-connected disabilities, which
means the injury or disease is linked to their military service. Veterans’ disability
benefits are exempt from taxation if the veteran was terminated through separation or
discharged under honorable conditions.

Correct Answer Explanation for D:

None, the VA (i.e., the United States Department of Veterans Affairs) typically does not
issue Form W-2 or other tax-related documents for veterans’ disability benefits.
Veterans’ disability benefits (also called VA Disability Compensation) are a type of
disability benefit paid specifically to a veteran for service-connected disabilities, which
means the injury or disease is linked to their military service. Veterans’ disability
benefits are exempt from taxation if the veteran was terminated through separation or
discharged under honorable conditions.

Show Other Explanations

57. Question ID: 95850137 (Topic: Medicare Waiver and Disability Payments)
The exemption for Medicare waiver payments applies only if:

 A. The care provider and the care recipient are related by blood, marriage or adoption.
 B. The care provider and the care recipient do NOT live together in the same home.
 C. The care provider and the care recipient must be legally married.wrong
 D. The care provider and the care recipient live together in the same home.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Incorrect Answer Explanation for C:

 The exemption for Medicare waiver payments applies only if the care provider and the
care recipient live together in the same home. The exemption applies to anyone
providing care in their own home, regardless of who owns the home. It is not necessary
for the caregiver to be related to the disabled individual, although this is often the case.

Correct Answer Explanation for D:

The exemption for Medicare waiver payments applies only if the care provider and the
care recipient live together in the same home. The exemption applies to anyone
providing care in their own home, regardless of who owns the home. It is not necessary
for the caregiver to be related to the disabled individual, although this is often the case.

Show Other Explanations

58. Question ID: 95850141 (Topic: Medicare Waiver and Disability Payments)
Are veterans' disability benefits taxable?

 A. No, they are exempt from taxation.correct

 B. It depends on the disability rating.
 C. Yes, they are fully taxable as pension income.wrong
 D. Yes, they are fully taxable as wages.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Incorrect Answer Explanation for C:

Veterans’ disability benefits are fully exempt from taxation if the veteran was discharged
under honorable conditions. Veterans’ disability benefits (also called VA Disability
Compensation) are a type of disability benefit paid specifically to a veteran for
disabilities that are service-connected, which means the injury or disease is linked to
their military service. The VA typically does not issue Form W-2, Form 1099-R, or any
other tax-related document for veterans’ disability benefits.

Correct Answer Explanation for A:

Veterans’ disability benefits are fully exempt from taxation if the veteran was discharged
under honorable conditions. Veterans’ disability benefits (also called VA Disability
Compensation) are a type of disability benefit paid specifically to a veteran for
disabilities that are service-connected, which means the injury or disease is linked to
their military service. The VA typically does not issue Form W-2, Form 1099-R, or any
other tax-related document for veterans’ disability benefits.

Show Other Explanations

59. Question ID: 95850142 (Topic: Medicare Waiver and Disability Payments)
 When are long-term disability payments from an insurance policy excluded from
income?

 A. When the disability is permanent

 B. When the taxpayer pays the premiumscorrect
 C. When the disability is temporarywrong
 D. When the employer pays the premiums
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Incorrect Answer Explanation for C:

Long-term disability payments from an insurance policy are excluded from income if the
taxpayer (or the employee) pays the premiums for the policy. If both the taxpayer and
their employer have paid the premiums for a disability insurance plan, only the amount
attributable to the employer’s payments is reported as income. For more information,
see the IRS detail page on Frequently Asked Questions for Life Insurance and Disability
Insurance Proceeds.

Correct Answer Explanation for B:

Long-term disability payments from an insurance policy are excluded from income if the
taxpayer (or the employee) pays the premiums for the policy. If both the taxpayer and
their employer have paid the premiums for a disability insurance plan, only the amount
attributable to the employer’s payments is reported as income. For more information,
see the IRS detail page on Frequently Asked Questions for Life Insurance and Disability
Insurance Proceeds.

Show Other Explanations

60. Question ID: 95850138 (Topic: Medicare Waiver and Disability Payments)
Which of the following is a nontaxable benefit that pays workers who are injured on the
job?

 A. Sick pay
 B. Worker's compensationcorrect
 C. Unemployment compensation
 D. Disability insurancewrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Incorrect Answer Explanation for D:

 Worker’s compensation specifically pays workers who are injured on the job. Worker's
compensation is always exempt from tax.

Correct Answer Explanation for B:

Worker’s compensation specifically pays workers who are injured on the job. Worker's
compensation is always exempt from tax.

Show Other Explanations

61. Question ID: 95850139 (Topic: Medicare Waiver and Disability Payments)
Which type of disability-related payments are generally not taxable at all?

 A. Worker's compensationcorrect
 B. Social Security benefits
 C. Unemployment compensation
 D. Retirement benefitswrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for D:

Workers' compensation provides cash benefits or medical care for workers who suffer
an injury due to their workplace. Worker’s compensation specifically pays workers who
are injured on the job. It is always exempt from tax.

Correct Answer Explanation for A:

Workers' compensation provides cash benefits or medical care for workers who suffer
an injury due to their workplace. Worker’s compensation specifically pays workers who
are injured on the job. It is always exempt from tax.

Show Other Explanations

62. Question ID: 95850143 (Topic: Medicare Waiver and Disability Payments)
If both an employee and their employer have paid the premiums for a disability
insurance plan, and the employee later becomes disabled and starts to receive long-
term disability payments, what portion of the disability benefits must be reported as
taxable income by the employee?

 A. None of the amounts would be taxable, regardless of who pays the policy
premiums.wrong
 B. Only the amount attributable to the employer's payments is reported as
income.correct
 C. Only the amount attributable to the employee's payments is reported as income.
 D. All of the amounts would be taxable, regardless of who pays the policy premiums.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Incorrect Answer Explanation for A:

If both the taxpayer and their employer have paid the premiums for a disability
insurance plan, only the amount attributable to the employer’s payments is reported as
income. Long-term disability payments from an insurance policy can be excluded from
income only if the taxpayer (or the employee) pays the full cost of the premiums for the
insurance policy. For more information, see the IRS detail page on Frequently Asked
Questions for Life Insurance and Disability Insurance Proceeds.

Correct Answer Explanation for B:

If both the taxpayer and their employer have paid the premiums for a disability
insurance plan, only the amount attributable to the employer’s payments is reported as
income. Long-term disability payments from an insurance policy can be excluded from
income only if the taxpayer (or the employee) pays the full cost of the premiums for the
insurance policy. For more information, see the IRS detail page on Frequently Asked
Questions for Life Insurance and Disability Insurance Proceeds.

Show Other Explanations

63. Question ID: 94849677 (Topic: Other Income Items)

Torin is a college student whose tuition and fees were $5,400 for the year. During the
year, he received the following income and other payments:

 Scholarship: $4,300.
 Support from his parents: $2,500.
 Loan from his college's financial aid office: $4,700.
 Interest income: $1,000.
 Cash prize from a lotto ticket: $2,000.
 Wage income from an internship: $4,950.
What is his gross income for the year?

 A. $5,950wrong
 B. $12,250
 C. $12,600
 D. $7,950correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for D:

The answer is calculated as follows:

$1,000 interest income

+$2,000 cash prize from a lotto ticket

+ $4,950 wage income from an internship

= $7,950 of gross income

The scholarship is not taxable because Torin's tuition costs exceed the scholarship
amounts. The support from his parents is not taxable, because it is a gift. The loan from
financial aid is not income because it must be repaid.

64. Question ID: 94815861 (Topic: Other Income Items)

An employee who receives _______ or more per month in cash tips from one job must
report the tip income to his employer.

 A. $100
 B. $10wrong
 C. $20correct
 D. All tip income must be reported to the employer, no matter how small.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

An individual who receives $20 or more per month of cash tips from one job must report
the tip income to his employer. Tips are taxable as follows:

 Tips paid in cash of $20 or more per month are taxable as wages. These tips are
subject to FICA, FUTA, and income tax.
 Tips of less than $20 a month are subject to income tax but are not subject to
FICA or FUTA.
 The fair market value of noncash tips (such as tickets or movie passes) is subject
to income tax but is not subject to FICA or FUTA.
The employee is required to report the tip income on Form 1040. Publication 531,
Reporting Tip Income, covers the tax rules for employees who receive tips.

65. Question ID: 95850148 (Topic: Other Income Items)

Norman is an executive working for a large corporation. The corporation offers him 500
shares of restricted stock, valued at $14,000. He cannot sell or otherwise use the
 shares for three years. If Norman quits his job, he forfeits the 500 shares. How should
this be treated on Norman's tax return?

 A. The stock is not taxable to Norman because it is classified as intangible

property.wrong
 B. The stock is taxable to Norman only if it is significantly valuable.
 C. The stock is not taxable to Norman because it is an illegal transaction.
 D. The stock is not included in Norman's income until it is available to him without
restriction.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for A:

Property received “in lieu” of wages is generally considered taxable income. However, if
an employee receives restricted stock or other property that is restricted, the property is
not taxable or included in their taxable income until it is available to the employee
without restriction.

Correct Answer Explanation for D:

Property received “in lieu” of wages is generally considered taxable income. However, if
an employee receives restricted stock or other property that is restricted, the property is
not taxable or included in their taxable income until it is available to the employee
without restriction.

Show Other Explanations

66. Question ID: 94851039 (Topic: Other Income Items)

Brylee is self-employed. One of her vendors sends her a Form 1099-NEC with the
wrong amount of income reported. What should Brylee do in this scenario?

 A. Report the income as stated on the Form 1099-NEC.wrong

 B. Contact the vendor for a corrected Form 1099-NEC.correct
 C. Contact the IRS for a corrected Form 1099-NEC.
 D. File a grievance with the Taxpayer Advocate's Office.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for B:

 A taxpayer who receives a Form 1099-NEC or a Form 1099-MISC with the wrong dollar
amounts reported should first contact the payor, and request a corrected Form 1099
(this question is based on an actual EA exam question released by the IRS).

67. Question ID: 94849744 (Topic: Other Income Items)

Which of the following items may be nontaxable to the recipient?

 A. Tips received by food servers

 B. Medicare waiver paymentscorrect
 C. Supplemental wageswrong
 D. Self-employment income from a side-gig
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for B:

Medicare waiver payments may be exempt from tax. The exemption for Medicare
waiver payments applies if the care provider and the care recipient live together in the
same home. The exemption applies to anyone providing care in their own home,
regardless of who owns the home. It is not necessary for the caregiver to be related to
the disabled individual, although this is often the case. All of the other choices would be
taxable income to the recipient.

68. Question ID: 95850149 (Topic: Other Income Items)

Under what of the following conditions will a tuition reduction, grant, or scholarship be
taxable to a student?

 A. Grants or scholarships are never taxable, regardless of the scenario.

 B. When the grant or scholarship is provided to out-of-state students who are pursuing
graduate degree programs.
 C. When it is provided to graduate studentswrong
 D. Any portion of a grant or scholarship that is compensation for services will be taxable
as wages to the student.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Incorrect Answer Explanation for C:

A common arrangement is when colleges offer tuition reduction and/or free on-campus
housing in lieu of wages to student teachers. However, any portion of a grant or
scholarship that is compensation for services is taxable as wages. For example, if a
student must serve as a part-time teaching assistant as a condition of their scholarship
or grant, then that is payment for work, and would be taxable as wages to the student.
 Correct Answer Explanation for D:

A common arrangement is when colleges offer tuition reduction and/or free on-campus
housing in lieu of wages to student teachers. However, any portion of a grant or
scholarship that is compensation for services is taxable as wages. For example, if a
student must serve as a part-time teaching assistant as a condition of their scholarship
or grant, then that is payment for work, and would be taxable as wages to the student.

Show Other Explanations

69. Question ID: 94849630 (Topic: Other Income Items)

A customer at a casino left a $10 poker chip as a tip for Maurice, who is a hotel
employee. He did not have any other tip income for the month. What is Maurice’s
reporting requirement for this tip?

 A. Maurice must report the tip income on his return at its fair market value, which would
be $10.correct
 B. Maurice should report this tip income to his employer, and it will be taxed as wages
on his Form W-2.
 C. The poker chip is not legal tender, and is therefore not taxable.wrong
 D. The tip is a gift, and therefore not taxable income.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

Although the tip was not paid in cash, it is still taxable at its fair market value, which
would be $10. The tip is not reportable to Maurice’s employer, since he earned less
than $20 of tip income during the month. He should report the tip income on his return.
It is subject to regular income tax, but it is exempt from Social Security and Medicare
taxes.

71. Question ID: 95850146 (Topic: Other Income Items)

What is a wage garnishment, and how is this amount taxed?

 A. A wage garnishment is a mandatory deduction from an employee's paycheck, and

the amounts are usually deductible.
 B. A wage garnishment is a mandatory deduction from an employee's paycheck, and
the amounts are usually exempt from payroll taxes and income taxes.
 C. A wage garnishment is a voluntary deduction from an employee's paycheck,
and it is fully deductible.wrong
 D. A wage garnishment is a court-ordered diversion of part of an employee's salary to
pay unpaid debts. The full amount of gross wages is taxable.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 83% of students.

Incorrect Answer Explanation for C:

Wage garnishment occurs when a court orders part of an employee’s salary to be

diverted to pay unpaid debts. Employees may have their wages garnished for various
reasons, such as when they owe child support, back taxes, or other debts. Regardless
of the amounts garnished from the employee's paycheck, the full amount of gross
wages must be included in the employee's taxable wages at year-end.

Correct Answer Explanation for D:

Wage garnishment occurs when a court orders part of an employee’s salary to be

diverted to pay unpaid debts. Employees may have their wages garnished for various
reasons, such as when they owe child support, back taxes, or other debts. Regardless
of the amounts garnished from the employee's paycheck, the full amount of gross
wages must be included in the employee's taxable wages at year-end.

Show Other Explanations

72. Question ID: 95850147 (Topic: Other Income Items)

Which types of debts can typically lead to a wage garnishment?

 A. Delinquent tax debtscorrect

 B. Personal loanswrong
 C. Delinquent credit cards
 D. Unpaid mortgage payments
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Incorrect Answer Explanation for B:

Delinquent tax debts (either federal or state tax debts) can lead to a wage garnishment.
Wage garnishment occurs when a court orders part of an employee’s salary to be
diverted to pay unpaid debts. Employees may have their wages garnished for various
reasons, such as when they owe child support, back taxes, or other debts. Regardless
of the amounts garnished from the employee's paycheck, the full amount of gross
wages must be included in the employee's taxable wages at year-end.

Correct Answer Explanation for A:

Delinquent tax debts (either federal or state tax debts) can lead to a wage garnishment.
Wage garnishment occurs when a court orders part of an employee’s salary to be
diverted to pay unpaid debts. Employees may have their wages garnished for various
reasons, such as when they owe child support, back taxes, or other debts. Regardless
 of the amounts garnished from the employee's paycheck, the full amount of gross
wages must be included in the employee's taxable wages at year-end.

Show Other Explanations

73. Question ID: 95850151 (Topic: How Much Income to Report)

Unger had the following income items during the year. Which of the following would be
fully taxable as wages, and subject to Social Security and Medicare taxes?

 A. $15,000 in Veterans' disability benefitswrong

 B. $17,000 in severance pay when he quit his jobcorrect
 C. $12,000 in unemployment benefits
 D. $11,500 in Worker's compensation
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Incorrect Answer Explanation for A:

Only the $17,000 in severance pay would be fully taxable as wages. Severance pay is
considered a type of supplemental wages or employee compensation.

The Veterans' disability and worker's compensation would not be taxable.

Unemployment compensation would be taxable, but would not be taxable as wages.

Correct Answer Explanation for B:

Only the $17,000 in severance pay would be fully taxable as wages. Severance pay is
considered a type of supplemental wages or employee compensation.

The Veterans' disability and worker's compensation would not be taxable.

Unemployment compensation would be taxable, but would not be taxable as wages.

Show Other Explanations

74. Question ID: 95850152 (Topic: How Much Income to Report)

Lacie has a regular job as a secretary, as well as a side-gig as a self-employed actress.
She had the following income items during the year. Based on the following information,
how much gross income should she report on Schedule C?

 $14,000 for an acting gig for a local Shakespeare festival, reported to her on
1099-NEC
 $2,000 for other acting gigs, not reported on 1099-NEC
 $19,500 in wages from her regular job
 $900 in unemployment compensation
  $700 from a state tax refund
 $600 from a scratch-off lottery ticket

 A. $16,600
 B. $18,200wrong
 C. $14,000
 D. $16,000correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Incorrect Answer Explanation for B:

Lacie should report $16,000 as self-employment income on Schedule C. This is the

$14,000 in self-employment income that was reported to her on the 1099-NEC, as well
as the other $2,000 in income that was not reported on a 1099-NEC.

Correct Answer Explanation for D:

Lacie should report $16,000 as self-employment income on Schedule C. This is the

$14,000 in self-employment income that was reported to her on the 1099-NEC, as well
as the other $2,000 in income that was not reported on a 1099-NEC.

Show Other Explanations

75. Question ID: 95850156 (Topic: How Much Income to Report)

Penelope is a retired Air Force veteran who now works as a self-employed bookkeeper,
but she also has a variety of income from other sources. She receives Medicare waiver
payments for taking care of her disabled father, Larry, who lives with her in her home,
but Larry is not her dependent. Penelope's brother died during the year, and she was
the sole beneficiary of his life insurance policy. Based on the following information, how
much taxable income should Penelope report on Form 1040?

 $8,000 in Medicare waiver payments

 $9,000 in VA disability benefits from a service-connected injury
 $28,000 in bookkeeping income from various clients
 $500 in gambling winnings from a slot machine
 $2,000 in interest income from a bank account
 $45,000 life insurance payout

 A. $75,500wrong
 B. $30,500correct
 C. $38,500
 D. $47,500
 Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Incorrect Answer Explanation for A:

The VA disability benefits, Medicare waiver payments, and the life insurance payout
would not be taxable to Penelope. The other items would be taxable. The answer is
figured as follows: ($28,000 + $500 + $2,000) = $30,500 in taxable income.

Correct Answer Explanation for B:

The VA disability benefits, Medicare waiver payments, and the life insurance payout
would not be taxable to Penelope. The other items would be taxable. The answer is
figured as follows: ($28,000 + $500 + $2,000) = $30,500 in taxable income.

Show Other Explanations

77. Question ID: 94849527 (Topic: How Much Income to Report)

Samuel, a degree candidate at Amlo Community College, had education-related
expenses and received financial assistance as follows:

 Tuition: $3,000
 Required activity fees: $ 300
 Books and supplies: $ 900
 Room and board: $3,500
 Academic scholarship: $2,500
 Food stamps: $1,000
 Scholarship from a veteran's organization: $2,500
How much taxable income does he have, if any?

 A. $4,200wrong
 B. $0
 C. $800correct
 D. $5,000
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 29% of students.

Correct Answer Explanation for C:

Samuel has $800 in taxable income. The answer is figured as follows:

 Tuition $3,000
Fees $300
Books and supplies $900
Qualifying educational expenses $4,200
Scholarships ($2,500 + $2,500) $5,000
Taxable amount $800
Scholarships that pay for qualified educational costs at eligible educational institutions
are not considered taxable income. The two scholarships Samuel received can offset
his qualifying educational expenses. The amounts for room and board are not qualifying
educational expenses. If any part of a scholarship was used for room and board, travel,
or personal living expenses, etc., that portion is taxable. (This question is based on a
prior-year EA exam question).

78. Question ID: 95850154 (Topic: How Much Income to Report)

Sammy had the following income items received during the year. How much taxable
income should he report on his Form 1040?

 $4,000 in Worker's compensation benefits

 $2,000 in interest earned on a high-yield savings account
 $3,000 winnings from a scratch-off ticket
 $1,500 in holiday pay from his employer
 $16,000 in regular wages

 A. $22,500correct
 B. $25,000wrong
 C. $17,500
 D. $26,500
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Incorrect Answer Explanation for B:

All of the income would be taxable, except for the Worker's compensation benefits.
Worker's compensation is not treated as wages, and is not taxable. Worker's
compensation should not be confused with disability insurance, sick pay, or
unemployment compensation; it is a type of benefit that pays workers who are injured
on the job.

Correct Answer Explanation for A:

 All of the income would be taxable, except for the Worker's compensation benefits.
Worker's compensation is not treated as wages, and is not taxable. Worker's
compensation should not be confused with disability insurance, sick pay, or
unemployment compensation; it is a type of benefit that pays workers who are injured
on the job.

Show Other Explanations

79. Question ID: 95850155 (Topic: How Much Income to Report)

Haley had to quit her job because of an injury. After she quit her job, she had the
following income items received during the year. How much taxable income should she
report on Form 1040?

 $2,000 in welfare benefits

 $6,000 in Worker's compensation benefits
 $8,000 in rental income from renting a bedroom in her home
 $4,000 gambling winnings from a casino
 $7,900 in unemployment benefits
 $5,000 in severance pay

 A. $17,000wrong
 B. $26,900
 C. $24,900correct
 D. $32,900
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Incorrect Answer Explanation for A:

The welfare benefits and Worker's compensation benefits would not be taxable to
Haley. The other items would be taxable. The answer is figured as follows: ($8,000 +
$4,000 + $7,900 + $5,000) = $24,900 in taxable income.

Correct Answer Explanation for C:

The welfare benefits and Worker's compensation benefits would not be taxable to
Haley. The other items would be taxable. The answer is figured as follows: ($8,000 +
$4,000 + $7,900 + $5,000) = $24,900 in taxable income.

Show Other Explanations

81. Question ID: 94849693 (Topic: How Much Income to Report)

 Supplemental wages are compensation paid to an employee in addition to their regular
pay. Which of the following types of income would not be classified as "supplemental
wages?"

 A. Worker's compensationcorrect
 B. Holiday pay
 C. Sick pay
 D. Vacation paywrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

Supplemental wages are compensation paid to an employee in addition to their regular

pay. Vacation pay and sick pay are examples of supplemental wages that are taxable
just like any other wage income, even though the employee has not technically “worked”
for the income. Supplemental wages also include:

 Bonuses, commissions, prizes

 Severance pay, back pay, and holiday pay
 Payment for nondeductible moving expenses
However, worker's compensation is not treated as wages, and is not taxable. Worker's
compensation should not be confused with disability insurance, sick pay, or
unemployment compensation; it is a type of benefit that pays workers who are injured
on the job.

2. Question ID: 95850124 (Topic: Receipt of Income)

Which situation does not constitute constructive receipt of income?

 A. The taxpayer wins a raffle, but declines to accept a prize.correct

 B. A taxpayer receives payment for services but agrees to accept property rather than
cash.
 C. Interest earned on a bank deposit that is not withdrawn.
 D. Wages that are directly deposited in an employee's bank account, but the employee
does not withdraw the money until the following week.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

 The doctrine of constructive receipt requires the actual receipt of property (or the right to
receive property). Income is not considered to be "constructively received" if a taxpayer
declines to accept an item, such as a prize or an award.

Show Other Explanations

8. Question ID: 95850127 (Topic: Self-Employed Taxpayers)

Which form do most self-employed individuals use to report their business activities?

 A. Schedule K-1
 B. Schedule Ccorrect
 C. Schedule E
 D. Schedule J
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for B:

Most self-employed individuals report business income on Schedule C of Form 1040

(self-employed farmers report their earnings on Schedule F of Form 1040).

Show Other Explanations

13. Question ID: 95850126 (Topic: Self-Employed Taxpayers)

What is the purpose of Form 1099-NEC?

 A. To report nonemployee compensationcorrect

 B. To report rental income
 C. To report investment income
 D. To report employee wages
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for A:

The 1099-NEC form is used to report nonemployee compensation, which includes

earnings from 1099 independent contractor positions (also known as self-employment
income). This form is specifically for reporting income received by independent
contractors, who are generally treated as self-employed and report income and loss on
Schedule C.

Show Other Explanations

 16. Question ID: 94815821 (Topic: Self-Employed Taxpayers)
Self-employment tax applies to which of the following individuals?

 A. Investors who report only interest and dividend income.

 B. Independent contractors reporting net earnings from self-employment of $400
or more.correct
 C. An individual with $2,000 in hobby income.
 D. Ministers reporting net earnings from self-employment of $100.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for B:

Independent Contractors reporting net earnings from self-employment of $400 or more

would be subject to self-employment tax. Unearned income, such as capital gains,
interest, dividends, and non-business income (such as hobby income, prizes, or income
from a lawsuit, etc.) are typically not subject to self-employment taxes. The starting
point for self-employment income to trigger self-employment tax is $400 in net profit. If
your self-employment income is less than $400 for the year, you don't need to pay self-
employment taxes.

18. Question ID: 95850131 (Topic: Employee Compensation and Worker

Classification)
How can misclassifying workers adversely affect an employee with regard to their
income taxes?

 A. Because a misclassified worker has committed a crime.

 B. Because the employer does not pay their portion of the payroll taxes and also
does not withhold the employee's portion.correct
 C. Because the employee cannot determine how much compensation they received.
 D. Because the employee is usually unable to get a second job.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for B:

Incorrectly classifying workers as independent contractors can have negative

consequences for employees. This is because the employer does not pay their portion
of the payroll taxes and also does not withhold the employee's portion. Typically,
employers are required by law to deduct and remit income taxes, Social Security,
Medicare, and unemployment taxes for their workers. A worker who believes they have
been misclassified as an independent contractor can file Form SS-8, Determination of
 Worker Status for Purposes of Federal Employment Taxes and Income Tax
Withholding, to seek a determination from the IRS.

Show Other Explanations

25. Question ID: 95850135 (Topic: Fringe Benefits)

Which of the following is no longer excludable for employees as a tax-free fringe
benefit?

 A. Health insurance premiums

 B. Retirement plan contributions
 C. Parking passes
 D. Moving expenses reimbursed by the employercorrect
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for D:

Due to changes in the Tax Cuts and Jobs Act, through 2025, employers must include
moving expense reimbursements in employees' wages. Employee moving expenses
paid by an employer, even under an accountable plan, are subject to withholding for
federal income taxes, as well as payroll taxes.

Note: There is an exception for U.S. Service members who move due to a permanent
change of station.

Show Other Explanations

29. Question ID: 95850132 (Topic: Fringe Benefits)

Which of the following would be considered a taxable fringe benefit to an employee?

 A. Medical and dental insurance

 B. Cafeteria plan benefits
 C. Off-site athletic facilities and health club membershipscorrect
 D. Employer-provided life insurance under $50,000
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

Off-site athletic facilities and health club memberships would be a taxable fringe benefit
to an employee. The other choices listed would not be taxable fringe benefits and can
be offered as a "pre-tax" fringe benefit to employees.
 Show Other Explanations

35. Question ID: 94815940 (Topic: Taxation for Clergy and Military)
Which type of income is generally NOT reported on an Armed Forces member's Form
W-2?

 A. Combat pay.
 B. Overseas extension bonus.
 C. VA disability benefitscorrect
 D. Enlistment and reenlistment bonuses.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for C:

VA disability compensation for disabilities paid either to veterans or their families are not
reported on Form W-2 and are not taxable. Combat pay, overseas extension bonus,
and enlistment or reenlistment bonuses are all included on the W-2 for a member of the
Armed Forces. For more on this topic, see the page about Special Tax Considerations
for Veterans on the IRS website.

46. Question ID: 94815839 (Topic: Taxation for Clergy and Military)
On February 1, 2024, Declan, a commissioned officer, served five months in the combat
zone of Afghanistan. In June he was injured and transferred to an Armed Forces
medical site outside the combat zone and entitled him to hostile fire/imminent danger
pay. He stayed at the medical site until November, when he finally received orders to
return home. He actually returns home on November 25, 2024. He received his last two
combat zone payments in December. Which months of combat pay will be excluded
from Declan's gross income?

 A. February through September

 B. February through June
 C. February through Novembercorrect
 D. February through December
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

From February through November, Declan was considered to be serving in a combat

zone. Any part of a month spent in a combat zone will exclude the entire month's pay.
To see a handy cheatsheet of the different types of military pay and how they are
treated for tax purposes, see this IRS Chart on Armed Forces Income.
 47. Question ID: 94849624 (Topic: Taxation for Clergy and Military)
Pedro and Yesenia are married, and both are active-duty military. Pedro is a soldier in
the U.S. Army and served in a combat zone from January 1 through October 2, 2024,
before being transferred to an active-duty post in Virginia. Pedro earned $30,000 in total
wages during the year ($2,500 per month). Yesenia served as a U.S. Navy nurse
stationed in Norfolk, Virginia. She earned $40,000 for the entire year. They plan to file
jointly. What amount of income can they exclude (as combat pay) from gross income
on their jointly-filed return?

 A. $70,000
 B. $25,000correct
 C. $0, all their income is taxable.
 D. $30,000
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for B:

For any part of a month that enlisted personnel or warrant officers in the U.S. military
serve in a combat zone, their military pay is excluded from gross income. Pedro served
in a combat zone for ten months (January through October), so he and Yesenia can
exclude $25,000 of his income only ($30,000 ÷ 12 = $2,500 × 10 months). None of
Yesenia's income is excludible.

To learn more about this topic, see the IRS page for Tax Exclusions for Combat Pay.

49. Question ID: 94850144 (Topic: Taxation for Clergy and Military)
Perry is an ordained minister of the Holy Revival Church in Florida. In the current year,
he receives the following:

 W-2 salary from the church: $50,000

 Housing allowance for rent and utilities: $20,000
 Fees for performing weddings and funerals: $5,000
How are these amounts taxed under the special rules for members of the clergy?

 A. Perry has to pay both income tax and self-employment tax on his salary and
the fees for performing weddings and funerals. He has to pay self-employment
tax for the housing allowance, but it is not subject to income tax.correct
 B. Because he is an ordained minister, Perry's salary and housing allowance are not
subject to income tax. However, he must pay self-employment tax on both his salary
and the housing allowance.
 C. Perry must claim the salary, housing allowance, and fees as income on his tax
return. The salary and fees are subject to income tax and self-employment tax.
However, the housing allowance is subject to income tax only.
 D. Because his church is tax-exempt, Perry does not have to report any wages received
from the church. However, the fees for performing weddings and funerals are taxable
income.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for A:

All the income received by Perry is taxable income. However, only the wages and fees
are subject to both income tax and self-employment tax. The housing allowance is
exempt from income tax, but subject to self-employment tax. The exclusion for housing
is limited to the lesser of:

 Fair market rental value (including utilities), or

 The actual cost to provide the home.
For more information about the special rules that apply to clergy, see IRS Publication
517, Social Security and Other Information for Members of the Clergy and Religious
Workers.

53. Question ID: 95850144 (Topic: Medicare Waiver and Disability Payments)
Devon works full-time as a warehouse employee. His employer pays the entire cost of
Devon's health and disability insurance plan. Later, Devon becomes disabled and starts
receiving monthly disability payments from the disability insurance plan. How are
disability benefits treated on Devon's tax return?

 A. The disability insurance payments are fully taxable to Devon.correct

 B. The disability payments are partially taxable to Devon.
 C. The disability insurance payments are not taxable to Devon.
 D. The disability payments are not taxable to Devon, but they are taxable to the
employer as an insurance reimbursement.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for A:

Since his employer paid the premiums for the policy, the disability insurance payments
are fully taxable to Devon.
 Long-term disability payments from an insurance policy can be excluded from income
only if the employee pays the full cost of the premiums for the insurance policy. For
more information, see the IRS detail page on Frequently Asked Questions for Life
Insurance and Disability Insurance Proceeds.

Show Other Explanations

70. Question ID: 95850150 (Topic: Other Income Items)

Frannie is a waitress at a popular restaurant. One of her customers gives her a non-
cash tip in the form of concert tickets, which have a face value of $80. She happily
accepts the tickets because she wants to go to the concert. How should Frannie treat
this non-cash tip?

 A. The non-cash tip is not taxable to Frannie, and does not need to be reported on her
tax return.
 B. The non-cash tip is taxable to her employer, but not to Frannie, since it is not made
with cash.
 C. The non-cash tip is taxable to Frannie, and must be reported to her employer and
added to her Form W-2 as wages.
 D. The non-cash tip is taxable to Frannie, and must be reported on her tax return.
She does not have to report the non-cash tip to her employer.correct
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for D:

The non-cash tip is taxable to Frannie and must be reported on her tax return. She does
not have to report it to her employer.

Non-cash tips (for example, concert tickets, sports tickets, or other items) do not have to
be reported to the employer, but they must be reported and included in the employee's
gross income at their fair market value.

Show Other Explanations

76. Question ID: 95850153 (Topic: How Much Income to Report)

Jessie is unmarried and the sole proprietor of two small businesses, a hot dog stand,
and an online auction business. The online auction business has a net income of
$50,000, while the hot dog stand has a net loss of ($23,000) for the year. He also earns
$5,600 in wages from a seasonal job at a department store, where he only works during
the holidays in December. Based on these facts, how much net income must Jessie pay
self-employment tax on?

 A. $32,600
 B. $28,600
 C. $27,000correct
 D. $50,000
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

Jessie must pay self-employment tax on $27,000 ($50,000 - $23,000) of income

because he may “net” the income and losses from both his businesses. If a taxpayer
owns more than one business, he or she must net the profit or loss from each business
to determine the total earnings subject to SE tax.

Note: The wages that he earns from his part-time job are not part of this calculation
because the self-employment tax does not apply to wages (wages are instead subject
to payroll taxes, which are already withheld by the employer).

Show Other Explanations

80. Question ID: 94849528 (Topic: How Much Income to Report)

Gene had the following potentially taxable transactions. How much income, if any,
should be included on his 2024 return?

 $200 in interest credited to his savings account on December 31. He did not
withdraw any money from the account during the entire year.
 $2,000 withheld from his paycheck by his employer to satisfy a garnishment for
past-due child support.
 $1,000 winnings from a scratch-off ticket.
 $500 check received on December 25 from an individual for one of Gene’s
original drawings. Gene didn’t cash or deposit the check until the next year
 $6,000 inheritance from his deceased father

 A. $9,700
 B. $3,700correct
 C. $1,700
 D. $3,200
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for B:

All of the amounts are taxable income, except for the $6,000 inheritance from his
deceased father, which is not taxable. The answer is figured as follows:

Interest $200
Garnished wages $2,000
Lottery winnings $1,000
Payment for painting $500
Taxable amount $3,700
(This question is based on a prior-year EA exam question).
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94849645 (Topic: Interest Income)

Leyla is your tax client. She received the following items during the current year:

 $600 of income reported on Form-OID.

 $200 of interest earned on a certificate of deposit (the amounts were not
withdrawn).
 $7,000 from a prior year installment sale ($5,000 was a return of principal and
$2,000 was interest).
 $500 earned on a savings bond.
 $2,100 of qualified dividends.
She had no other income during the year. How much interest income must Leyla report
on her tax return?

 A. $4,800wrong
 B. $8,100
 C. $3,300correct
 D. $7,700
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

The answer is calculated as follows:

$2,000 interest on installment sale
+ $500 savings bond interest
+ $200 interest on certificate of deposit
+ $600 OID interest
= $3,300 reportable interest
The amounts that constituted a return of principal on the installment sale ($5,000) are
not considered income. The $2,100 of qualified dividends is taxed as dividend income,
not as interest income.

2. Question ID: 94849749 (Topic: Interest Income)

Which of the following statements is CORRECT, with regard to interest income?

 A. All interest income must be reported on a taxpayer's return, even if it is tax-

exempt.correct
 B. Tax-exempt interest does not need to be reported on a taxpayer's return.wrong
 C. All interest income is taxable.
 D. Interest earned on foreign investments is never taxable.
 Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Interest income may be taxable or tax-exempt. All interest income must be reported on
the tax return, even if it is tax-exempt.

3. Question ID: 94849750 (Topic: Interest Income)

Interest income is earned on all of the following except:

 A. U.S. Savings Bondswrong

 B. Deposits in credit union accounts
 C. Rental propertiescorrect
 D. Deposits in savings accounts
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Income earned from rental properties is classified as rental income, not interest income.

4. Question ID: 94849722 (Topic: Interest Income)

Interest earned by an individual taxpayer is considered:

 A. Employee compensation.wrong
 B. Earned income.
 C. Tax-exempt.
 D. Unearned income.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for D:

Interest income is considered unearned income. Unearned income is income from

investments and other sources which is unrelated to employment. Other examples of
"unearned income" include interest from savings accounts, capital gain distributions,
unemployment compensation, alimony, and dividends from stock.

5. Question ID: 94850057 (Topic: Interest Income)

What type of interest is exempt from federal tax?
 A. Interest on an annuity.
 B. Interest earned on a savings account.wrong
 C. Municipal bond interest.correct
 D. Interest on a certificate of deposit.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for C:

Interest earned on municipal bonds is exempt from federal income tax. However, this
type of interest must still be reported on a taxpayer’s return.

6. Question ID: 94849751 (Topic: Interest Income)

Alexa earned $1,505 on municipal bonds issued by the Ohio Water Authority. How
should this income be treated on Alexa's tax return?

 A. Alexa must report the interest on her return, but it is non-taxable.correct

 B. The interest is fully taxable and should be reported on Page 1 of the Form
1040.wrong
 C. Alexa does not need to report the interest, because it is non-taxable.
 D. The interest is fully taxable and should be reported on Schedule B.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Alexa must report the municipal bond interest on her return, but it is non-taxable.
Interest income may be taxable or tax-exempt, but all interest income is reported on the
tax return, even if it is tax-exempt.

7. Question ID: 94849752 (Topic: Interest Income)

Interest income is usually reported to the taxpayer on which IRS form?

 A. 1099-S
 B. 1099-MISCwrong
 C. 1099-INTcorrect
 D. 1099-NEC
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 98% of students.

Correct Answer Explanation for C:

 Interest income is usually reported on Form 1099-INT. Taxable interest income must be
reported on the tax return, even if the taxpayer does not receive Form 1099-INT.

8. Question ID: 94816010 (Topic: Interest Income)

Brayden owns several profitable investments, including tax-exempt muni bonds. How
would the interest from the muni bonds be reported to Brayden?

 A. They would not be reported to him at all, since the amounts are not taxable.
 B. Form 1099-MUNI.wrong
 C. Form 1099-S.
 D. Form 1099-INT.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

Form 1099-INT is used to report tax-exempt interest income to the taxpayer. Tax-
exempt interest is interest income that is not subject to federal income tax. Municipal
bonds (also commonly called "muni bonds") are commonly tax-free at the federal level
but can be taxable at state or local income tax level.

9. Question ID: 94849709 (Topic: Interest Income)

Which of the following types of interest income is not taxable to the recipient?

 A. Interest income from Treasury bills.

 B. Interest on certificates of deposit (CDs).
 C. Interest earned on a personal loan.wrong
 D. Municipal bond interestcorrect
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

Nontaxable interest includes:

 Municipal bond interest (Muni bonds).

 Interest redeemed from Series EE and Series I bonds may be excluded from
income if used to pay for qualified higher educational expenses during the year
and you meet other requirements for the Educational Savings Bond Program.
For more information on taxable and nontaxable interest, see IRS Publication 550,
Investment Income and Expenses.
 10. Question ID: 94849710 (Topic: Interest Income)
Moises holds a promissory note for a cash loan that he made to his brother-in-law,
David. David pays Moises principal and interest on the loan each month. How should
Moises report this transaction on his individual tax return?

 A. The interest should be reported as "other income" on Moises' Form 1040.

 B. The interest does not have to be reported if Moises considers it a gift from family.
 C. No reporting is necessary, since this is a loan between related parties.wrong
 D. Even though Moises does not receive a Form 1099-INT from his brother-in-law, he
should report the interest on Schedule B of his Form 1040.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Even though Moises does not receive a Form 1099-INT from his brother-in-law, he
should report the interest on Schedule B of his Form 1040. Note that, if a taxpayer
received less than $10 in interest, the taxpayer's bank or other financial institution might
not issue Form 1099-INT. Even if the taxpayer did not receive Form 1099-INT, they
must still report all of their taxable interest income.

11. Question ID: 94849507 (Topic: Interest Income)

Agatha purchased Series EE U.S. Savings Bonds ten years ago. She cashes them in to
pay for her son's college tuition of $10,000. She receives $7,250 from the bonds,
representing $5,000 in principal and $2,250 in interest. What portion is non-taxable?

 A. The $2,250 in interest is taxable to Agatha's son.

 B. The $2,250 in interest is taxable to Agatha, but the $5,000 in principal is not.
 C. A portion of the interest is taxable to Agatha, but the rest of the money is
not.wrong
 D. The entire amount is non-taxable because it was used solely for her son's education
expenses.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for D:

Because the money was used solely to pay for her son's education expenses, the entire
amount is considered non-taxable.

14. Question ID: 94849721 (Topic: Interest Income)

Interest received on a municipal bond issued by the state of California to fund school
buildings is:
 A. Fully taxable for federal tax purposes.
 B. Taxable when earned.
 C. Partially taxable.wrong
 D. Tax-exempt.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for D:

Interest received on a municipal bond issued by the state of California to fund school
buildings is tax-exempt. Municipal bond funds are one of a few investments in the
market that offer exemption from federal tax.

17. Question ID: 94849495 (Topic: Dividend and Distribution Income)

Arturo is a 10% shareholder of a family-owned C corporation that sells appliances. He is
also an employee of the company and works as a full-time appliance salesman. The
company pays Arturo the following:

 Mortgage and property taxes for his personal home: $48,000

 Company car to make sales calls: $12,000
 Medical and dental benefits: $18,000
 W-2 Wages: $50,000
During the year, the corporation goes under IRS audit, and several of the payments are
disallowed by the auditor. How could this affect Arturo's personal tax return?

 A. The IRS may reclassify the mortgage and property taxes, medical and dental
benefits, and the wages as a constructive distribution.wrong
 B. The IRS would likely reclassify the mortgage and property taxes as a constructive
distribution. The reclassified distributions would be taxable to Arturo as a dividend, and
not deductible by the C corporation.correct
 C. All the payments would be treated as taxable distributions to Arturo, but still fully
deductible by the corporation.
 D. It would not affect Arturo's personal income tax return, because a C corporation is
not a pass-through entity.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

The IRS would likely reclassify the mortgage and property taxes as a constructive
distribution, and these distributions would be taxable to Arturo as taxable dividends and
not deductible by the corporation. Certain transactions between a corporation and its
 shareholders may be regarded as "constructive distributions" or "constructive
dividends". This most often happens when a corporation goes under audit. The
corporation as well as the shareholder are affected.

They may be considered dividends or nondividend distributions, and may be taxable to

the shareholders. Examples of constructive distributions include payment of personal
expenses on behalf of an employee-shareholder. In this case, Arturo’s mortgage and
property taxes for his home are clearly personal expenses. Some or all of the other
payments could be legitimate nontaxable employee benefits.

19. Question ID: 94815900 (Topic: Dividend and Distribution Income)

Kokona receives a Form 1099-DIV reporting a dividend payment. She is a U.S. citizen,
however, she had failed to provide her correct Social Security number to the brokerage
firm that manages her investments. She ignores all of the notices that the brokerage
firm sends to her, and eventually they began to withhold taxes from her dividends.
What percentage of income is likely to be withheld from her dividend income?

 A. 28%
 B. 24%correct
 C. 35%wrong
 D. 0%
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for B:

Backup withholding occurs when certain payers, such as banks or other businesses,
are required to withhold and pay to the IRS a specified percentage of those payments.
The backup withholding rate for U.S. citizens and U.S. residents is 24% in 2024.
Backup withholding can apply to most kinds of payments that are reported on Form
1099. These include:

 Interest payments
 Dividends
 Rents, profits, other gains (Form 1099-MISC)
 Commissions, fees, or other payments for work done by independent contractors
 Payments by brokers/barter exchanges
 Royalty payments
Backup withholding applies in a number of instances, including when a payee fails to
furnish her correct taxpayer identification number or when the IRS notifies a payer to
start withholding on interest or dividends because the taxpayer has underreported them.
See the IRS detail page on Backup Withholding.
 22. Question ID: 94849525 (Topic: Dividend and Distribution Income)
Luke owns 500 shares of ABC Stock. He receives a $200 non-dividend distribution
during the year, which is reported on his 1099-DIV. His stock basis before the
distribution was $4,000. How is the non-dividend distribution taxed?

 A. The $200 distribution is taxed as portfolio income.

 B. The $200 distribution is taxed at capital gains rates.
 C. The $200 distribution is taxed at ordinary income tax rates.wrong
 D. The non-dividend distribution is non-taxable, and lowers his basis in his stock.correct
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

The non-dividend distribution is non-taxable, and lowers his basis in his stock. As long
as Luke has basis in the investment, any non-dividend distribution will not be taxable. A
non-dividend distribution is one that is not paid out of a corporation's earnings and
profits, meaning that they represent a share in the capital rather than a share in the
earnings.

23. Question ID: 94849767 (Topic: Dividend and Distribution Income)

Which of the following would be most likely considered a constructive dividend to a
shareholder?

 A. Wages paid to an employee-shareholder

 B. A below-market loan to a shareholder.correct
 C. Payment of health insurance for an employee-shareholderwrong
 D. Family and medical leave paid to a shareholder
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

A below-market loan to a shareholder would be considered a "constructive distribution"

or a "constructive dividend". A corporation's payment of a shareholder's personal
expenses may also be treated as a deemed distribution of a dividend, and taxable to the
shareholder, while being non-deductible by the corporation.

25. Question ID: 94849692 (Topic: Dividend and Distribution Income)

Which of the following types of income are taxable?

 A. Cash inheritance
 B. Muni bond interest
 C. Worker's compensationwrong
 D. Qualified dividendscorrect
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Qualified dividends are taxable income. The muni-bond interest does need to be
reported on the taxpayer's return, but it is not taxable. Inheritances and worker's
compensation are not taxable and generally do not need to be reported on the tax
return (with the exception of foreign inheritances, which are not taxable, but may need
to be reported on Form 3520).

27. Question ID: 94849689 (Topic: Basis of Assets - General)

During the current year, Ishmael purchased a new utility van for his package delivery
business. The van is used 100% for business. He reports his income and loss on
Schedule C. His costs were as follows:

 Cost of the van: $64,000.

 Sales tax on the van: $3,850.
 Title transfer charges: $700.
 Installation of special equipment: $1,500.
 Personal property taxes on the van: $2,000 (DMV registration fees).
What is Ishmael’s depreciable basis in this utility van?

 A. $66,200wrong
 B. $72,050
 C. $68,550
 D. $70,050correct
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 42% of students.

Correct Answer Explanation for D:

The answer is calculated as follows: $64,000 cost of van + $3,850 sales tax + $700
transfer charges + $1,500 installation charges = $70,050.

The basis of property is generally its cost. Sales tax paid in acquisition of property is
treated as a cost of the property. Delivery charges, installation, and testing also are
included as part of the cost of property. Personal property taxes, however, are not
treated as a cost of the property. The DMV fees would be deductible as a current
business expense on Schedule C, and not included in the basis of the van.
 28. Question ID: 94849699 (Topic: Basis of Assets - General)
Joselyn received 500 shares of restricted stock from her employer on March 1, 2024,
with the condition that she would forfeit the stock unless she completed five years of
service. On March 1, the fair market value of the stock was $15,000. What amount
should Joselyn include in income in 2024, and what is her basis in the stock?

 A. Joselyn would not report any income or have any basis in the stock until she
completes five years of service. correct
 B. Income of $0; basis of $15,000.wrong
 C. Income of $15,000; basis of $0.
 D. Income of $15,000; basis of $15,000.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for A:

This would not be a taxable event in the current year, because there is a "substantial
limitation" on the stock since Joselyn would forfeit the shares if she does not complete
five years of service. Therefore, she does not have constructive receipt of the stock.
She does not need to report any income and she has no basis in the stock until she has
completed five years of service and actually receives the stock and has control and
ownership over the shares.

30. Question ID: 94849674 (Topic: Basis of Assets - General)

Elizabeth owns 450 shares of Hess Corporation stock. Her cost basis is $15 per share.
At the end of the year, Hess Corporation issues a 2-for-1 stock split. What is Elizabeth’s
new basis per share after the stock split?

 A. $15wrong
 B. $30
 C. $7.50correct
 D. $8
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for C:

Elizabeth's new basis per share is $7.50. She has 900 shares after the stock split. 450
original shares x 2 = 900 shares

Her basis per share is figured as follows:

450 original number of shares x $15 = $6,750 cost basis

 $6,750 ÷ 900 shares after the split = $7.50 new basis per share

A stock split is an increase in the number of shares outstanding. When an investor is

granted stock in a 2 for 1 stock split, the cost basis stays the same, but it is "spread
over" double the number of shares. In other words, the basis of the overall stock
remains the same; it is only the per-share basis that is reduced.

31. Question ID: 94849563 (Topic: Basis of Assets - General)

On January 3, Barry bought 200 shares of Abbot Inc. stock at $9 per share for a total
cost of $1,800. On May 1, he bought 300 shares of Adobe, Inc. at $12 per share for a
total of $3,600.On December 1, the stock in both companies split 3 for 1. What is
Barry's basis per share in each company's stock after the 3-for-1 split?

 A. Abbot: 600 shares at $3, Adobe: 900 shares at $4correct

 B. Abbot: 200 shares at $3, Adobe: 300 shares at $4wrong
 C. Abbot: 600 shares at $9, Adobe: 900 shares at $9
 D. Abbot: 200 shares at $9, Adobe: 300 shares at $12
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

The resulting stock split means that Barry owns the following shares at the end of the
year:

 Abbot: 600 shares at $3

 Adobe: 900 shares at $4
Starting with 200 shares of Abbot stock at $9 per share for a total cost of $1,800 (the 3-
for-1 split: 3 x 200 original shares = 600 shares, then divide the total basis $1,800 by
600, which equals $3 per share)

Starting with 300 shares of Adobe stock at $12 per share for a total of $3,600 (the 3-for-
1 split: 3 x 300 original shares = 900 shares, then divide the total basis $3,600 by 900,
which equals $4 per share)

(This question is based on a prior-year EA exam question)

32. Question ID: 94849686 (Topic: Basis of Assets - General)

Leonardo sets up a computer system and designs a custom website for Lindsay’s
restaurant business. In return, Lindsay gives Leonardo a delivery van that he plans to
use for his own business and depreciate. The fair market value of both Leonardo’s
services and the delivery van is $70,000. Lindsay’s basis in the delivery van was
$45,000. What amount of income should Leonardo report for this bartering transaction
and what is his depreciable basis in the delivery van?
 A. $0 income and no depreciable basis.wrong
 B. $45,000 income; $70,000 depreciable basis.
 C. $70,000 income; $45,000 depreciable basis.
 D. $70,000 income; $70,000 depreciable basis.correct
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for D:

If compensation for personal services is paid in property, its fair market value at the time
of receipt is gross income, which becomes the basis in the property. Since the delivery
van’s FMV at the time of the barter exchange is $70,000, Leonardo must recognize
$70,000 of income and the property’s depreciable basis is also $70,000.

33. Question ID: 94849714 (Topic: Basis of Assets - General)

Floris purchased her first home this year. Which of the following costs would be added
to the basis of the home?

 A. Legal fees for the title search and preparation of the sales contract and deed.correct
 B. Fire insurance premiums.
 C. Cost of a credit report.wrong
 D. Rental costs for occupying the home before closing.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for A:

A taxpayer can include in a home's basis the settlement fees and closing costs paid for
buying the home. The following are some of the settlement fees and closing costs that
can be included in the original basis of a taxpayer's home.

 Abstract fees (abstract of title fees).

 Charges for installing utility services.
 Legal fees (including fees for the title search and preparation of the sales
contract and deed).
 Recording fees and land surveys.
 Transfer or stamp taxes.
 Owner's title insurance.
 Any amount the seller owes that the buyer agrees to pay, such as back taxes or
interest, recording or mortgage fees, cost for improvements or repairs, and sales
commissions.
 These items are NOT added to a home's basis and are also not deductible:

 Fire insurance premiums.

 Charges for using utilities or other services related to occupancy of the home
before closing.
 Rent for occupying the home before closing.
 Charges connected with getting or refinancing a mortgage loan, such as: Loan
assumption fees, Cost of a credit report, and Fee for an appraisal required by a
lender.
See Publication 530, Tax Information for Homeowners, for more information.

34. Question ID: 94849641 (Topic: Basis of Assets - General)

On March 3, Gary buys 100 shares of Grunge Inc. stock at $3 per share. On October 1,
he bought 200 shares of Handy Caddy, Inc. at $18 per share. On December 31, the
stock in both companies split 3 for 1. What are Gary's total shares and his basis per
share in each company's stock after the 3-for-1 split?

 A. Grunge Inc: 150 shares at $1.50 per share; Handy Caddy: 300 shares at $12 per
share
 B. Grunge Inc: 300 shares at $1 per share; Handy Caddy: 600 shares at $6 per
sharecorrect
 C. Grunge Inc: 300 shares at $3 per share; Handy Caddy: 600 shares at $12 per
sharewrong
 D. Grunge Inc: 200 shares at $1.50 per share; Handy Caddy: 300 shares at $18 per
share
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for B:

On March 3, Gary buys 100 shares of Grunge Inc. stock at $3 per share. On October 1,
he bought 200 shares of Handy Caddy, Inc. at $18 per share. The resulting 3-for-1
stock split means that Gary owns the following shares at the end of the year:

 Grunge Inc: 300 shares at $1 per share (the 3-for-1 split: 3 x 100 original
shares = 300 shares, then divide the total basis (100 x $3 = $300 original basis)
by 300, which equals $1 per share)
 Handy Caddy: 600 shares at $6 per share (the 3-for-1 split: 3 x 200 original
shares = 600 shares, then divide the total basis (200 x $18 = $3,600 original
basis) by 600, which equals $6 per share)

35. Question ID: 94849575 (Topic: Basis of Assets - General)

 When calculating the basis of stock or other securities held for investment, which of the
following costs would NOT be included in a stock's basis?

 A. Direct costs of purchase.

 B. Recording fees.wrong
 C. Interest paid on a margin loan.correct
 D. Broker's commissions.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for C:

The basis of stocks or bonds is generally the purchase price plus the costs of purchase,
such as broker's commissions and recording or transfer fees. In most cases, the cost
basis of an investment is the original purchase price upon acquisition. However, interest
incurred on a margin loan would not be included in the basis of securities. Instead,
investment interest expense is a tax deduction.

Note: Investment interest expense is the interest paid on money borrowed to purchase
taxable investments. This includes interest incurred on margin loans for buying stock in
a brokerage account. This deduction is limited to the amount of net investment income.

36. Question ID: 94849633 (Topic: Basis of Assets - General)

Which of the following items does not decrease an asset’s basis?

 A. A casualty loss.
 B. A manufacturer’s rebate.
 C. Section 179 deductions.wrong
 D. The cost of defending a title to the property.correct
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for D:

The cost of defending or perfecting a title increases an asset’s basis. Each of the other
answers decreases an asset’s basis.

38. Question ID: 94849763 (Topic: Basis of Assets - General)

Benny purchased 1,000 shares of Grundel Manufacturing, Inc. for $10,000 three years
ago. The corporation did a 2-for-1 stock split during the year. What is Benny's basis per
share AFTER the stock split?

 A. $20 per share

 B. $5 per sharecorrect
 C. $10 per sharewrong
 D. $1 per share
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

A 2-for-1 stock split doubles the amount of the taxpayer's shares. In other words, a 2-
for-1 stock split means that for every one share held by an investor, there will now be
two. After a stock split, the way to calculate the basis per share is to take the taxpayer's
original investment amount ($10,000) and divide it by the new number of shares (2,000)
to arrive at the new per-share cost basis ($10,000/2,000 = $5 per share).

39. Question ID: 94849717 (Topic: Basis of Assets - General)

During the year, Jennifer received a 2-for-1 stock split on her Apple stock. She held 100
shares of stock before the split. After the split, she had 200 shares. What are the
taxable repercussions of this event? Does she need to pay taxes on the additional stock
that she received as the result of a stock split?

 A. This is not a taxable event, but Jennifer must reallocate her basis between the
original shares and the shares newly acquired in the stock split.correct
 B. This is a taxable event, and Jennifer must pay tax on the value of the additional
shares.
 C. This is a taxable event, and Jennifer must pay estimated taxes on the newly
acquired shares.wrong
 D. This is not a taxable event, but Jennifer must report the stock split on Schedule D.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for A:

In general, a stock split is not a taxable event, but Jennifer must reallocate her basis
between the original shares and the shares newly acquired in the stock split. In a stock
split, the corporation issues additional shares to current shareholders, but the
shareholder's total basis doesn't change. Following a stock split, a taxpayer must
reallocate their basis between the original shares and the shares newly acquired in the
stock split. For additional information, see Publication 550, Investment Income and
Expenses.

43. Question ID: 95850156 (Topic: Basis of Assets - Divorce)

Gary and Nancy are getting divorced. As part of their divorce settlement, Nancy must
transfer ownership of a classic vehicle worth $59,000 to Gary. Which of the following is
 NOT a requirement for this property transfer to qualify as a tax-free transfer which is
“incident to a divorce”?

 A. The vehicle must have been solely owned by Nancy during their marriage.correct
 B. The transfer must generally occur within one year of the divorce.wrong
 C. The transfer must be related to the cessation of the marriage.
 D. The transfer must be pursuant to a divorce or separation instrument.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

The property's ownership (whether solely or jointly owned) during the marriage is not a
specific requirement for the transfer to be tax-free.

When property is transferred from one spouse to another during a divorce, typically,
there are no tax implications for this transfer. For property transfers to qualify
as "incident to a divorce," the transfer generally must occur within one year after the
date the marriage ends.

For more information about spousal transfers during a divorce, see Publication 504,
Divorced or Separated Individuals.

44. Question ID: 95850157 (Topic: Basis of Assets - Divorce)

Harold and Bethany finalized their divorce this year. A month after the divorce was
final, Harold transferred 1,000 shares of stock with a $50,000 basis to Bethany as part
of the divorce settlement. The stock’s value increased to $60,000 during their divorce
proceedings, and this was the value of the stock when it was transferred to Bethany.
What are the tax implications for this transfer?

 A. Neither Harold nor Bethany recognizes any gain or loss on the transfer.correct
 B. Harold may recognize a loss of $10,000 on the transfer.wrong
 C. Bethany must recognize a gain of $10,000 on the transfer.
 D. Harold must recognize a gain of $10,000 on the transfer.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for B:

Neither Harold nor Bethany recognizes any gain or loss on the transfer. Bethany's basis
in the stock would remain the same as Harold's ($50,000).
 When property is transferred from one spouse to another during a divorce, typically,
there are no tax implications for this transfer. For property transfers to qualify as
"incident to a divorce," the transfer generally must occur within one year after the date
the marriage ends.

For more information about spousal transfers during a divorce, see Publication 504,
Divorced or Separated Individuals.

Correct Answer Explanation for A:

Neither Harold nor Bethany recognizes any gain or loss on the transfer. Bethany's basis
in the stock would remain the same as Harold's ($50,000).

When property is transferred from one spouse to another during a divorce, typically,
there are no tax implications for this transfer. For property transfers to qualify as
"incident to a divorce," the transfer generally must occur within one year after the date
the marriage ends.

For more information about spousal transfers during a divorce, see Publication 504,
Divorced or Separated Individuals.

Show Other Explanations

45. Question ID: 94850081 (Topic: Basis of Assets - Divorce)

Sammy and Belinda are getting divorced. They are both 35 years old. As part of the
divorce settlement, Sammy is required to transfer $75,000 from his traditional IRA to
Belinda's IRA account. The transfer is incident to the divorce and is part of the official
divorce decree. How is this transfer treated for tax purposes?

 A. The transfer is treated as a taxable distribution to Sammy.wrong

 B. The transfer is treated as a taxable gift.
 C. The transfer is treated as taxable alimony income to Belinda.
 D. The transfer is tax-free.correct
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for D:

If an interest in a traditional IRA is transferred from one spouse to another by a divorce

decree, the transfer is tax-free, and there are no penalties. The transfer is not treated as
a taxable distribution. The IRS calls this a “transfer incident to divorce.” For more
information about spousal transfers during a divorce, see Publication 504, Divorced or
Separated Individuals.

46. Question ID: 95850158 (Topic: Basis of Assets - Divorce)

 When does a transfer between spouses qualify as a tax-free transfer “incident to a
divorce”?

 A. The property must be treated as a taxable gift.

 B. The transfer must only involve jointly-owned assets.wrong
 C. The transfer must made be pursuant to a divorce or separation instrument.correct
 D. The transfer must be made within six years of the divorce.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Incorrect Answer Explanation for B:

When property is transferred from one spouse to another during a divorce, typically,
there are no tax implications for this transfer. For property transfers to qualify as
"incident to a divorce," the transfer generally must occur within one year after the date
the marriage ends.

For more information about spousal transfers during a divorce, see Publication 504,
Divorced or Separated Individuals.

Correct Answer Explanation for C:

When property is transferred from one spouse to another during a divorce, typically,
there are no tax implications for this transfer. For property transfers to qualify as
"incident to a divorce," the transfer generally must occur within one year after the date
the marriage ends.

For more information about spousal transfers during a divorce, see Publication 504,
Divorced or Separated Individuals.

Show Other Explanations

47. Question ID: 94850071 (Topic: Basis of Assets - Divorce)

Gilbert and Brittney are getting divorced. Gilbert has decided to buy Brittney out of their
jointly-owned rental property as a condition of the divorce. What is the proper
classification of this payment?

 A. A non-deductible property settlement.correct

 B. The buyout is treated as a taxable sale to Brittney.wrong
 C. A deductible property settlement.
 D. Non-deductible child support.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 56% of students.

 Correct Answer Explanation for A:

This is classified as a non-deductible property settlement. Property transfers “incident to

divorce” are not taxable income to the recipient and, therefore, are not tax-deductible to
the payor. For more information, see Publication 504, Divorced or Separated
Individuals.

48. Question ID: 94849640 (Topic: Basis of Gifted Assets)

Murray purchased a first edition of an Ernest Hemingway novel in the 1920s for $25.
Decades later, Murray gave the book to his grandson, Maximus. At the time of the gift,
the book had an appraised value of $1,325. Nine months later, Maximus sold the book
for $1,650. What is the amount and character of Maximus’ gain from the sale of the first
edition book?

 A. $1,300 long-term capital gain.wrong

 B. $325 short-term capital gain.
 C. $1,625 long-term capital gain.correct
 D. $1,625 ordinary gain.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for C:

Maximus has a $1,625 long-term capital gain ($1,650 – transferred basis $25). The
holding period is long term, because the holding period of his grandfather is “tacked-on”
to Maximus’ holding period.

50. Question ID: 95850160 (Topic: Basis of Gifted Assets)

Shania's brother, Franklin, gave her a gold coin that he purchased three years ago.
Franklin originally purchased the coin for $1,800, but it is now worth $3,600. What is
Shania's basis in the coin for determining gain on any future sale?

 A. Shania's basis in the coin is zero, because she paid nothing for the coin.
 B. Shania's basis in the coin is $1,800correct
 C. Shania's basis in the coin is $3,600wrong
 D. Shania's basis in the coin is $3,000
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Incorrect Answer Explanation for C:

Shania's basis in the coin is $1,800. Generally, the basis of gifted property for the donee
is equal to the donor's adjusted basis. This is called a "transferred basis."
 Correct Answer Explanation for B:

Shania's basis in the coin is $1,800. Generally, the basis of gifted property for the donee
is equal to the donor's adjusted basis. This is called a "transferred basis."

Show Other Explanations

52. Question ID: 94849560 (Topic: Basis of Gifted Assets)

Hester acquired an acre of farmland as a gift from her aunt. At the time of the gift, the
acre had a fair market value (FMV) of $19,000. Her aunt's adjusted basis in the land
was $14,000. No gift tax was paid on the gift. No events occurred to increase or
decrease her basis in the property. Hester later sold the acre of land at a bargain price
of $10,000, because she wanted the cash from a quick sale. What is Hester's gain (or
loss) on the sale?

 A. $9,000 loss
 B. $0 (no gain or loss)wrong
 C. $10,000 loss
 D. $4,000 losscorrect
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for D:

Hester's loss is $4,000 ($14,000 - $10,000 sale price). Since she sold the property at a
loss, her basis in the land for calculating the loss is $14,000, because it is the lower of
her aunt's adjusted basis and the fair market value on the date of the gift. See
IRS Publication 551, Basis of Assets, for more information on how to calculate the basis
of gifted property.

53. Question ID: 94849655 (Topic: Basis of Gifted Assets)

On January 30, Tracy received two acres of land as a gift from her brother, Matthew. At
the time of the gift, the land had an FMV of $77,000. Matthew’s adjusted basis in the
land was $74,000. Tracy then spent $2,000 of her own funds to clear tree stumps from
the land. On December 31, Tracy sold the property for $76,500. How should she report
this transaction on her tax return?

 A. $2,500 gain.
 B. $500 loss.wrong
 C. $500 gain.correct
 D. $2,500 loss.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

 Correct Answer Explanation for C:

Tracy has to recognize a $500 gain on the sale of the land. The basis of property
received as a gift is figured differently than property that is purchased. Generally, the
basis of gifted property is the same in the hands of the donee as it was in the hands of
the donor, but may also include the amount of gift tax paid by a donor, if any. If the fair
market value of the property on the date of the gift is less than the transferred basis, the
donee’s basis for gain is the transferred basis. However, if the donee reports a loss on
the sale of gifted property, her basis is the lower of the transferred basis or the FMV of
gifted property. The sale of gifted property can also result in no gain or loss. This
happens when the sale proceeds are greater than the gift’s FMV, but less than the
transferred basis. Tracy has a $500 gain because she uses the donor's adjusted basis
at the time of the gift ($74,000) plus the amount that she spent to clear the property
($2,000) as the basis to figure gain. Therefore, since she sold the property for $76,500
she has a $500 capital gain, calculated as follows:

($74,000 + $2,000) = $76,000 basis

($76,500 - $76,000) = $500 capital gain on sale

54. Question ID: 94849574 (Topic: Basis of Inherited Property)

Cyrus died on March 19, 2024. Before his death, he was an active stamp collector,
which he did as a hobby and shared with his granddaughter, Robin, who also became a
serious hobbyist. At the time of Cyrus’ death, his collection had a fair market value of
$20,000 and an adjusted basis of $4,000, while Robin’s smaller stamp collection had a
fair market value of $8,000 and an adjusted basis of $2,000. Upon his death, his entire
collection went to Robin. A few months later, Robin was too sad to continue stamp
collecting, so she sold all of the stamps in a bulk sale for $40,000. What is Robin’s
taxable gain on the sale of the stamps?

 A. $18,000correct
 B. $34,000wrong
 C. $10,000
 D. $26,000
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for A:

The basis of inherited property is generally the FMV of the property on the date of the
decedent's death. This means that if the property is sold by the beneficiary, gain will be
calculated based on the change in value from the date of death. The answer is
calculated as follows: $40,000 sales price minus $20,000 (stepped-up basis of Cyrus'
stamp collection) and $2,000 (basis of Robin’s collection) = $18,000 taxable gain.
 Note: Stamps are considered a collectible and subject to a special capital gains tax rate.
If a taxpayer has collectibles that are sold at a gain, the gains will be subject to a
maximum long-term capital gains tax rate of up to 28%. Collectibles include works of
art, rugs, gemstones, antiques, and precious metals, and collectible coins.

56. Question ID: 94849665 (Topic: Basis of Inherited Property)

Trenton wishes to sell a home that he inherited from his deceased mother in San
Francisco. His mother paid $45,000 for the home over forty years ago. His mother put a
new roof on the property two years ago, just before her death, at a cost of $10,500. His
mother also owed $5,000 in delinquent property taxes on the home when she died. The
fair market value of the home on the date of his mother’s death was $920,000. No
estate tax return was filed for his mother's estate. What is Trenton's basis in the
inherited home?

 A. $45,000wrong
 B. $60,500
 C. $55,500
 D. $920,000correct
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for D:

Trenton's basis in the home is $920,000, the FMV on the date of his mother’s death.
Usually, heirs use a stepped-up basis for inherited property, regardless of what the
deceased person actually paid for the asset, and regardless of any improvements that
the decedent made to the home while they were still alive.

Note: The basis of inherited property is generally the FMV of the property on the date of
the decedent's death. This means that when the property is sold, the gain will be
calculated based on the change in value from the date of death.

57. Question ID: 94849764 (Topic: Basis of Inherited Property)

Jennifer inherited 1,000 shares of stock from her grandmother, who died on February 1,
2024. Her grandmother had originally paid $10 per share when she purchased the stock
several years prior. The fair market value of that stock on February 1 was $13 per
share. Nine months later, on November 1, Jennifer sold all the stock for $14 a share. No
estate tax return was filed for her grandmother's estate. What is the amount and nature
of Jennifer's gain?

 A. $1,000 in long-term capital gain.correct

 B. $4,000 in long-term capital gain.wrong
 C. $1,000 in short-term capital gain.
 D. $4,000 in short-term capital gain.
 Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for A:

She has $1,000 in long-term capital gain. Her cost basis of the stock is the fair market
value of that stock as of the date of the decedent's death. Since the FMV of the stock
was $13 on the date of her grandmother's death, then her basis would be $13,000 ($13
x 1,000 shares) Therefore, if Jennifer sells all the stock for $14 a share and on the date
of death the value was $13 a share, then she would pay tax on $1 a share ($14,000
sales price - $13,000 stepped-up basis). Since the stock was inherited, it would
automatically be treated as long term capital gains.

58. Question ID: 94849653 (Topic: Basis of Inherited Property)

Kendria inherited 100 shares of stock from her father, who died on May 3, 2024. Her
father’s adjusted basis in the stock was $42,000 just before he passed away. On May 3
(the date of her father's death) the stock’s fair market value was $78,000. On November
3, 2024, (6 months after the date of her father’s death) the stock's value was $72,000.
The 100 shares of stock was finally distributed to Kendria by the estate’s executor on
December 7, 2024. On the date of distribution, the stock’s value was $71,000. The
estate is worth over 19 million dollars and the estate's executor must file an estate tax
return (Form 706). The executor selected the alternate valuation for the estate. What is
Kendria’s basis in the inherited stock for determining gain or loss?

 A. $42,000wrong
 B. $72,000correct
 C. $71,000
 D. $78,000
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for B:

Kendria’s basis is $72,000, the fair market value on the alternate valuation date, which
is six months after the date of the decedent’s death. The basis of property received from
a decedent's estate is generally the fair market value of the property on the date of the
decedent’s death. If the executor of the estate elects the alternate valuation date for the
estate tax return, the basis of assets is their fair market value six months after the date
of death.

59. Question ID: 94850114 (Topic: Other Basis Topics)

Harry and Melanie are married. They live in a community property state (Texas). They
lived together all year. Harry has $2,000 per month in retirement pay, which is
considered to be community income. Harry also owns a rental (his name is on the deed,
 but his wife's name is not). The rental produces $600 a month in net income. Melanie
does not have a job and does not work. Melanie and Harry decide to file separate tax
returns. How much is considered to be community income and reportable on Melanie's
separate return?

 A. $1,300 per month.correct

 B. $2,000 per month.
 C. $1,000 per month. wrong
 D. $0, retirement pay and rental income is exempt from community property rules.
This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for A:

If Melanie and Harry decide to file separate tax returns, and they live in a community
property state, then one-half of the income would be treated as earned by Melanie. So
$1,300 a month would be her portion of the community income (one-half the pension
income and one-half of the rental income).

Note: Community property rules are complex and can vary from state to state. This
question is based directly on an example in Publication 555, Community Property.
According to Publication 555, in Idaho, Louisiana, Texas, and Wisconsin, income from
most separate property is treated as community income. Couples can also choose to
have a legal agreement that provides that no community property will be created during
the marriage (such as a Prenuptial Agreement between the spouses).

60. Question ID: 94849652 (Topic: Capital Gains and Losses)

Malila purchased 300 shares of Berger Electronics Inc. stock ten years ago. Her basis
per share is $4. On January 5, 2024, Berger Electronics issues a 2-for-1 stock dividend,
increasing her total shares to 600. On November 26, 2024, Malila sells all 600 shares
for $9 per share. What is the amount and nature of her gain?

 A. $2,100 long-term capital gain and $2,100 short-term capital gain.

 B. $5,400 long-term capital gain.
 C. $4,200 short-term capital gain.wrong
 D. $4,200 long-term capital gain.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

A stock dividend does not increase basis. Instead, the original basis of the stock is
spread over the additional shares. Stock acquired in a stock dividend or stock split has
the same holding period as the original stock owned. Since Malila's original stock has a
 long-term holding period, the stock she received in a stock dividend also has a long-
term holding period and all of her gain is long-term. The answer is calculated as follows:

300 shares × $4 per share = $1,200 (taxpayer’s basis before stock dividend)
600 shares × $2 per share = $1,200 (taxpayer’s basis after stock dividend)
600 shares × $9 per share = $5,400 (gross sale price)
$5,400 - $1,200 = $4,200 long-term capital gain

61. Question ID: 94849518 (Topic: Capital Gains and Losses)

Lilly bought 90 shares of Roboto Inc., stock for $1,275 on January 1, 2024. On May 15,
2024, she received a non-taxable distribution of $250 on the 90 shares of stock she
owned. She sold all the stock to an unrelated party for $1,220 on December 22. What is
her gain or loss on the sale?

 A. $305 capital loss

 B. $305 capital gainwrong
 C. $55 capital loss
 D. $195 capital gaincorrect
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

She has a $195 capital gain on the sale. The answer is figured as follows:

Starting basis $1,275

Minus nontaxable distribution ($250)
Basis after distribution $1,025
Sale price $1,220
Gain $195
Since she held the stock for less than a year, it would be treated as a short-term gain.
(Based on a prior EA exam question).

63. Question ID: 94849642 (Topic: Capital Gains and Losses)

Mindy purchased 300 shares in the Great Rock Mutual Fund on May 1, 2024. She
received a capital gain distribution, also known as a capital gain dividend, of $80 on
Form 1099-DIV at the end of the year. How should she report this on her tax return?

 A. She should report the $80 as a short-term capital gain on Schedule D.

 B. She should report the $80 on Schedule B as an ordinary dividend.wrong
 C. She should not report it, instead she needs to reduce the basis of her stock by $80.
 D. She should report the $80 as a long-term capital gain on Schedule D.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 31% of students.

Correct Answer Explanation for D:

She should report the $80 on Schedule D as a long-term capital gain. Under IRS
regulations, capital gain distributions from a mutual fund are always taxed as long-term
capital gains, no matter how long the taxpayer has owned the stock.

65. Question ID: 94849515 (Topic: Capital Gains and Losses)

Karen bought 50 shares of Roca-Cola, Inc. stock for $475 on March 31, 2024. On
November 15, 2024, Karen received a non-taxable distribution of $155 on the 50 shares
of stock she owned. She sold the stock for $300 on December 22, 2024. What is her
gain or loss on the sale?

 A. $175 capital gain

 B. $20 capital losscorrect
 C. $20 capital gainwrong
 D. $175 capital loss
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for B:

Karen has a $20 capital loss on the sale. Her loss in figured as follows:

Starting basis $475

Minus nontaxable distribution ($155)
Basis after distribution $320
Sale price $300
Loss ($20)
She has a capital loss of $20. Since she held the stock for less than a year, it would be
treated as short-term. (Based on a prior EA exam question).

66. Question ID: 94849604 (Topic: Capital Gains and Losses)

 Larry bought 140 shares of stock from his sister, Ezra, for $7,600. Her original cost
basis on the stock was $10,000. Larry sold all the shares two years later through a
stockbroker for $11,500. What is his recognized gain on the sale?

 A. $1,500 gain.correct
 B. $6,100 gain.
 C. $3,900 gain.
 D. $2,400 gain.wrong
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for A:

The sale between Larry and his sister is a related-party transaction, and is therefore
subject to special rules. If, in a purchase or exchange, a taxpayer received property
from a related person who had a loss that was not allowable and the taxpayer later sells
the property at a gain, the taxpayer will recognize the gain only to the extent it is more
than the loss previously disallowed to the related person. Although Ezra lost $2,400 in
the original sale to her brother, the loss was not deductible. When Larry later sold the
same stock to an unrelated party for $11,500, he realized a gain of $3,900. However,
the recognized gain is only $1,500 (the portion of the gain that is more than the $2,400
loss not allowed to his sister).

68. Question ID: 94850076 (Topic: Capital Gains and Losses)

Jenny owns stock that became worthless last year, because the corporation filed for
bankruptcy. Her basis in the stock is $5,500, which is how much she originally paid. She
did not sell the stock. The only other income she has for the year is $52,000 in wages.
Is her loss deductible, and if so, how should she report the loss?

 A. This loss should be reported as a bad debt deduction on Schedule A.

 B. She cannot take a capital loss until she sells the stock to an unrelated buyer.
 C. This loss should be reported as a casualty loss. She can take the entire $5,500
loss in the current year. wrong
 D. This loss should be reported as a capital loss, which would be limited to $3,000 in the
current year. Any unused losses would be carried forward. correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

Jenny should report the loss as a capital loss; the loss would be limited to $3,000 in the
current year, and she can carryover the unused loss indefinitely. If a taxpayer owns
stock that becomes totally worthless, this would be reported as a capital loss on
 Schedule D. The stock does not have to be sold if the stock is truly worthless, because
worthless securities have no market value. See more about the rules for worthless
securities.

69. Question ID: 94849703 (Topic: Capital Gains and Losses)

Jayden sold stock during the year and had a $24,000 capital gain. He is only a casual
investor and not a stockbroker or securities dealer. His capital gains should be reported
by using which forms?

 A. Schedule C.
 B. Schedule D only.
 C. Schedule B.wrong
 D. Schedule D and Form 8949.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for D:

Jayden should use Schedule D and Form 8949 to report his capital gains and losses.

70. Question ID: 94849731 (Topic: Capital Gains and Losses)

Aston sold multiple collectibles during the year. All were held for bona fide investment
purposes, and he is not a dealer in collectibles. How much capital gain (or loss) does he
have?

 Sold a collectible toy for a short-term capital loss of $ 5,000

 Sold an antique vase for a short-term capital gain of $16,000
 Sold a painting that was held for investment for a long-term capital loss $11,000
 Sold a collectible coin for a long-term capital gain of $10,000

 A. $11,000 in net capital gain

 B. Reportable capital loss of $ 5,000wrong
 C. $10,000 in net capital gaincorrect
 D. $9,000 in net capital gain
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for C:

He has $10,000 in net capital gain, figured as follows:

 Short-term gains and losses (Collectibles) ($5,000) + $16,000 = $11,000
Long-term gains and losses (Collectibles) ($11,000) + $10,000 = ($1,000)
Net gains $10,000
Short-term gains and losses ($5,000) + $16,000 = $11,000 gain Long-term gains and
losses ($11,000) + $10,000 = ($1,000) loss. He should use Schedule D (Form 1040),
Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital
Assets, to report the sales of his collectibles. Collectibles are considered capital assets,
but subject to a special tax rate. Net capital gains from the sale of collectibles are taxed
at a maximum of 28%.

71. Question ID: 94849572 (Topic: Capital Gains and Losses)

Carton had multiple stock sales during the year. How should he calculate and report the
following transactions on his return?

 Total short-term capital losses $ 6,000

 Total short-term capital gains $15,000
 Total long-term capital losses $10,000
 Total long-term capital gains $10,000

 A. $22,000 net capital gain

 B. $25,000 in net capital gain
 C. $0 in capital gainswrong
 D. $9,000 net capital gain correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for D:

Carton has $9,000 in net capital gain, figured as follows:

Short-term gains and losses ($6,000) + $15,000 = $9,000

Long-term gains and losses ($10,000) + $10,000 = $0
Carlton should use Schedule D (Form 1040), Capital Gains and Losses and Form
8949, Sales and Other Dispositions of Capital Assets, to report the sales of his stock.

72. Question ID: 94849573 (Topic: Capital Gains and Losses)

Alfie and Bettie sold stock during the year. The sale resulted in a short-term capital loss
of $4,000. The couple had no other capital sales transactions during the year. Their only
 other taxable income was $46,000 in wages, which was all earned by Alfie. How much
of the capital loss is currently deductible on their joint return, and how much, if any,
must be carried over to the next year?

 A. $0 loss; $4,000 carryover.

 B. $3,000 loss; $1,000 carryovercorrect
 C. $3,000 loss; $0 carryover.
 D. $4,000 loss; $0 carryover.wrong
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

Alfie and Bettie have a $3,000 capital loss and a $1,000 capital loss carryover, which
they may carryover to future tax years. If a taxpayer has a net capital loss, he or she
can deduct up to $3,000 ($1,500 if filing MFS) of it against ordinary income. Any
amounts exceeding this limit must be carried forward to future tax years. For more on
this topic, see Topic No. 409 Capital Gains and Losses.

73. Question ID: 94849852 (Topic: Capital Gains and Losses)

Alice is 34 years old and single. She sold stock during the year and had a capital loss of
$8,964 from the sale. She had no other capital gains or losses. She also had $54,700 in
wages. After the calculation of her allowable losses, what amount, (if any), of the capital
loss can Alice carry over to the following year?

 A. $5,964correct
 B. $0
 C. $6,912wrong
 D. $2,964
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

Alice can carry over $5,964 ($8,964 - $3,000) to the following year. Alice would only be
able to deduct $3,000 of her capital losses against her wage income. The remaining
capital losses must be carried over (the capital loss limit is $1,500 for taxpayers that file
MFS). To learn more about how taxpayers can deduct capital losses, see IRS Topic No.
409 Capital Gains and Losses.

74. Question ID: 94815928 (Topic: Capital Gains and Losses)

Sasha and Noreen are married and file jointly. Their combined wages totaled $75,000,
and they had the following transactions in the current year:
  Sold 100 shares of Ellison Corporation stock for $5,000. They had purchased the
shares ten years ago for $14,000.
 Sold 50 shares of Martinez Company stock for $7,500. They had purchased the
shares two years ago for $3,000.
They had no other capital asset transactions during the year. How should they handle
these transactions on their tax return?

 A. They can claim a loss of $3,000 in the current year and carry forward the
remaining $6,000 loss. They must report a long-term gain of $4,500 on their
current year tax return.wrong
 B. They must report a long-term gain of $4,500 on their current year tax return. Stock
losses are not deductible.
 C. They have a long-term loss of $4,500 that they can claim in the current year. Since
they file jointly, their capital loss deduction is up to $6,000 per year.
 D. They can claim a loss of $3,000 in the current year and carry forward the remaining
$1,500 loss.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for D:

The answer is calculated as follows: The Ellison Corporation stock loss of $9,000
($14,000 minus $5,000) is netted against the Martinez Company stock gain of $4,500
($7,500 minus $3,000), for a net long-term capital loss of $4,500. A taxpayer can deduct
up to $3,000 ($1,500 for MFS) of net capital losses against ordinary income in a tax
year. (Taxpayers filing jointly are also limited to a $3,000 deduction.) They can carry
forward the remaining $1,500 loss ($4,500 loss minus $3,000). Any excess capital loss
can be carried over for an unlimited time until it is used up. A capital loss carried over to
a later tax year retains its long-term or short-term character. A short-term capital loss
carryover first offsets short-term gain in the carryover year. If a net short-term capital
loss results, this loss offsets long-term capital gain. Any remaining net loss can then be
used to offset up to $3,000 of ordinary income. To learn more about capital gains and
losses, see IRS Topic No. 409 Capital Gains and Losses.

75. Question ID: 94849667 (Topic: Capital Gains and Losses)

Jalal bought 600 shares of Herringbone Corporation stock for $1,500, including a
broker's commission. Five years later, the corporation distributed a nontaxable stock
dividend of 10 shares to Jalal. A few days after the stock dividend was distributed, Jalal
sold all his Herringbone stock for $2,030. What is the amount and nature of his gain or
loss?

 A. Long-term capital gain of $2,030.

 B. Short-term capital gain of $530.wrong
 C. Long-term capital gain of $530.correct
 D. Long-term capital gain of $500, Short-term capital gain of $30.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Although the taxpayer owned the 10 shares he received as a nontaxable stock dividend
for only a few days, all the stock has a long-term holding period. Stock acquired as a
stock dividend has the same holding period as the original stock owned. Because he
bought the stock for $1,500 and then sold it for $2,030 more than a year later, he has a
long-term capital gain of $530 on the sale of the 610 shares.

76. Question ID: 94849568 (Topic: Capital Gains and Losses)

On January 1, Geneva paid $10,000 for 100 shares of stock in Agri-Barn, Inc. a start-up
company. Six months after she bought it, she sold the stock to her brother, Henry, for
$8,000, which was its current market value. Two months later, the stock suddenly
shoots up in value, and on December 31, Henry sells all the stock to an unrelated party
for $16,000. What gain or loss should Geneva and Henry recognize on their tax returns
in the year of sale?

 A. Geneva recognizes $2,000 capital loss; Henry recognizes $7,000 capital gain.
 B. Geneva recognizes $2,000 capital loss; Henry recognizes $8,000 capital
gain.wrong
 C. Geneva recognizes $0 capital loss; Henry recognizes $8,000 capital gain.
 D. Geneva recognizes $0 capital loss; Henry recognizes $6,000 capital gain.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for D:

This is a related party transaction, and special rules apply. Geneva recognizes $0
capital loss; Henry recognizes $6,000 capital gain. This is because Geneva cannot
claim a loss on the sale of stock to her own brother. Losses from sale or exchange of
property, directly or indirectly, are disallowed between related parties. When the
property is later sold to an unrelated party, any previously disallowed loss may be used
to offset gain on that transaction. However, since Henry sold the stock at a profit, he
would be able to use the basis of the original seller (Geneva) in order to calculate his
own gain on the sale.

Note: With regard to related parties sales, IRC §267 contains an "anti-abuse" provision
to prevent the recognition of loss by a taxpayer through a related party transaction.
 However, IRC §267 contains a relief provision by allowing the matching of expenses
with income incurred between related parties to permit a deduction only when a
corresponding recognition of income is made by the related payee. In other words,
When the property is later sold to an unrelated party, any disallowed loss may be used
to offset gain on that transaction.

77. Question ID: 94850124 (Topic: Capital Gains and Losses)

Morgan buys 100 shares of Fairview Property stock and then later sells them for a $500
loss. Almost immediately, though, she regrets the sale, so she decides to repurchase
the same number of shares of Fairview Property. How long must Morgan wait after the
sale of the stock in order to avoid the wash sale rules?

 A. 365 days.
 B. 366 days.wrong
 C. 30 days.
 D. 31 days.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 48% of students.

Correct Answer Explanation for D:

Under the wash sales rules, Morgan must wait 31 days after the sale of the initial stock
before purchasing identical shares if she wants to be able to deduct her loss from the
earlier sale. The wash sale rules disallow recognition of a loss from a sale if the
taxpayer purchases identical securities within 30 days before or 30 days after the sale
date.

79. Question ID: 95005888 (Topic: Capital Gains and Losses)

Cedric has the following items of income and loss during the taxable year:

 $4,500 long-term capital gain from the sale of land.

 ($9,000) short-term capital loss from the sale of stock.
 $72,000 ordinary income from wages.
He had also carried over a $4,000 short-term capital loss from the prior year. How
should he handle the capital loss and gain on his individual tax return, and what
amount, if any, can he carry over to the following year?

 A. Cedric may deduct $5,500 of short-term capital losses against his wages.wrong
 B. Cedric may claim a capital loss of $3,000 in the current year, and carry over $5,500
in losses to future years.correct
 C. Cedric may deduct $8,500 of short-term capital losses against his wages.
 D. Cedric may deduct $9,000 in capital losses in the current year, and carryover $4,000
to future years.
 Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

Cedric has a current-year capital loss of $4,500 ($9,000 short-term loss - $4,500 long-
term capital gain). Adding the $4,000 capital loss carried over from the prior tax year, he
has a net capital loss of $8,500 for the year. However, his capital losses are limited. He
can only use $3,000 in the current year to offset his ordinary income. The remaining
$5,500 in losses must be carried over to future tax years. The losses can be carried
forward indefinitely, because a capital loss carryforward does not expire (except on
death). To learn more about capital gains and losses, see IRS Topic No. 409 Capital
Gains and Losses.

80. Question ID: 95092922 (Topic: Capital Gains and Losses)

Dolly has the following items of income and loss during the taxable year:

 $900 in income from a modeling gig

 $2,500 long-term capital gain from the sale of cryptocurrency
 ($8,000) short-term capital loss from the sale of land
 $1,000 in interest income from a CD
 $42,000 in wages.
How should she handle the capital gains and losses on her individual tax return, and
what amount, if any, can she carry over to the following year?

 A. Dolly may claim a capital loss of $5,500 in the current year.wrong

 B. Dolly may claim a capital loss of $3,000 in the current year. She may carry back the
$2,500 in excess losses to the prior tax year.
 C. Dolly may claim a capital loss of $3,000 in the current year, and carry over $2,500 in
losses to future years.correct
 D. Dolly may claim a capital loss of $4,500 in the current year. She may carry over
$1,000 in losses to future years.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for C:

Dolly has a current-year capital loss of $5,500 ($8,000 short-term loss - $2,500 long-
term capital gain). Her capital losses are limited, and she can only use $3,000 in the
current year to offset ordinary income. The remaining $2,500 in losses must be carried
over to future tax years. The losses can be carried forward indefinitely, because a
 capital loss carryforward does not expire (except upon death). To learn more about
capital gains and losses, see IRS Topic No. 409 Capital Gains and Losses.

81. Question ID: 94849494 (Topic: Capital Gains and Losses)

Mario is 35 years old and single. He sells stock during the year and incurs a $9,000
capital loss on the sale. He has wage income of $65,000 and no other capital gains and
losses during the year. What is the amount of capital losses that Mario can claim on his
individual tax return?

 A. A $9,000 capital loss from the disposition of his stock is deductible against his
wages.
 B. He must carryover the entire loss to a year that he has passive income to offset the
losses.
 C. He may deduct $1,500 in capital losses in the current tax year. The remaining
loss must be carried back 2 years.wrong
 D. A $3,000 capital loss may be deducted against his wage income. The remaining
capital losses must be carried over to future years.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for D:

Mario has a $3,000 deductible loss and a $6,000 capital loss carryover. The $3,000
capital loss may be deducted against his wage income. The remaining capital losses
must be carried over to future years. Only $3,000 ($1,500 for MFS filers) of capital
losses in excess of capital gains is deductible against ordinary income in any tax year.
Net capital losses in excess of this limit can be carried over to subsequent years. To
learn more about capital gains and losses, see IRS Topic No. 409 Capital Gains and
Losses.

82. Question ID: 94849598 (Topic: Capital Gains and Losses)

Jason has a full-time job as a software programmer and earns a salary of $72,000
during the current year. He also has an investment in a limited partnership that reports
the following items on his Schedule K-1: $6,000 of ordinary income and long-term
capital gain of $4,000. He also sells stock during the year and has an $11,500 loss on
its sale. Jason and his wife file jointly and have no other items of income or loss during
the year. Based on this information, what is their capital loss carryover to the next year?

 A. $4,500 capital loss carryover.correct

 B. $0 carryover.wrong
 C. $7,400 capital loss carryover.
 D. $11,500 capital loss carryover.
Study Unit 7: Capital Gains and Losses covers the information for this question.
 This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for A:

Jason and his wife have a $4,500 capital loss carryover. The capital loss of $11,500 on
the stock sale is offset by the $4,000 capital gain passed through from the limited
partnership investment, resulting in a net capital loss of $7,500. Jason and his wife can
claim $3,000 of the loss on their current year return. The remaining $4,500 of capital
loss must be carried over to the next year. The deduction for capital losses is limited to
$3,000 ($1,500 for MFS) per year, with a carryforward of excess loss to future years. To
read more about how to report Capital Gains and Losses, see IRS Topic No. 409
Capital Gains and Losses.

84. Question ID: 94815934 (Topic: Capital Gains and Losses)

When does an individual taxpayer's capital loss carryover expire?

 A. Upon the taxpayer's death. correct

 B. Never.
 C. 5 years.wrong
 D. 10 years.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for A:

Capital losses can be carried forward indefinitely during a taxpayer's lifetime. However,
capital loss carryovers do expire upon a taxpayer's death. The losses do not carryover
to the taxpayer's estate, because the decedent and estate are treated as separate tax
entities. To learn more about capital gains and losses, see IRS Topic No. 409 Capital
Gains and Losses.

85. Question ID: 94849970 (Topic: Capital Gains and Losses)

Hung owns several valuable collectibles, which he holds for investment purposes. On
May 1, he sells an antique vase for $65,000 which he purchased for $40,000 over ten
years ago. On November 15, he sells a painting for $12,000 which he purchased for
$20,000 two years ago. What is the nature of his gain or loss for the year?

 A. Net capital gain of $25,000

 B. Net capital gain of $17,000correct
 C. Net ordinary gain of $25,000
 D. Net ordinary gain of $17,000wrong
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

 Correct Answer Explanation for B:

His net capital gain is $17,000. He realizes a $25,000 ($65,000 - $40,000) capital gain
on the sale of the vase, which is offset by the capital loss of $8,000 ($20,000 - $12,000.)
He may offset the gains with the losses from the sale of both collectibles. The gain is
long-term, because he held the collectibles for more than one year. A "collectible" is
defined by the IRS as:

 Artwork, rugs or antiques,

 Precious metals or gemstones,
 Stamps, comic books, collectible cards, like baseball cards
 Alcoholic beverages (like premium wines),
 Gold and silver coins, and antique coins
He will be subject to a long-term capital gains tax rate of up to 28%. To learn more
about this topic, see Topic No. 409 Capital Gains and Losses.

12. Question ID: 94849570 (Topic: Interest Income)

Gregory had income from several sources during the year. Which of the following types
of income is he required to report on his return?

 A. Child support received from his ex-spouse.

 B. Court awards for physical injury sustained in an auto accident.
 C. Interest on life insurance dividends.correct
 D. Veterans’ disability benefits.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Gregory must report the interest on life insurance dividends. Although life insurance
proceeds paid to a beneficiary are not taxable, the interest earned on life insurance
dividends is taxable.

13. Question ID: 94849720 (Topic: Interest Income)

Interest received on a certificate of deposit (CD) is:

 A. Partially taxable.
 B. Tax-exempt.
 C. Taxable only when withdrawn.
 D. Fully taxable.correct
 Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

Interest received on a certificate of deposit (CD) is fully taxable when it is earned.

A certificate of deposit (CD) is a timed deposit sold by banks and other financial
institutions that have a specific, fixed term usually at a fixed interest rate. The bank will
send a 1099-INT for interest exceeding $10 paid during the year.

15. Question ID: 94849545 (Topic: Dividend and Distribution Income)

Margaret received the following items during the year. Which of these amounts is
considered taxable income to her?

 A. $4,200 of child support.

 B. $13,000 of qualified dividends.correct
 C. $18,000 cash inheritance.
 D. $28,500 direct rollover of IRA distributions.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

Only the qualified dividends are taxable. Qualified dividends are a type of dividends that
are eligible for taxation at preferential long-term capital gain rates. The IRA rollover
would need to be reported on Margaret’s return, but it is not a taxable event.

16. Question ID: 94849769 (Topic: Dividend and Distribution Income)

Danny is a 50% shareholder in Grand Toys, Inc., a C Corporation. Danny owns the
office building in which the company is located, and he charges rent to the company of
$5,000 per month. However, other similar buildings are renting for an average of $2,000
per month in the same area. Later, Grand Toys gets audited by the IRS, and the portion
of these rent payments that exceeds the fair market price are deemed excessive. What
is the tax result for Danny and the corporation?

 A. There is no tax effect for either Danny or the corporation.

 B. The excessive rents will be taxable to Danny as a constructive dividend, and
no longer deductible by the corporation as a business expense. correct
 C. The corporation will be taxed an additional 20% accumulated earnings tax on the
disallowed amounts.
 D. The excessive rents will become taxable to Danny as wages, and the corporation
and Danny will owe payroll tax on the full amount.
 Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

The excessive rents will be taxable to Danny as a constructive dividend, and no longer
deductible by the corporation as a business expense. When a corporate shareholder
uses corporate funds in a way that do not constitute business expenses, these
expenditures can be reclassified by the IRS as a constructive dividend. A constructive
dividend is a payment or a benefit given to a shareholder in a company that is not
intended or classified as a distribution to the shareholder, but which is classified later as
a dividend by the IRS and thus becomes taxable to the shareholder, and nondeductible
to the corporation. Other examples of constructive dividends include:

 Excessive compensation, including excessive rents paid to the shareholder

 Use by shareholders of corporate property
 Payment of personal expenses with corporate funds
 Assumption of shareholder debt by the corporation
18. Question ID: 94849695 (Topic: Dividend and Distribution Income)
Two years ago, Nadira bought 100 shares of Great Lakes Inc. stock for $10,000. On
January 29, 2024, she received a non-dividend distribution of $6,000 from the company.
On December 15, 2024, she received another non-dividend distribution of $5,000. What
is the proper tax treatment for the second non-dividend distribution?

 A. The amount is not taxable until she disposes of the stock.

 B. She must report a taxable distribution of $5,000.
 C. She must report a long-term capital gain of $1,000.correct
 D. She does not need to report the distribution because it is not taxable.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for C:

She must report a long-term capital gain of $1,000. Distributions that are not paid out of
earnings and profits are non-dividend distributions. Non-dividend distributions are
considered a recovery or return of capital and therefore are generally not taxable.
However, these distributions reduce the taxpayer's basis. The first distribution reduces
her stock basis to $4,000 ($10,000 - $6,000). Once basis is reduced to zero, any
additional distributions are capital gains and are taxed as such. The first $4,000 of the
December $5,000 distribution reduces Nadira's basis to zero. She then must report a
long-term capital gain of $1,000. Non-dividend distributions are reported on Form 1099-
DIV.
 20. Question ID: 94849610 (Topic: Dividend and Distribution Income)
Dustin purchased stock five years ago for $3,000. During the tax year, he received a
nondividend distribution of $550. How should this be reported?

 A. Dustin must report the $550 as a long-term capital gain.

 B. Dustin must reduce the basis of his stock by $550.correct
 C. Dustin must report the nondividend distribution as interest income.
 D. Dustin must report the nondividend distribution as dividend income.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for B:

Dustin must reduce his stock basis by $550. A nondividend distribution reduces the
basis of a taxpayer’s stock. It is not taxed until the basis in the stock is fully recovered.
This nontaxable portion is also called a return of capital; it is a return of the taxpayer’s
investment in the stock of the company. When the basis of the stock has been reduced
to zero, the taxpayer must report any additional nondividend distributions received as a
capital gain.

21. Question ID: 94849725 (Topic: Dividend and Distribution Income)

Gerardo is the sole shareholder of a C corporation that offers financial services. The
corporation pays Gerardo’s personal expenses, including rent on his personal home,
which the corporation wrongly deducts as a business expense. The corporation is later
audited by the IRS, and the improper expenses are disallowed. How could these
corporate distributions affect Gerardo’s personal income tax return?

 A. The distributions would likely be treated as a constructive distribution and

would be taxable on Gerardo’s personal income tax return.correct
 B. The distributions are treated as a nontaxable fringe benefit.
 C. The distributions are treated as a stock option.
 D. There would be no taxable effect.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for A:

The distributions would likely be treated as a constructive distribution and would be

taxable on Gerardo’s personal income tax return. Certain transactions between a
corporation and its shareholders may be regarded as constructive distributions (or
constructive dividends). A constructive dividend is taxable to the shareholder, and not
 deductible to the corporation, so it has a very negative impact. Constructive dividends
are usually assessed under audit. Examples include when a corporation:

 Pays personal expenses on behalf of an employee-shareholder.

 Pays an employee-shareholder an unreasonably high salary considering the
services actually performed.
 Rents property from a shareholder and the rent is unreasonably higher than the
shareholder would charge an unrelated party for use of the property.
 Cancels a shareholder’s debt without repayment by the shareholder.
 Loans money to a shareholder on an interest-free basis or at a below-market
rate.
24. Question ID: 94849768 (Topic: Dividend and Distribution Income)
Terrence is a 20% shareholder of Willow Corporation, a C Corporation. The corporation
makes the following payments to Terrence during the year. Which of the following would
most likely be reclassified as a constructive dividend to Terrence?

 A. Reimbursement of business mileage

 B. A below-market loan made to Terrence by the corporationcorrect
 C. Retirement plan benefits offered to Terrence by the corporation
 D. Salary paid to Terrence by the corporation
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for B:

Loans to shareholders at "below-market" interest rates would be classified as a

constructive dividend. A constructive dividend is a payment or a benefit given to a
shareholder in a company that is not intended or classified as a distribution to the
shareholder, but which is classified later as a dividend by the IRS and thus becomes
taxable to the shareholder, and nondeductible to the corporation. Other examples of
constructive dividends include:

 Excessive compensation, including excessive rents paid to the shareholder

 Use by shareholders of corporate property
 Payment of personal expenses with corporate funds
 Assumption of shareholder debt by the corporation

26. Question ID: 94849694 (Topic: Basis of Assets - General)

On May 11, 2024, the Barberry Corporation granted 800 incentive stock options to their
top sales executive, Julie, with an option price of $15. On December 31, 2024, Julie
 exercised all of her stock options when the market price per share was $23. Once she
exercised her options, she decided to hold onto the stock for investment purposes.
What is the basis of her stock and how much should be included on Julie's Form W-2 as
income for the year?

 A. Basis $12,000; income $12,000.

 B. Basis $0; income $0.
 C. Basis $12,000; income $0.correct
 D. Basis $12,000; income $6,400.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 43% of students.

Correct Answer Explanation for C:

For incentive stock options, (ISOs) the basis in the stock is the actual price per share
paid upon exercise of the options. In this case, the executive’s basis is 800 × $15 =
$12,000. The bargain element attributable to the difference between the exercise price
and the value at the date of exercise ([$23 - $15] × 800 shares = $6,400) is not
recognized until the stock is sold. However, the taxpayer may need to make an
adjustment for alternative minimum tax (AMT) purposes for the bargain element. When
the stock is later sold, she will recognize gain equal to the difference between her basis
and the net proceeds of the sale.

For more information on how to report taxable stock options, see IRS Topic No. 427
Stock Options.

29. Question ID: 94849646 (Topic: Basis of Assets - General)

Vikki purchased a rental property for $200,000. She made a cash down payment of
$50,000 and financed $150,000 of the purchase price. Closing costs were $8,000 and
loan points were $7,000. What is Vikki’s basis in the rental property?

 A. $208,000correct
 B. $200,000
 C. $215,000
 D. $65,000
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for A:

The answer is calculated as follows: $200,000 sales price + $8,000 closing costs
= $208,000 basis. The basis of real estate may include a number of costs in addition to
 the purchase price. If a taxpayer purchases real property, certain fees and other
expenses are included in the cost basis. They may include real estate taxes the seller
owed at the time of the purchase, if the real estate taxes were paid by the buyer.
Generally, a taxpayer must also include settlement costs for the purchase of property in
his basis. The following fees are some of the closing costs that can be included in a
property’s basis:

 Abstract fees
 Charges for installing utilities
 Legal fees (including title search and preparation of the deed)
 Recording fees
 Land surveys
 Transfer taxes and owner’s title insurance
Also included in a property’s basis are any amounts the seller legally owes that the
buyer agrees to pay, such as recording or mortgage fees, charges for improvements or
repairs, and sales commissions. However, fees and costs for obtaining a loan on the
property (points) are not included in a property’s basis. Points can be deducted as
mortgage interest expense on Schedule E, (if the property is a rental). See
IRS Publication 551, Basis of Assets, for more information.

37. Question ID: 94849566 (Topic: Basis of Assets - General)

Jaxton bought 4 shares of common stock in Alter Corporation for $200. Later in the
same year, the corporation distributed additional shares in a 2-for-1 stock split. At the
date of the split, the common stock had a fair market value of $40 per share. What is
Jaxton basis in each share after this stock dividend?

 A. $100
 B. $20
 C. $25correct
 D. $50
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for C:

His basis in each share of stock after the stock dividend is $25 per share ($200 original
basis ÷ 8 shares). His original cost basis was $50 per share ($200 ÷ 4 shares), which
was spread out over 4 shares of common stock. Later, the corporation issued a 2-for-1
stock split, which doubled his shares. The fair market value of the stock at the time of
the stock split is irrelevant in this scenario. To find the basis after a stock split, you take
the original investment amount and divide it by the new number of shares to arrive at
the new per-share cost basis.
 40. Question ID: 94849644 (Topic: Basis of Assets - General)
Maura was granted 50 nonqualified stock options by her employer, Yancey Corporation,
on June 8, 2024, to purchase stock in the company. At the date of the grant, the
company was privately-held and the FMV of the stock was not readily determinable.
The option price was $10 a share. Yancey Corporation completed an initial public
offering (IPO) on November 1, and Maura exercised her options on December 15, 2024.
The stock’s FMV on the exercise date was $32 a share. Maura immediately sold the
stock upon exercise and received gross proceeds of $1,600. How should Maura report
this transaction on her tax return?

 A. Ordinary income of $1,100correct

 B. Capital gain of $1,100
 C. Dividend income of $1,600
 D. Capital gain of $1,600
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 25% of students.

Correct Answer Explanation for A:

The difference between the option price ($10/share) and the FMV ($32/share) is
included in Maura’s taxable compensation ($22 × 50 shares = $1,100) and thus is
taxable as ordinary income. For more information and examples of stock options, see
IRS Tax Topic 427, Stock Options.

41. Question ID: 94849662 (Topic: Basis of Assets - General)

Hyun purchases an empty parking lot for $90,000 at a county property auction. He plans
to use the property for investment purposes. He pays $20,000 in cash and finances the
remaining $70,000 with a bank loan. The lot has a $12,000 lien against it for unpaid
property taxes that were owed by the previous owner. Hyun agrees to pay the
delinquent property taxes as a condition of the sale. Which of the following statements
is correct?

 A. His basis in the property is $78,000.

 B. His basis in the property is $102,000.correct
 C. His basis in the property is $90,000, and he can deduct the property taxes on his
Schedule A as property taxes paid.
 D. His basis in the property is $32,000.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for B:

 Hyun's basis in the property is determined as follows: ($90,000 + $12,000 = $102,000).
Hyun cannot deduct the delinquent property taxes as a current expense, because the
property taxes were not his liability (they were assessed on the previous owner
and owed by the previous owner). Any obligations of the seller that are assumed by the
buyer increase the basis of the asset, and are not currently deductible. Since Hyun did
not own the property when the taxes accrued but agreed to pay them as a condition of
the sale, he should add the property tax payment to his basis in the property.

42. Question ID: 94849719 (Topic: Basis of Assets - General)

Daniel buys shares of ABC stock. On January 1, 2024, he bought 100 shares at $10 per
share. On April 1, he bought another 100 shares at $12 per share. ABC Corp.
announces a 2 for 1 stock split in May and issues Daniel additional shares. Daniel
updates his records. The first lot that he purchased, of 100 shares, is now 200 shares.
His total basis in the 200 new shares is the same $1,000 basis he had in the 100 shares
before the split. The new per-share basis in the first lot is $5 ($1,000/200 = $5).
Similarly, his second lot of 100 shares is now 200 shares. What is his basis per-share in
the SECOND lot of stock after the stock split?

1. First Lot purchased in Jan: 100 shares/$10 per share

2. Second Lot purchased in Apr: 100 shares/$12 per share

 A. $6 per sharecorrect
 B. $12 per share
 C. $7 per share
 D. $10 per share
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

His basis in the second lot of 200 new shares is $1,200, the same as his basis in the
100 shares before the split. The new per share basis in the second lot is $6 per share
($1,200/200 = $6).

CALCULATIONS:
FIRST LOT: 100 shares at $10 per share ($1,000 total).
SECOND LOT: 100 shares at $12 per share ($1,200 total).
After the split, the first lot is now 200 shares. The new per share basis is $5 ($1,000/200
= $5).
After the split, the second lot is now 200 shares. The new per share basis is $6
($1,200/200 = $6).

A stock split occurs when a company creates additional shares, thus reducing the price
per share. If you own stock that has split and now own additional shares, you must
 adjust your basis per share or per the lots of the stock you own. If the old shares of
stock and the new shares are uniform and identical: Allocate the basis of the old shares
to the old and new shares. You must determine the per-share basis by dividing the
adjusted basis of the old stock by the number of shares of old and new stock. (For
additional examples, see Publication 550, Investment Income and Expenses.)

49. Question ID: 95850159 (Topic: Basis of Gifted Assets)

In general, what is the basis of property received as a gift?

 A. The basis of gifted property is usually zero.

 B. The adjusted basis of the property just before the donor made the gift.correct
 C. The fair market value (FMV) at the time of the gift.
 D. The original cost basis of the property, without any adjustments.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for B:

The basis of property received as a gift is generally the donor's adjusted basis just
before making the gift. This is known as a "transferred basis."

Show Other Explanations

51. Question ID: 95850161 (Topic: Basis of Gifted Assets)

Kareem gives his favorite cousin, Nicole, a gold watch. Two years ago, Kareem paid
$4,000 for the watch, but its value has increased to $6,000. What are the tax
implications to Nicole?

 A. Nicole's basis in the watch is adjusted to the fair market value.

 B. Nicole's basis in the watch remains the same as Kareem's basis.correct
 C. Nicole's basis in the watch is adjusted to zero, because she did not pay for the
watch.
 D. Nicole's basis is increased to $6,000, and $2,000 becomes taxable to Nicole as a
capital gain.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

There are no tax implications, and Nicole's basis in the watch remains the same as
Kareem's basis. Generally, the basis of gifted property for the donee is equal to the
donor's adjusted basis. This is called a "transferred basis." If FMV equals or exceeds
the donor's basis, the donee's basis remains the same as the donor's.
 Show Other Explanations

55. Question ID: 94849549 (Topic: Basis of Inherited Property)

Horatio's sister, Melinda, died during the year. Horatio inherited 300 shares of stock
from Melinda. She had paid $4,000 for the shares over ten years ago. On the date of
Melinda's death, the stock was valued at $14,500. On December 31, Horatio sold all the
stock for $15,100. What is the amount and nature of his gain (or loss)?

 A. $600 short-term capital gain.

 B. $11,100 long-term capital gain.
 C. $600 long-term capital gain.correct
 D. $0 gain or loss.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Horatio’s gain is $600, and it is long-term. Since Horatio inherited the stock, he uses the
stepped-up basis to calculate gain or loss on the stock, (the deceased person’s original
basis is irrelevant). The basis of inherited property is generally the FMV of the property
on the date of the decedent's death. Inherited property is always considered long-term,
regardless of how long it was held by either the decedent or the beneficiary.

62. Question ID: 94849678 (Topic: Capital Gains and Losses)

Five years ago, Edwin bought 500 shares of Ramses Company stock for $1,500. He
paid a broker's commission of $110 on the transaction. On July 15, 2024, Ramses Co.
distributed a nontaxable stock dividend of 100 additional shares. On December 25,
2024, Edwin sold all his Ramses Co. stock for a total of $2,000. What is the nature and
the amount of his gain on all the shares he sold?

 A. Long-term capital gain of $390.correct

 B. Long-term capital gain of $317; short-term gain of $183.
 C. Long-term capital gain of $500.
 D. Long-term capital gain of $273; short-term gain of $117.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for A:

Although Edwin owned the 100 shares he received as a nontaxable stock dividend for
less than one year, all the stock has a long-term holding period. He bought the stock for
$1,500 plus a $110 broker’s commission, so his basis in the stock is $1,610. He sold it
 for $2,000 more than a year later, so he has a long-term capital gain of $390 on the sale
of the 600 shares. The answer is calculated as follows:

($1,500 purchase price + $110 broker’s fee) = $1,610 basis

($2,000 sale price - $1,610 basis) = $390 long-term capital gain

Note: Although Edwin owned the 100 shares he received as a nontaxable stock
dividend for less than one year, all the stock has a long-term holding period. It is
because stock splits or stock dividends generally have the same holding period as the
original stock. Please see IRS Publication 550, Investment Income and Expenses, for
more information about stock transactions.

64. Question ID: 95003068 (Topic: Capital Gains and Losses)

Alain purchased 1,000 shares of ABC Company stock for $15,000, including a
commission, thirteen months ago. On March 26, 2024, Alain sold 600 shares of the
ABC stock. Form 1099-B, reports a sales price less commission (net proceeds) of
$7,900. How much is his gain or loss on the sale, and what is the nature of his gain or
loss?

 A. $7,100 long-term capital loss.

 B. $1,100 long-term capital loss.correct
 C. $7,100 short-term capital gain.
 D. $1,100 short-term capital loss.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

The price Alain paid per share was $15,000 divided by 1,000 shares, or $15. The basis
for the shares he sold was $15 × 600 = $9,000. He held the shares for 13 months (over
one year). Therefore, he has a long-term capital loss of $1,100 ($9,000 - $7,900).

67. Question ID: 94849519 (Topic: Capital Gains and Losses)

Jacqueline owns a truck that she purchased for $20,000 in cash several years ago. The
truck has some cosmetic damage from a minor fender-bender, so Jacqueline decides to
sell it. She eventually sells the truck for $5,000 to an unrelated party. She has not
deducted any depreciation on the truck and has never used it for business. She used
the truck to commute to work and for personal errands. What is the amount of the loss
that she can deduct on her tax return?

 A. A short-term capital loss of $15,000.

 B. $0correct
 C. An ordinary loss of $15,000.
 D. A long-term capital loss of $15,000.
 Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

None of her loss is deductible. Losses on personal-use property are generally not
deductible. Losses on business property, however, are deductible.

78. Question ID: 94849718 (Topic: Capital Gains and Losses)

Kandy received a 1099-DIV showing a $180 capital gain distribution from her mutual
fund investment. However, she never sold any of her mutual fund shares during the
year. What is the most likely scenario for this event?

 A. The 1099-DIV is likely incorrect, and the income is not taxable.

 B. This is a nontaxable event. The amount lowers her basis in her shares.
 C. This is a taxable capital gain and generally must be reported on Schedule
D.correct
 D. This is obvious securities fraud and she should file a police report.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for C:

This is a taxable capital gain and generally must be reported on Schedule D. The
taxpayer owns shares in the mutual fund, but the fund owns capital assets, such as
shares of stock, corporate bonds, government obligations, etc. One of the ways the fund
makes money is to sell these assets at a gain. A mutual fund is a regulated investment
company that pools funds of investors allowing them to take advantage of a diversity of
investments and professional asset management.

For more information, see Publication 550, Investment Income and Expenses.

83. Question ID: 94849969 (Topic: Capital Gains and Losses)

Two years ago, Kaori bought an old painting from a thrift store for $175. This year, she
discovers the painting is an expensive original work of art. She takes the painting to an
auction house and sells it for $6,000. The auction house takes a $1,500 commission.
What amount must Kaori report as taxable capital gain, and what is the nature of her
gain?

 A. $4,500 in short-term capital gain.

 B. $6,000 long-term capital gain.
 C. $4,325 in long-term capital gain. correct
 D. $5,825 short-term capital gain.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for C:

She must pay her net capital gain on the sale of the painting. The amount is calculated
as follows: $6,000 income - $1,500 commission fees - $175 initial basis = $4,325 long-
term capital gain. The gain is long-term, because she held the painting for more than
one year. She will pay taxes on this amount. The painting is considered a collectible,
which includes artwork, antiques, jewelry, etc. She will be subject to a long-term capital
gains tax rate of up to 28%. To learn more about this topic, see Topic No. 409 Capital
Gains and Losses.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94849635 (Topic: Installment Sales)

Mario sells a plot of farmland to his friend Natalie. The farmland has a basis of $70,000
and he sold it to Natalie for $140,000. Mario's gross profit is $70,000. Rather than using
a bank loan, Mario offers to carry the note for Natalie, the buyer. Mario receives a
$28,000 down payment on June 1, 2024, from Natalie, as well as a notarized buyer’s
note for $112,000. The note provides for four annual payments of $28,000 plus 7%
interest. Exclusive of the interest income, what amount must Mario report as
taxable gain in 2024?

 A. $8,750
 B. $0wrong
 C. $17,500
 D. $14,000correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for D:

This is an installment sale. In this example, Mario’s gross profit percentage on the sale
is 50% ($70,000 ÷ $140,000). He must report as his installment gain this same
percentage of each $28,000 payment received ($28,000 × 50% = $14,000). In each
year a taxpayer receives a payment related to an installment sale, he must report the
interest income and the applicable portion of his gain on the sale. The taxpayer does
not include in income the part that is the return of his basis in the property. This is the
"installment sale method" of recognizing income.

Note: The “installment sale method” for reporting taxable income on an installment
sale only applies when the taxpayer has a gain on the sale of the property. It does not
apply when the taxpayer sells property at a loss. For more information about installment
sales, see IRS Publication 537, Installment Sales.

2. Question ID: 94849682 (Topic: Installment Sales)

Eveline sells a condo to her friend, Fred, for $200,000. Her basis was $150,000 and her
gross profit is $50,000. Instead of using a lender, Eveline carries the note for her friend,
and will receive five annual payments of $40,000, plus interest, until the note is paid off.
She receives the first principal payment of $40,000 from Fred on December 30, 2024
She wants to use the installment method to report income from the sale. What is the
amount of installment sale income that Eveline must report in the current year?

 A. $10,000correct
 B. $0
 C. $8,000wrong
 D. $40,000
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for A:

This is an example of an installment sale. Eveline's gross profit percentage is 25%

($50,000 annual payments ÷ $200,000 sales price). Eveline would report 25% of each
principal payment, (25% × $40,000) = $10,000, as installment sale income from the sale
for the tax year she receives the payment (after subtracting interest, if any). The
balance of each payment, exclusive of interest, is the tax-free return of her adjusted
basis.

Note: The "installment method" only applies when a taxpayer has a gain on the sale. If
the taxpayer incurs a loss on the sale, the installment method does not apply. For more
information, see IRS Publication 537, Installment Sales.

3. Question ID: 94849618 (Topic: Installment Sales)

Cassie sells a plot of land with an adjusted basis of $150,000 on January 1, 2024, under
an installment sale. The buyer agrees to pay $200,000, with a cash down payment of
$50,000 and $30,000 (plus 4% interest) in each of the next five years. What is Cassie’s
gross profit on the installment sale, and what amount is taxable in 2024?

 A. Gross profit $25,000; $25,000 taxable.wrong

 B. Gross profit $25,000; $5,000 taxable.
 C. Gross profit $50,000; $12,500 taxable.correct
 D. Gross profit $50,000; $10,000 taxable.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

This is an installment sale. Cassie’s overall gross profit is $50,000 ($200,000 selling
price - $150,000 adjusted basis), and her gross profit percentage is 25% ($50,000 ÷
$200,000). She must report 25% of each payment received (excluding the portion
representing interest income) as gain from the sale. Thus, $12,500 (25% of the $50,000
down payment) is taxable in the current year. For more information on installment sales,
see IRS Publication 537, Installment Sales.

4. Question ID: 94849660 (Topic: Installment Sales)

Peggy sold two acres of land to her brother, Zeke on January 1. She realized a gain of
$50,000 on the sale. Zeke agreed to pay her in five annual installments, and Peggy
 treats the sale as an installment sale. On November 1, eleven months after he
purchased the land, Zeke sold the land to another person. Zeke plans to keep making
installment payments based on their original agreement. How does this sale affect
Peggy?

 A. The installment sale method is disallowed to Peggy, and Peggy must report the
entire gain of $50,000 on the sale, even though she has not received all the installment
payments.correct
 B. There is no effect to Peggy from Zeke's sale of the land to another party.wrong
 C. Both Zeke and Peggy will face IRS penalties for selling the land before the required
two-year holding period for installment sales between related persons.
 D. The new sale invalidates the earlier sale and Peggy will not have to report any gain.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for A:

Installment sales to related persons are generally allowed. However, if a taxpayer sells
property to a related person who then subsequently, the buyer sells or disposes of the
property within two years of the original sale, the original seller will lose the benefit of
installment sale reporting. Peggy must report the entire gain of $50,000, even though
she has not received all of the installment payments.

5. Question ID: 94849715 (Topic: Installment Sales)

An installment sale is reported on Form 6252, Installment Sale Income. When must the
Form 6252 be filed?

 A. Form 6252 must be completed only if the seller is opting out of the installment sale
method.
 B. Form 6252 must be completed only in the year title of the property is
transferred to the buyer.wrong
 C. Only in the year of the sale.
 D. Form 6252 must be completed for each year of the installment agreement.correct
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for D:

Form 6252, Installment Sale Income, must be completed for each year of the
installment agreement. See IRS Publication 537, Installment Sales, for examples and
more information.

6. Question ID: 94850093 (Topic: Other Capital Asset Topics)

 Franklin invests in many types of collectibles, but he is not a professional dealer. Which
of the following items is not considered a "collectible" to the IRS?

 A. Artwork
 B. Antiqueswrong
 C. Cryptocurrencycorrect
 D. Comic books
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

Cryptocurrency is not treated as a collectible. The IRS considers cryptocurrency to be

property, and dispositions are treated like the disposition of stock. See the IRS page on
Virtual Currencies. A "collectible" is defined by the IRS as:

 Artwork
 Rugs or antiques,
 Precious metals or gemstones,
 Stamps, comic books, collectible cards, like baseball cards
 Alcoholic beverages (like premium wines),
 Gold and silver coins, and antique coins
When collectibles are sold, they are taxed at their own special capital gain rate. Gains
are taxable at a maximum tax rate of 28%.

7. Question ID: 94850163 (Topic: Other Capital Asset Topics)

Why would a taxpayer receive a Form 1099-B?

 A. As a record of proceeds from stock transactions that can be used to determine gain
on the sale of securities.correct
 B. As a record of withdrawals from a retirement account.wrong
 C. As a record of payments made to him as an independent contractor.
 D. As a record of interest and dividends received.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for A:

The 1099-B is a record of proceeds from stock transactions. It is primarily used to

determine gain on the sale of securities, as well as basis. A taxpayer needs to know his
 basis to figure any gain or loss on the sale or other disposition of property. Learn more
about the Form 1099-B, Proceeds from Broker and Barter Exchange Transactions.

8. Question ID: 94849738 (Topic: Other Capital Asset Topics)

What type of income is reported to the taxpayer on Form 1099-S?

 A. Proceeds from real estate transactions.correct

 B. Canceled debt.
 C. Crop insurance proceeds of $600 or more.wrong
 D. Non-employee compensation over $600.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

Form 1099-S, Proceeds From Real Estate Transactions, is used to report the sale or
exchange of real estate. A "sale or exchange" includes any transaction properly treated
as a sale or exchange for federal income tax purposes, even if the transaction is not
currently taxable. For example, a sale of a main home may be a reportable sale even
though the transferor may be entitled to exclude the gain under section 121.

9. Question ID: 94849663 (Topic: Other Capital Asset Topics)

Praveen purchased a rental apartment building several years ago for $140,000. She
made major improvements at a cost of $40,000 and deducted depreciation of $20,000.
Praveen started having financial difficulties during the year, so she sold the building on
December 10, 2024 for $200,000 cash and also received a used diesel truck with a fair
market value of $40,000 from the buyer. The buyer also paid Praveen’s delinquent real
estate taxes of $6,000 and assumed an existing mortgage of $34,000 on the building.
Praveen also incurred selling expenses of $8,000. What is Praveen’s taxable gain on
the sale?

 A. $112,000correct
 B. $104,000
 C. $20,000wrong
 D. $80,000
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for A:

Praveen’s basis in the property was $160,000 ($140,000 + $40,000 – $20,000). She
received net proceeds of $272,000 ($200,000 + $40,000 + $34,000 + $6,000 – $8,000),
resulting in a realized gain of $112,000.
 11. Question ID: 94849638 (Topic: Sale of Personal Residence)
For the past six years, Claire lived with her parents in the home her parents owned. On
February 1, 2024, she purchased her childhood home from her parents, and her parents
moved out to live in another state. She continued to live in the home until December 1,
2024, when she sold the house because her job was transferred to another state. Does
she meet the requirements for the Section 121 exclusion?

 A. No, she does not meet both the ownership and use tests.
 B. She qualifies for a partial exclusion under Section 121.correct
 C. She qualifies for a full Section 121 exclusion of $250,000.wrong
 D. No, because she did not own the house for at least two years.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for B:

Although she did not own it for the required two years, she qualifies for a “partial
exclusion” on her gain, because a job transfer is a qualified reason for a partial
exclusion. A taxpayer who owned and used a home for less than two years may be able
to claim a reduced exclusion under certain conditions. This may apply if a home sale
has occurred primarily because of “unforeseen circumstances” during the taxpayer’s
period of use and ownership.

"Unforeseen circumstances" include the following safe harbor exceptions: death,

divorce, or legal separation; certain health reasons; unemployment or a job change;
multiple births resulting from the same pregnancy; damage to the residence resulting
from a disaster, an act of war, or terrorism; or involuntary conversion of the property.
See IRS Topic 701, Sale of a Main Home, for more references and information.

12. Question ID: 94849606 (Topic: Sale of Personal Residence)

Tyler and Sophia are married and file jointly. They owned and lived in a house as their
main home for 19 months. Sophia accepted a new job in another state, so they sold
their home. What is the maximum amount of gain they can exclude from taxation under
a reduced section 121 exclusion?

 A. $395,833correct
 B. $295,600
 C. $197,916
 D. $500,000wrong
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 66% of students.

 Correct Answer Explanation for A:

Tyler and Sophia are eligible for a “reduced exclusion”, even though they did not live in
the home for two full years. The maximum amount of their reduced exclusion
is $395,833 ($500,000 x [19 months/24 months]). A taxpayer who owned and used a
home for less than two years (and therefore does not meet the ownership and use
tests) or who has used the home sale exclusion within the prior two-year period may be
able to claim a reduced exclusion under certain conditions. This may apply if a home
sale has occurred primarily because of “unforeseen circumstances” during the
taxpayer’s period of use and ownership. Unforeseen circumstances include the
following:

 Death, divorce, or legal separation.

 Certain health reasons related to care for the taxpayer, a spouse, a child, or
certain other related persons.
 Unemployment or a job change if a new job is at least 50 miles farther from the
old home than was the former place of employment.
 Multiple births resulting from the same pregnancy.
 Damage to the residence resulting from a disaster, an act of war, or terrorism.
 Involuntary conversion of the property.
The “unforeseen circumstances” may involve the taxpayer, his spouse, a co-owner, or a
member of the taxpayer’s household (i.e., it does not have to be a dependent or a
taxpayer named on the return).

14. Question ID: 94849614 (Topic: Sale of Personal Residence)

Stephanie and Roger, a married couple, purchased a home together seven years ago
for $180,000. They both lived in it until January 12, 2024, when they legally separated,
and Roger moved out. The court granted Stephanie sole ownership of the home as part
of their divorce settlement. Their divorce became final on September 1, 2024. The fair
market value of the home was $442,000 when ownership was transferred to Stephanie.
She sold the house on December 26, 2024, for $451,000. What is Stephanie’s taxable
gain on this transaction?

 A. $9,000wrong
 B. $271,000
 C. $21,000correct
 D. $0
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for C:

 Special rules apply to divorced taxpayers. Stephanie meets the "ownership and use"
tests, and the basis in the property remains the same. Transfers related to a divorce are
generally nontaxable, and the fair market value of the property at the time of the divorce
has no bearing on the taxable outcome. The gain is figured as follows:

 Original cost: $180,000

 Sale price: $451,000
 Total realized gain: $271,000
 Sec. 121 exclusion for single filers: ($250,000)
 Taxable gain she must report on her tax return: $21,000 in long-term capital
gains
Since she owned the property for longer than one year, the taxable portion of
Stephanie’s gain would be reported as a long-term capital gain. Because she is no
longer legally married in the year of the sale, she will be filing single, and her maximum
section 121 exclusion is $250,000, not $500,000.

15. Question ID: 95400234 (Topic: Sale of Personal Residence)

Joyce bought her home three years ago. She got behind on her mortgage payments
and the bank foreclosed on the home on January 10, 2024. All of the debt was incurred
to purchase the home, and the home was her primary residence. She received Form
1099-C for the amount of mortgage debt that was canceled by the bank. She was not
insolvent nor in bankruptcy at the time of the foreclosure. How should this transaction
be reported on her tax return?

 A. Her tax return should include Form 8949 and Schedule D to show the basis of the
home disposed of through foreclosure, and Form 982 to exclude the debt cancellation
from income. correct
 B. Her tax return should include the cancelled debt on Schedule D. All the
cancelled debt is taxable. wrong
 C. Her tax return should include the cancelled debt as "other income" on Form 1040.
 D. Her tax return should include Schedule B, to show the basis of the home disposed of
through foreclosure.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for A:

All of her debt is "qualified principal residence indebtedness," so it's not taxable, (even if
she is not insolvent or in bankruptcy) but it still must be reported on her return. Her tax
return should include Form 8949 and Schedule D to show the basis of the home
disposed of through foreclosure, and Form 982 to exclude the debt cancellation from
income. See IRS Topic No. 431 Canceled Debt for information.
 Note: The Mortgage Debt Relief Act (2007-2020) was the first bill to apply this provision.
The exclusion from debt for principal residence indebtedness was further extended
through tax year 2025 by the Consolidated Appropriations Act in December of 2020.

16. Question ID: 97433535 (Topic: Sale of Personal Residence)

John and Penny are married and file jointly. They owned and used their house as their
main home for 15 months. John got transferred to another state, and they were forced
to move and sell their home. They have a $400,000 gain on the sale. What is the
maximum amount of gain they can exclude from income under the rules regarding a
reduced exclusion?

 A. 312,500correct
 B. 400,000wrong
 C. 65,500
 D. 215,000
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for A:

John and Penny can exclude up to $312,500 in gain from the sale. A reduced exclusion
is available, even though they did not live in the home for two full years. They qualify for
a reduced exclusion because they are moving for a change in John's employment. Their
maximum reduced exclusion is $312,500 ($500,000 × [15 months/24 months]). This
would be the maximum that they could exclude on the sale. The reduced exclusion
applies when the premature sale is primarily due to a move for employment in a new
location.

18. Question ID: 94850075 (Topic: Sale of Personal Residence)

Michael sold his personal home at a $20,000 loss. Is the loss on the sale of his home
deductible?

 A. A loss on a personal home is not deductible.correct

 B. A loss on a personal home is deductible only if the taxpayer is in bankruptcy.
 C. A loss on a personal home is deductible if the taxpayer is insolvent.wrong
 D. A loss on a personal home is deductible as a casualty loss.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

 A loss on the sale or exchange of a personal residence isn't deductible. Only losses
associated with property used in a trade or business and investment property (for
example, stocks, or a rental property) are deductible. For additional information,
see Publication 523, Selling Your Home.

19. Question ID: 94850123 (Topic: Sale of Personal Residence)

Samuel is unmarried. He sold his home for $275,000. His selling expenses were
$10,000. He purchased the home seven years ago for $125,000, he has lived in it as his
main home. He qualifies for the Section 121 exclusion. How much gain may he exclude
from tax on this sale?

 A. $125,000
 B. $250,000
 C. $150,000wrong
 D. $140,000correct
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for D:

Samuel can exclude all the gain, or $140,000, from tax under Section 121. The gain is
figured as follows: ($275,000 sales price - $125,000 basis - $10,000 closing costs).
None of the gain on the sale is taxable, because it is under the Section 121 exclusion
amount for single filers. The law permits a maximum gain exclusion of $250,000
($500,000 MFJ). See IRS Topic 701, Sale of a Main Home, for more references and
information.

23. Question ID: 94850003 (Topic: Sale of Personal Residence)

Deborah, a single taxpayer, earns $220,000 in wages during the year. She sells her
primary residence, which she has owned and resided in for the last twelve years for
$460,000. She purchased the home for $200,000 and that is her basis. Her realized
gain on the sale is $260,000. Under section 121, what is the maximum amount of gain
that she can exclude from the sale of her home?

 A. $220,000wrong
 B. $260,000
 C. $250,000correct
 D. She does not qualify for an exclusion, because her AGI is too high.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

 Correct Answer Explanation for C:

Under section 121, she may exclude up to $250,000 of gain on the sale. To qualify for a
section 121 exclusion, the taxpayer must own and occupy the property as a principal
residence for two of the five years immediately before the sale. The law permits a
maximum gain exclusion of $250,000 ($500,000 for MFJ).

24. Question ID: 95850163 (Topic: Like-Kind Exchange)

What is “boot” in a like-kind exchange?

 A. Property that does not qualify for like-kind treatment.correct

 B. The expenses associated with the exchange.wrong
 C. When the taxpayer acquires undeveloped land.
 D. Any real property received by the taxpayer.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 53% of students.

Incorrect Answer Explanation for B:

The term "boot" refers to non-like-kind property received in an exchange, and does not
qualify for like-kind treatment. Usually, boot is in the form of cash, but can also include
property.

Correct Answer Explanation for A:

The term "boot" refers to non-like-kind property received in an exchange, and does not
qualify for like-kind treatment. Usually, boot is in the form of cash, but can also include
property.

Show Other Explanations

25. Question ID: 94849538 (Topic: Like-Kind Exchange)

Penny wishes to exchange her rental duplex in Miami, Florida with a triplex in Las
Vegas, Nevada. Penny's duplex has an existing mortgage of $500,000 and a basis of
$500,000. The triplex in Las Vegas has an existing mortgage of $900,000 which Penny
assumes. Penny also adds $100,000 of her own cash to the deal in order to close the
sale. The buyer assumes the $500,000 existing mortgage on Penny's Miami Duplex.
The Section1031 exchange is completed within 60 days, and Penny takes possession
of the triplex in Las Vegas. What is Penny's basis in the new rental property (the
Nevada triplex)?

 A. $900,000wrong
 B. $600,000
 C. $500,000
 D. $1,000,000correct
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 35% of students.

Correct Answer Explanation for D:

The answer is $1,000,000. Her basis in the Las Vegas triplex is calculated as follows:
Basis of Relinquished Property (Miami duplex) $500,000
ADD: Mortgage liability assumed by Penny +$900,000
Plus: Amount of cash boot paid by Penny +$100,000
Less: Liabilities assumed by other party ($500,000)
Equals: Penny's basis in the Las Vegas property = $1,000,000

27. Question ID: 95850162 (Topic: Like-Kind Exchange)

What types of property qualify for a like-kind exchange?

 A. Only undeveloped land.

 B. Both real and personal property.wrong
 C. Personal property such as vacation homes, vehicles, furniture, and equipment.
 D. Real property held in a trade or business or for investment, including land, buildings,
and certain unsevered natural products of land.correct
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for B:

Only real property held in a trade or business or for investment qualifies for like-kind
exchange treatment; including land, buildings, and certain unsevered natural products
of land (such as natural mineral deposits, mines, and wells).

Correct Answer Explanation for D:

Only real property held in a trade or business or for investment qualifies for like-kind
exchange treatment; including land, buildings, and certain unsevered natural products
of land (such as natural mineral deposits, mines, and wells).

Show Other Explanations

28. Question ID: 95850164 (Topic: Like-Kind Exchange)

When might a like-kind exchange be partially taxable?

 A. When the taxpayer acquires undeveloped land.

 B. When the taxpayer receives boot.correct
 C. When the taxpayer exchanges land for a building.wrong
 D. When the taxpayer incurs expenses.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for C:

A like-kind exchange may be partially taxable when a taxpayer receives boot. The term
"boot" refers to non-like-kind property received in an exchange that does not qualify for
like-kind treatment. Boot is usually in the form of cash but can also include property.

Correct Answer Explanation for B:

A like-kind exchange may be partially taxable when a taxpayer receives boot. The term
"boot" refers to non-like-kind property received in an exchange that does not qualify for
like-kind treatment. Boot is usually in the form of cash but can also include property.

Show Other Explanations

29. Question ID: 94849539 (Topic: Like-Kind Exchange)

All of the assets listed below are used for business or investment purposes. Which of
the following types of assets would NOT qualify for a like-kind exchange?

 A. Undeveloped land
 B. Farmlandwrong
 C. A piece of factory equipmentcorrect
 D. Commercial office building
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

A piece of factory equipment would not be qualifying property for a Section 1031
exchange (a like-kind exchange). All types of real properties (real estate) generally
qualify, regardless of whether they’re improved or unimproved. Due to changes in the
Tax Cuts and Jobs Act, exchanges of machinery, equipment, vehicles, artwork,
collectibles, patents and other intellectual property and intangible business assets
generally do not qualify as like-kind exchanges.

30. Question ID: 94849579 (Topic: Like-Kind Exchange)

 Franklin owns a strip mall that he rents out to business tenants. His sister, Maribel,
owns a residential rental property. Franklin exchanged his strip mall, plus $15,000, for
his sister's property. At that time, the fair market value of his strip mall was $200,000
and its adjusted basis was $65,000. The fair market value of his sister's rental property
was $215,000 and its adjusted basis was $70,000. What is Franklin's basis in the real
property he received in this Section 1031 exchange?

 A. $70,000
 B. $185,000wrong
 C. $65,000
 D. $80,000correct
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for D:

Because this is a like-kind exchange and Franklin received no cash or non-like-kind

property in the exchange, he will recognize no gain on the exchange. Franklin's basis in
the real property he received is $80,000 (the $65,000 adjusted basis of the real property
given up (the strip mall) plus the $15,000 cash he paid). His sister recognizes gain only
to the extent of the money she received, $15,000. Her basis in the real property she
received was $70,000 (the $70,000 adjusted basis of the real property she exchanged
minus the $15,000 received, plus the $15,000 gain she recognized).

This MCQ is based directly on an example in IRS Publication 544, Sales and Other
Dispositions of Assets.

33. Question ID: 958501806 (Topic: Like-Kind Exchange)

Under which section of the Internal Revenue Code can a business exchange property
without recognizing immediate gain or loss?

 A. Section 1031correct
 B. Section 1231wrong
 C. Section 1245
 D. Section 1250
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Incorrect Answer Explanation for B:

 Section 1031 of the Internal Revenue Code allows businesses to exchange property for
like-kind property without recognizing immediate gain or loss, provided certain
conditions are met.

Correct Answer Explanation for A:

Section 1031 of the Internal Revenue Code allows businesses to exchange property for
like-kind property without recognizing immediate gain or loss, provided certain
conditions are met.

Show Other Explanations

34. Question ID: 95850165 (Topic: Involuntary Conversions)

What is an involuntary conversion?

 A. A nontaxable property transfer between related parties.

 B. A voluntary sale of property.wrong
 C. A situation where a taxpayer’s property is lost, damaged, or destroyed.correct
 D. A tax-deferred like-kind exchange of property.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for B:

An involuntary conversion occurs when a taxpayer's property is lost, damaged, or

destroyed and the taxpayer receives a payment as a result, such as an insurance
reimbursement. This can occur due to a casualty, disaster, theft, or condemnation.

Correct Answer Explanation for C:

An involuntary conversion occurs when a taxpayer's property is lost, damaged, or

destroyed and the taxpayer receives a payment as a result, such as an insurance
reimbursement. This can occur due to a casualty, disaster, theft, or condemnation.

Show Other Explanations

36. Question ID: 95850168 (Topic: Involuntary Conversions)

In an involuntary conversion, does replacing the converted property with property
purchased from a related party qualify for nonrecognition treatment under Section
1033?

 A. It qualifies only if the property is held at least two years.

 B. No, it does not qualify.correct
 C. Only if the related party is an immediate family member.wrong
 D. Yes, it qualifies.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 23% of students.

Incorrect Answer Explanation for C:

Replacement property in an involuntary conversion cannot be acquired from a related

party.

Unlike a 1031 exchange, replacing the converted property with property purchased from
a related party does not qualify for nonrecognition treatment.

Correct Answer Explanation for B:

Replacement property in an involuntary conversion cannot be acquired from a related

party.

Unlike a 1031 exchange, replacing the converted property with property purchased from
a related party does not qualify for nonrecognition treatment.

Show Other Explanations

38. Question ID: 94849605 (Topic: Involuntary Conversions)

Ingram purchased a diamond ring at an estate sale for $1,500. Later, he had the ring
appraised and discovered it was a rare antique worth $45,000. He insured the ring for
$30,000. The ring was stolen a year later during a robbery. His homeowner’s insurance
company reimbursed Ingram for $30,000 of his theft loss. How would Ingram report this
transaction on his tax return?

 A. $15,000 capital loss.

 B. $28,500 taxable gain.correct
 C. $1,500 capital loss.wrong
 D. $13,500 taxable gain.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

Ingram must report a $28,500 taxable gain, equal to the amount by which the insurance
reimbursement exceeded his basis in the ring ($30,000 - $1,500 = $28,500).
 39. Question ID: 94849626 (Topic: Rental Property and Income)
LuAnn rents a room in her home to a college student for nine months of the year. The
student pays $600 a month in rent. The home has five rooms in the house. Each room
is approximately the same size. LuAnn paid the following expenses in the current year:

 Mortgage interest: $9,000

 Homeowner’s insurance: $1,000
 Property taxes: $2,000
 Utilities: $1,000
What amounts should LuAnn report as rental income and deduct as rental expenses on
her Schedule E?

 A. Rental income: $3,450; deduction: $0.wrong

 B. Rental income: $5,400; deduction: $13,000.
 C. Rental income: $5,400; deduction: $1,950.correct
 D. Rental income: $5,400; deduction: $2,600.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 29% of students.

Correct Answer Explanation for C:

LuAnn must report the full amount of rental income collected: (9 × $600 =$5,400). Her
expenses total $13,000. Because the student uses one-fifth (20%) of her house, she
can deduct 20% of the expenses ($13,000 × .20 = $2,600), but only for the nine months
during which the student rented the room. Thus, the expenses must be further allocated
for the period of occupancy (9/12 months = 75% × $2,600 = $1,950).

A taxpayer who rents part of a property must divide certain expenses between the part
of the property used for rental purposes and the part used for personal purposes, as
though there were actually two separate pieces of property. Expenses related to the
part of the property used for rental purposes can be deducted as rental expenses on
Schedule E. This includes a portion of expenses that normally are nondeductible
personal expenses, such as painting the outside of a house. If an expense applies to
both rental use and personal use, such as a heating bill for the entire house, the
taxpayer must allocate the expense between the two. The two most common methods
for allocating such expenses are based on:

 The number of rooms in the house, and

 The square footage of the house.

40. Question ID: 98939195 (Topic: Rental Property and Income)

 Eduardo owns an interest in three limited partnerships. He is only an investor (a limited
partner) and has no involvement in the running of the business. One of the partnerships
is profitable, and the other two are not profitable. Eduardo also earned $36,000 in
wages from a part-time job. Based on these figures, calculate Eduardo's passive loss
carryover on his individual return.

 Oil and Gas Partnership #1: $4,000 profit

 Medical Research Partnership #2: ($9,000 loss)
 Wind Energy Partnership #3: ($16,000 loss)

 A. $15,000 carryover losswrong

 B. $21,000 carryover losscorrect
 C. $6,000 carryover loss.
 D. $0 carryover loss. He can offset his wages.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for B:

Eduardo has a $21,000 carryover loss. Net loss = ($9,000)+ ($16,000) + $4,000 =
($21,000). The full $21,000 passive activity loss for the taxable year is disallowed, and
cannot offset his wages (it is not a rental activity, and therefore not eligible for the
special $25,000 "rental loss allowance"). All the losses must be carried forward to a
following year to offset future passive income, or until the taxpayer disposes of the
activity. Based on an example from Publication 925, Passive Activity and At-Risk
Rules.

42. Question ID: 94849691 (Topic: Rental Property and Income)

Samuel owns a ten-unit apartment building and charges $800 rent per month for each
unit. Nine units were rented for the entire year. A tenant occupied the tenth unit from
January 1 to June 30. The tenant did considerable damage to the apartment so the
tenant’s security deposit of $500 was not refunded to her when she moved out. Another
tenant rented the apartment for $800 a month with a one-year lease, beginning
September 1, 2024. The new tenant paid the first and last months’ rent and a
refundable security deposit of $500. Disregarding any allowable expenses, how
much gross rental income must Samuel report on Schedule E for the year?

 A. $95,200wrong
 B. $94,400
 C. $95,700correct
 D. $96,200
Study Unit 9: Rental and Royalty Income covers the information for this question.
 This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for C:

Samuel must include all the rental income, including the forfeited security deposit he
retains for the damage to the unit. The refundable security deposit from the new tenant
is not included in Samuel’s income because it is refundable. The answer is calculated
as follows:

 $800 rent × 12 months × 9 units: $86,400.

 $800 rent × 6 months for tenant from Jan through June: $4,800.
 Security deposit retained for tenant who moved out: $500.
 $800 rent × 4 months for new tenant from September through December: $3,200.
 Advance rent paid by new tenant: $800.
 Total Rental Income $95,700
This question is based directly on an example in Publication 527, Residential Rental
Property

44. Question ID: 94815927 (Topic: Rental Property and Income)

Antonio is unmarried and owns a residential rental property. He is not a real estate
professional. He reports his rental income on Schedule E. In the current year, his wage
income was $82,000, and his losses from the rental property were $27,000. He actively
participated in the rental activity. How much of the rental loss can he deduct on his
individual tax return?

 A. $25,000, with a $2,000 loss carryover.correct

 B. $27,000wrong
 C. $0, the losses are completely disallowed by the passive activity rules.
 D. $25,000 with no carryover.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

Antonio can deduct up to $25,000 of his rental losses from his active income. The
disallowed amount ($2,000) can be carried over to the next year. If a taxpayer actively
participates in a passive rental real estate activity that produces a loss, the taxpayer can
deduct the loss from non-passive income, up to $25,000. This $25,000 allowance is
only allowed for rental activities. However, there are income limitations. If modified
adjusted gross income (MAGI) exceeds $100,000 ($50,000 if MFS), the allowance is
limited to 50% of the difference between $150,000 ($75,000 if MFS) and MAGI. If MAGI
is $150,000 or more ($75,000 or more if MFS), the losses are disallowed and must be
 carried forward. To learn more about rental losses and passive loss limits, refer
to Publication 925, Passive Activities and At-Risk Rules.

45. Question ID: 94849596 (Topic: Rental Property and Income)

Tony lives near a popular football arena. He rents his main home during sporting events
for 12 days during the tax year and earns $2,500. During the time he rents his home, he
stays across town with his parents. Tony does not rent his home at any other time
during the year. How should this income be reported?

 A. The income is not taxable and does not need to be reported.correct

 B. The income is taxed as ordinary income and is subject to self-employment tax.
 C. The income is taxed as rental income and should be reported on Schedule
E.wrong
 D. The income is taxed as ordinary income and should be reported as “other income” on
Form 1040. The income is not subject to self-employment tax.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

The income is not taxable and does not need to be reported. There is an exception
when a taxpayer rents his primary residence for fewer than 15 days during the year.
That period is not treated as rental activity. This is also called the “15 day rule” or the
exception for “Minimal Rental Use”. The taxpayer is not required to report the income
and is not allowed to deduct the rental expenses.

46. Question ID: 94849629 (Topic: Rental Property and Income)

Which of the following would be considered "passive activity" income?

 A. Rental income received by a taxpayer who is not a real estate professional.correct

 B. Portfolio income.
 C. Cancellation of debt income.wrong
 D. Alaska Permanent Fund dividends.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

Generally, a passive activity is any rental activity OR any business in which the taxpayer
does not materially participate. Nonpassive activities are businesses in which the
taxpayer works on a regular, continuous, and substantial basis. Passive activity income
also does NOT include:
  Portfolio income, such as interest, dividends, annuities, and royalties not derived
in the ordinary course of a trade or business, or gain or loss from the disposition
of property that produces these types of income or that is held for investment.
 Personal service income. This includes salaries, wages, commissions, self-
employment income from trade or business activities in which the taxpayer
materially participated, deferred compensation, taxable Social Security and other
retirement benefits, and payments from partnerships to partners for personal
services.
 Any income from intangible property, such as a patent, copyright, or literary,
musical, or artistic composition, if the taxpayer’s personal efforts significantly
contributed to the creation of the property.
 State, local, and foreign income tax refunds.
 Income from a covenant not to compete.
 Alaska Permanent Fund dividends.
 Cancellation of debt income, if at the time the debt is discharged, the debt is not
allocated to passive activities.
To learn more about passive activity income, refer to Publication 925, Passive Activities
and At-Risk Rules.

47. Question ID: 94849631 (Topic: Rental Property and Income)

Ivan buys an apartment building for $160,000 on January 10. He plans to rent it out to
long-term tenants. The latest real estate tax assessment on the property allocates 85%
of the value to the building and 15% to the land. What is his basis for depreciation on
Schedule E?

 A. $136,000correct
 B. $0.
 C. $24,000wrong
 D. $160,000
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for A:

Ivan's basis for depreciation is $136,000 (85% × $160,000). When determining the
basis for calculating depreciation, the cost basis of the land and building need to be
calculated separately. The basis of the land is not subject to depreciation.

48. Question ID: 94815968 (Topic: Rental Property and Income)

Cecile is a limited partner in two different partnerships. Cecile also owns a residential
rental that she manages herself, but she is not a real estate professional. All the
 activities generated a profit for the year. Where should Cecile report the income she
receives from these activities?

 A. All the income should be reported on Schedule E.correct

 B. The pass-through income from the partnership would be reported on Schedule C.
The rental would be reported on Schedule E.
 C. All the income should be reported on Schedule C.wrong
 D. The pass-through income from the partnership would be reported on Schedule D.
The rental would be reported on Schedule E.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for A:

All the income should be reported on Schedule E (Form 1040). Taxpayers use
Schedule E to report income (or loss) from rental real estate, royalties, partnerships, S
corporations, estates, trusts, and residual interests in REMICs.

50. Question ID: 94849651 (Topic: Rental Property and Income)

Norbert purchased his home six years ago for $250,000. The purchase price was
allocatable to fair market values of (1) $50,000 for the underlying land and (2) $200,000
for the house. Norbert paid an additional $18,000 for adding an additional bathroom to
the home. Norbert moves out of the home on June 1, because of a job transfer. Instead
of selling the home, he decides to rent it out. A tenant moved in on October 1, 2024.
The FMV of the property on October 1 was $310,000, comprised of $65,000 for the land
and $245,000 for the house. He paid $2,400 for plumbing repairs during November after
his tenant discovered a water leak in the garage. Based upon the information listed,
what is the basis on which depreciation should be calculated during the rental period?

 A. $218,000correct
 B. $245,000wrong
 C. $250,000
 D. $270,400
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for A:

The basis for depreciation is the lesser of fair market value or the taxpayer’s adjusted
basis on the date the property was converted to rental use. The adjusted basis on
October 1 was $218,000 (original cost of $200,000 + improvements of $18,000). Since
this amount was lower than the FMV of the home ($245,000) on the same date, the
lower figure must be used as the basis for depreciation on the property. The basis of the
 land is not subject to depreciation (land is never depreciated). The plumbing repairs are
deductible as a current expense and are not depreciated. Instead, the repairs would
simply be deductible as an expense on Schedule E.

52. Question ID: 94849701 (Topic: Rental Property and Income)

Kaitlin owns a residential rental property. The sewage and water bill is in Kaitlin's name
because she is the owner of the property. Her tenant pays the sewage bill for her rental
property and deducts the amount from the normal rent payment. Under the terms of the
lease, her tenant doesn’t have to pay this bill. How should Kaitlin treat this transaction
on her Schedule E?

 A. She must include the utility bill paid by the tenant as a rental payment in her rental
income. She can deduct the utility payment made by the tenant as a rental
expense.correct
 B. The property owner must report the utility payment made by the tenant as
rental income on Schedule E. No amounts are deductible in this scenario.wrong
 C. The property owner can deduct the utility payment made by the tenant as a rental
expense on Schedule E.
 D. No reporting is required, since the amounts paid by the tenant are a "wash".
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

If your tenant pays any of your expenses, those payments are rental income. Because
you must include this amount in income, you can also deduct the expenses if they are
deductible rental expenses. If a tenant pays the water and sewage bill for a rental
property, the taxpayer (i.e., the property owner) must include the utility bill paid by the
tenant and any amount received as a rent payment in their rental income. The property
owner can deduct the utility payment made by the tenant as a rental expense on
Schedule E. See Publication 527, Residential Rental Property, for more information and
to see similar examples.

53. Question ID: 94849726 (Topic: Rental Property and Income)

Rajeev lives in a community where there is a large music festival for two weeks during
August every year. He usually rents out his home for these 14 days and goes to visit his
sister. In the current year, he had $6,000 of rental income and $700 of expenses from
the 14 rental days. How should Rajeev report this income and expense on his tax
return?

 A. $6,000 of rental income added to his other income on Form 1040; $700 of expenses
deducted on Schedule A.
 B. No reporting is required of either the rental income or rental expenses.correct
 C. $6,000 of rental income and $700 of expenses on Schedule E.wrong
 D. $6,000 of rental income added to his other income on Form 1040; $28 (4% of 365
days) of expenses deducted on Schedule A.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for B:

The primary function of a home that is rented for less than 15 days during the year is
not considered to be rental, and it should not be reported on Schedule E. This is called
the "15-day rule" or "minimal rental use". Rajeev is not required to report the rental
income and expenses from this activity. Any regular expenses such as mortgage
interest and property taxes are reported as normally allowed for a home on Schedule A,
but no expenses related to the rental activity can be deducted.

55. Question ID: 94849524 (Topic: Rental Property and Income)

Which of the following is not rental income in the year received?

 A. Refundable security depositcorrect

 B. One year of pre-paid rent, paid in advance by the tenant
 C. Payment to cancel the remaining lease
 D. Repairs paid by the tenant in lieu of rentwrong
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

A security deposit is not rental income if the deposit is meant to be returned to a tenant
at the end of the lease agreement.

57. Question ID: 94849541 (Topic: Rental Property and Income)

Antwan is single. He has the following income and losses during the year:

 Wages: $55,000
 Passive activity income from a limited partnership: $4,000
 Passive loss from a rental real estate activity (in which he actively participated):
$6,000
Which of the following statements is correct?

 A. He must carry over his loss to the next tax year.wrong

 B. He cannot deduct the passive loss to reduce taxation of his wages.
 C. The first $4,000 of Antwan’s $6,000 passive loss offsets his passive income. He can
deduct the remaining $2,000 to reduce taxation of his wages.correct
 D. He cannot offset the rental loss against the passive income from the partnership
because it is not the same type of passive activity.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

Antwan can use $4,000 of his rental loss to offset the passive activity income from the
limited partnership. The remaining $2,000 loss can be deducted to reduce taxation of
his wages.

Note: A taxpayer can deduct up to $25,000 per year of losses for rental real estate
activities in which he actively participates. This special allowance is an exception to the
general rule of disallowing losses from passive activities in excess of passive activity
income. This $25,000 allowance is only allowed for rental activities. However, there are
income limitations. If modified adjusted gross income (MAGI) exceeds $100,000
($50,000 if MFS), the allowance is limited to 50% of the difference between $150,000
($75,000 if MFS) and MAGI. If MAGI is $150,000 or more ($75,000 or more if MFS), the
losses are disallowed and must be carried forward.

58. Question ID: 94855000 (Topic: Rental Property and Income)

Peter owns a lake cottage that he bought last year, intending to use the home as a
vacation property for himself. In the current year, he rented the cottage for 10 days to a
stranger, and Peter used the cottage for 20 days for his own personal use. The cottage
was not used the rest of the year, and sat empty. Peter had rental income of $1,000 and
he paid $450 for repairs because his renter broke a window. How should he report
these activities on his tax return?

 A. $1,000 income, $450 expense on Schedule Ewrong

 B. $0 income, $0 expense (it does not have to be reported)correct
 C. $1,000 reported as "other income" and no rental expenses would be permitted.
 D. $1,000 income, $450 expense on Schedule C
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

Peter would report $0 income, and $0 expenses (i.e., this rental activity does not have
to be reported). If you rent out a personal dwelling for less than 15 days during the tax
year, this is considered "Minimal Rental Use." This is a special rule that applies, if the
property qualifies as a residence and is rented for less than 15 days during the
year, then the rental income is not taxable, and no expenses would be deductible.
 (For more information, see Publication 527, Residential Rental Property)

59. Question ID: 94815999 (Topic: Rental Property and Income)

Marcas is a Canadian resident and citizen who owns a profitable rental property in the
United States that nets $50,000 in rental income per year. He is not currently a citizen
or resident of the United States, but he has a Social Security number because he
worked in the United States decades ago. How should Marcas report his rental income?

 A. Since he has a valid SSN, Marcas can choose whether to file Form 1040-NR or Form
1040.
 B. Marcas should file Form 1040-NR.correct
 C. Marcas does not need to file any U.S. tax return.wrong
 D. Marcas should file Form 1040.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

In order to report his income, Marcas will need to file Form 1040-NR. Just because
someone has an SSN, doesn't mean they are a resident of the U.S. for tax purposes.
Many nonresident aliens have a Social Security number for various reasons.

60. Question ID: 94850303 (Topic: Rental Property and Income)

Thomas owns a rental property in Miami, Florida, that he rents out to short-term tenants.
Thomas provides services like fresh linens, fresh towels daily, and a complimentary
breakfast for his guests. What form should he report this income?

 A. Schedule F
 B. Schedule E
 C. Schedule Ccorrect
 D. Schedule Dwrong
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

Thomas should report the rental income on Schedule C. If a property owner provides
“substantial services” to short-term renters, the IRS says that the rental activity should
be reported on Schedule C. The IRS defines substantial services as services generally
provided to guests that are primarily for their convenience and not normally provided
with a rental. For example, meals, daily laundry, and maid services.

63. Question ID: 97473768 (Topic: Rental Property and Income)

 Frank owns a residential rental property that he actively manages himself. He collects
rental income of $20,600 during the year. The rental expenses total $16,000, plus
$12,000 of depreciation. He earns $98,500 in wages during the year, and has no other
activity for the year. He files as single. What is his allowable rental loss on Schedule E?

 A. $7,400correct
 B. $28,000wrong
 C. $0
 D. $10,600
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for A:

Frank has a net loss on his rental of $7,400 ($20,600 rental income - $28,000 ($16,000
rental expenses + $12,000 depreciation). The loss is permitted because he actively
participates in the activity, and his income is below the threshold for the special loss
allowance. He also can deduct the $7,400 loss from his other income (i.e., his wages).

66. Question ID: 94849531 (Topic: Rental Property and Income)

Yahir and Taliyah are married and file jointly. Yahir earned $85,000 of wages and
Taliyah had net income of $4,000 on her Schedule F, from selling eggs and chickens
that she raised herself. They had interest income of $700. Taliyah also had a $32,000
loss from a rental real estate activity in which she actively participated. She is not a real
estate professional. Based on this information, how much of the rental loss can they
deduct on their joint tax return?

 A. $25,000correct
 B. $32,000
 C. $0wrong
 D. $4,000
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

Since Taliyah actively participated in the rental activity and their adjusted gross income
is less than $100,000, they are allowed to deduct $25,000 of rental losses against other
income. A special rule allows taxpayers deduct up to $25,000 of losses from rental real
estate in which you actively participate. This is often called the "$25,000 rental loss
allowance". The $25,000 allowance is phased out when modified adjusted gross income
is from $100,000 to $150,000, resulting in no deduction if the taxpayer's AGI is above
 $150,000. They can carry forward the remainder of the rental losses to the following tax
year, subject to the same limitation.

67. Question ID: 94849567 (Topic: Rental Property and Income)

Serenity owns a condo in Hawaii. She lives in the home most of the year and uses it as
her primary residence. While she was away visiting friends, she rented her condo for 13
days, charging $100 per day for a total of $1,300. She also had $320 of expenses
during that time. How should this rental income be reported?

 A. She should report the income as ordinary income on Form 1040. The expenses are
deductible as a miscellaneous itemized deduction on Schedule A, if she itemizes
deductions.
 B. The income is not taxable and does not need to be reported. The expenses are not
deductible. correct
 C. She can deduct the expenses. The rental income is not taxable.wrong
 D. She should report all the rental income. She can deduct $320 of expenses on
Schedule E.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for B:

She does not report any of the income or expenses based on the exception for minimal
rental use. If a taxpayer rents a main home or vacation home for fewer than 15 days,
she does not have to recognize any of the income as taxable. She also cannot deduct
any rental expenses. This is called the “15-day rule” or “minimal rental use”. For more
examples, refer to Publication 527, Residential Rental Property.

68. Question ID: 94849599 (Topic: Rental Property and Income)

Which of the following is NOT rental income in the year received?

 A. Security deposit, equal to one month’s rent, to be refunded at the end of the lease if
the building passes inspection.correct
 B. Payment to cancel the remaining lease.
 C. Pre-paid rent (rent paid in advance)
 D. Repairs paid by the tenant in lieu of rent.wrong
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for A:

A refundable security deposit received from a tenant is not rental income. A security
deposit is money that is given to a lender, seller, or landlord as proof of intent and may
 be used to pay for damages caused by a renter. A landlord should not include a security
deposit in their income on Schedule E, if they may be required to return it to the tenant
at the end of the lease.

(For more information, see Publication 527, Residential Rental Property)

69. Question ID: 94849700 (Topic: Rental Property and Income)

Ignatius owns one-half of a residential rental house. His cousin, Marina, owns the other
half. The house is rented out all year to long-term tenants. Last year, Ignatius paid $968
out of pocket for repairing a broken water pipe on the property. How should this
expense be treated on his tax return?

 A. He can deduct $968 as a business expense on Schedule C.

 B. He can deduct $484 (50% × $968) as a rental expense on Schedule E. The other
50% he can claim as an adjustment to income on his Form 1040.wrong
 C. He can deduct $968 as a rental expense on Schedule E.
 D. He can deduct $484 (50% × $968) as a rental expense on Schedule E. He is entitled
to reimbursement for the remaining half from the co-owner.correct
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for D:

If you own a part interest in rental property, you can deduct expenses you paid
according to your percentage of ownership. Therefore, Ignatius can deduct $484 (50%
X $968) as a rental expense. He is also entitled to reimbursement for the remaining half
from the co-owner. See Publication 527, Residential Rental Property, for more
information and to see similar examples.

70. Question ID: 94850304 (Topic: Rental Property and Income)

Angelo, an unmarried taxpayer, owns a rental property that he actively manages
himself. He collects the rents and chooses the tenants. He also works full-time as a
math tutor. Angelo had the following income and loss during the tax year.

Salary from his tutoring job $42,300

Dividends 300
Interest from a CD 1,400
Rental loss (5,000)
The rental loss came from the house, which he owns. Although he actively participated
in the rental activity, he is not a real estate professional. Based on this information, how
much of the rental loss is Angelo permitted to deduct against his other taxable income in
the current year?
 A. He may not deduct any of the losses in the current year, because he has no
passive activity income to offset. The full amount must be carried over to future
years. wrong
 B. Up to $1,700 in losses, to offset the amount of his dividends and interest ($300 +
$1,400)
 C. Up to $3,000 in losses, the maximum capital loss limit for an individual taxpayer.
 D. He may deduct the full amount of his losses ($5,000) against his wages. correct
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

He may deduct the full amount of his losses ($5,000) against his wages. The rental loss
came from a house he owned. He advertised and rented the house to the current tenant
himself. He also collected the rents and did the repairs or hired someone to do them.
Even though the rental loss is a loss from a passive activity, he can use the entire loss
to offset his other income because he "actively participated" in the activity. This example
is based directly on a scenario in Publication 925.

Note: Special $25,000 allowance: If you or your spouse actively participated in a

passive rental real estate activity, the amount of the passive activity loss that’s
disallowed is decreased and you therefore can deduct up to $25,000 of loss from the
activity from your nonpassive income. This special allowance is an exception to the
general rule disallowing the passive activity loss. Similarly, you can offset credits from
the activity against the tax on up to $25,000 of nonpassive income after taking into
account any losses allowed under this exception.

71. Question ID: 95033971 (Topic: Rental Property and Income)

What type of rental property is never depreciated?

 A. Undeveloped land.correct
 B. Land improvements.
 C. Commercial buildings.wrong
 D. Residential rentals.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

The cost of land is never depreciated, even if it is used in rental activity (for example,
rented farmland, or undeveloped land that is used as an overflow parking lot). Land
improvements, such as fencing, paved parking areas, and outdoor lighting, may be
depreciated.
 72. Question ID: 97473769 (Topic: Rental Property and Income)
Gary and Betty are married but have lived apart for 5 years. They both file MFS returns.
Gary owns a residential rental that he manages himself. His wages for the year were
$38,000, and he had no other taxable income. He incurred a ($5,000) loss on his rental
property. How much of his rental loss is he allowed to deduct on his tax return?

 A. $5,000correct
 B. $2,500
 C. $3,000wrong
 D. $0, because he is filing MFS
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for A:

Gary can deduct the entire rental loss against his wages. This is because, even though
he files MFS, he is allowed to take the full rental loss because (1) he did not live with his
spouse, (2) his MAGI was under $50,000, and (3) his rental losses were less than
$12,500 (one-half of the “special allowance”).

74. Question ID: 94849588 (Topic: Royalty Income)

Mathew inherited a large piece of land when his father passed away. Mineral deposits
were discovered on the land several years ago. A mining company processes the
minerals and sends Mathew a 1099-MISC reporting $30,000 in royalties. Mathew is not
involved in the mining production at all, he is simply the landowner. How should he
report these royalties on his tax return?

 A. On Schedule E of his Form 1040. correct

 B. As "other income" on Schedule 1 of his Form 1040.
 C. On Schedule C of his Form 1040.wrong
 D. On Schedule D of his Form 1040.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

Mathew should report the income on Schedule E, as royalties. The amounts are subject
to income tax, but not self-employment tax. Schedule E is also used to report pass-
through income from a partnership or S corporation. However, if a taxpayer receives
royalties as a self-employed writer, inventor, artist, they should report their income on
Schedule C, rather than Schedule E.

75. Question ID: 95850170 (Topic: Royalty Income)

 What is the tax treatment of royalties?

 A. Taxable as ordinary incomecorrect

 B. Taxable as capital gains
 C. Taxable as passive activity income
 D. Exempt from taxationwrong
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 45% of students.

Incorrect Answer Explanation for D:

Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as
ordinary income. Royalties are generally reported on Schedule E. For example, natural
resource royalties are paid for the extraction of natural resources, like timber, oil, gas,
and minerals. The owner of the land or mineral rights typically receives a royalty based
on the value of the resource extracted.

Correct Answer Explanation for A:

Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as
ordinary income. Royalties are generally reported on Schedule E. For example, natural
resource royalties are paid for the extraction of natural resources, like timber, oil, gas,
and minerals. The owner of the land or mineral rights typically receives a royalty based
on the value of the resource extracted.

Show Other Explanations

76. Question ID: 94815863 (Topic: Royalty Income)

Nhung is a self-employed musical composer that plays several instruments and also
plays live performances on a contract basis. He receives $26,700 in royalties from his
musical compositions during the tax year. How is this income reported on his tax return?

 A. No reporting is required.
 B. On his Schedule E, taxed as ordinary income that is not subject to self-employment
tax.
 C. On his Schedule D, taxed as capital gains.wrong
 D. On his Schedule C, taxed as ordinary income that is subject to self-employment
tax.correct
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for D:

 Like rental income, royalty income is generally reported on Schedule E. Royalties from
copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income,
but not subject to self-employment tax. HOWEVER, self-employed writers, musicians
like Nhung, and inventors must report the income on Schedule C, Profit or Loss from
Business, and the income is subject to self-employment tax.

77. Question ID: 94849620 (Topic: Royalty Income)

Payments for the use of trademarks, trade names, copyrights, and mineral rights are
generally classified as what type of income?

 A. Royalty incomecorrect
 B. Capital gain income
 C. Passive rental income
 D. Self-employment incomewrong
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for A:

Payments for the use of trademarks, trade names, copyrights, and mineral rights are
generally classified as royalties for federal tax purposes. Royalties are reported on
Schedule E. All royalties are subject to ordinary tax rates, but generally not subject to
self-employment tax. However, an exception exists for self-employed artists, authors, or
inventors. If the royalties relate to a self-created copyright, trademark, or patent, the
creator would typically report the income on Schedule C, (not Schedule E) and the
income would be subject to income tax and self-employment tax.

78. Question ID: 94815908 (Topic: Taxable Recoveries)

Boldo received a state tax refund related to his prior-year return. He itemized
deductions on Schedule A in the previous year and plans to itemize again in the current
year. How does Boldo's state tax refund affect his current year tax return?

 A. Boldo must report his state tax refund as a reduction of his itemized deduction for
state income taxes paid on his current year tax return.
 B. It does not. State tax refunds do not affect federal income taxes.
 C. Boldo must report his prior year state tax refund as income on his federal tax return
in the current year.correct
 D. None of the above.wrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for C:

 Boldo must report his prior year state tax refund as income on his federal tax return in
the current year. A state refund is included in federal gross income in the year it is
received, but only if the taxpayer itemized deductions in the year to which the refund
relates. If the taxpayer had claimed the standard deduction in the prior year, and thus
received no benefit from the state income taxes paid, the related refund would not be
taxable.

79. Question ID: 98939103 (Topic: Taxable Recoveries)

A federal tax refund is a type of recovery, but it is never taxable. Why are federal
income tax refunds (IRS tax refunds) never included in a taxpayer's income?

 A. Because they are reported on Schedule B.

 B. Because they are reported on Schedule A.
 C. Because they are never allowed as a deduction.correct
 D. Because they are considered gifts from the government.wrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Incorrect Answer Explanation for D:

Federal income tax refunds (i.e., IRS tax refunds) are not included in a taxpayer's
income because they are never allowed as a deduction.

Correct Answer Explanation for C:

Federal income tax refunds (i.e., IRS tax refunds) are not included in a taxpayer's
income because they are never allowed as a deduction.

Show Other Explanations

80. Question ID: 98939105 (Topic: Taxable Recoveries)

Are income tax refunds from state governments always taxable?

 A. Only if the taxpayer received a Form 1099-G from the state.

 B. Only if the taxpayer itemized deductions in the year they overpaid those taxes.correct
 C. Yes, regardless of whether the taxpayer itemized deductions.wrong
 D. No, they are never taxable.

Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Incorrect Answer Explanation for C:

 Income tax refunds from state and local governments are not always taxable, but they
can be. State tax refunds are only taxable if the taxpayer itemized deductions in the
year they overpaid those taxes and only to the extent the amount paid in the previous
year reduced their tax liability.

Correct Answer Explanation for B:

Income tax refunds from state and local governments are not always taxable, but they
can be. State tax refunds are only taxable if the taxpayer itemized deductions in the
year they overpaid those taxes and only to the extent the amount paid in the previous
year reduced their tax liability.

Show Other Explanations

81. Question ID: 94850060 (Topic: Taxable Recoveries)

What is a taxable recovery?

 A. A type of income averaging.

 B. A return of income a taxpayer deducted or claimed as a credit in an earlier
year.correct
 C. The amount deducted as a casualty or theft loss.wrong
 D. Another name for a federal tax refund.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for B:

A taxable recovery is a return of an amount a taxpayer deducted or claimed as a credit

in an earlier year. The most common recoveries are refunds, reimbursements, and
rebates of deductions itemized on Schedule A of Form 1040. A taxpayer may also have
recoveries of non-itemized deductions (such as payments on previously deducted bad
debts) and recoveries of items for which he previously claimed a tax credit. A taxpayer
must include a recovery in income in the year he receives it, to the extent the deduction
or credit reduced his tax in the earlier year.

82. Question ID: 98939104 (Topic: Taxable Recoveries)

Which of the following is a common type of taxable recovery?

 A. Federal income tax refunds.

 B. Gifts from family members.
 C. State tax refund.correct
 D. Life insurance proceeds.wrong
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 75% of students.

Incorrect Answer Explanation for D:

A state tax refund is a common type of taxable recovery. The other answer choices are
not taxable.

A “recovery” is a return of an amount a taxpayer deducted or took a credit for in an

earlier year. The most common recoveries are state tax refunds, medical
reimbursements, and rebates of deductions that were previously reported on Schedule
A. Taxpayers must include a recovery in income in the year they receive it, but only to
the extent the deduction or credit reduced income tax in the prior year. Income tax
refunds from state and local governments are only taxable if the taxpayer itemized
deductions in the year they overpaid those taxes and only to the extent the amount paid
in the previous year reduced their tax liability. The entity issuing the refund will provide a
Form 1099-G, Certain Government Payments, to the taxpayer and send a copy to the
Internal Revenue Service by January 31st.

Correct Answer Explanation for C:

A state tax refund is a common type of taxable recovery. The other answer choices are
not taxable.

A “recovery” is a return of an amount a taxpayer deducted or took a credit for in an

earlier year. The most common recoveries are state tax refunds, medical
reimbursements, and rebates of deductions that were previously reported on Schedule
A. Taxpayers must include a recovery in income in the year they receive it, but only to
the extent the deduction or credit reduced income tax in the prior year. Income tax
refunds from state and local governments are only taxable if the taxpayer itemized
deductions in the year they overpaid those taxes and only to the extent the amount paid
in the previous year reduced their tax liability. The entity issuing the refund will provide a
Form 1099-G, Certain Government Payments, to the taxpayer and send a copy to the
Internal Revenue Service by January 31st.

Show Other Explanations

83. Question ID: 94815869 (Topic: Taxable Recoveries)

Gerry receives a 1099-G from the State of California indicating that he received a state
tax refund of $2,900 for the prior tax year. He did not itemize deductions on his prior-
year tax return. How will this Form 1099-G impact his Federal tax return in the current
tax year?

 A. He is required to amend his prior year tax return to report the taxable refund.
 B. A portion of the state tax refund may be taxable.
 C. The state tax refund will be fully taxable, and must be included on his tax
return.wrong
 D. There is no impact on his tax return, and he does not need to report the state tax
refund.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

There is no impact on his tax return, and he does not need to report the state tax
refund. In general, if a taxpayer didn’t itemize their deductions and didn't deduct their
state and local income taxes in the prior year, they don’t need to pay taxes on their
refunds in the following year.

84. Question ID: 94849704 (Topic: Taxable Recoveries)

State income tax refunds are reported to the taxpayer on the Form ________.

 A. Form 1099-Misc.
 B. Form 1099-G.correct
 C. Form W2-G.
 D. Form W2.wrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

State and local income tax refunds are reported to the taxpayer on the Form 1099-G.

10. Question ID: 94815888 (Topic: Other Capital Asset Topics)

For IRS purposes, what activity qualifies a person as a stockbroker or bona-fide
"securities dealer"?

 A. A taxpayer who engages in the business of professional gambling.

 B. A person who purchases securities for personal investment.
 C. A taxpayer engaged in the trade or business of selling securities.correct
 D. A taxpayer who reports income and loss on Schedule E.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for C:

IRC Sec. 475 defines a "securities dealer" or "stockbroker", as a taxpayer who regularly
purchases and sells securities (such as stocks and bonds) in the ordinary course of a
trade or business. A stockbroker is unique; unlike other taxpayers who purchase and
 sell securities, a securities dealer is a taxpayer engaged in the trade or business of
selling securities. Because a securities dealer holds securities for sale to customers in
the ordinary course of business, such securities are not considered capital assets;
therefore, the gain or loss is treated as ordinary gain or loss, NOT a capital gain or loss.
A self-employed securities dealer must make a special election called the "Mark-to-
Market" election, and then report their income or loss on Schedule C (not Schedule D).
The IRS discusses Securities Dealers in Tax Topic 429, Traders in Securities.

13. Question ID: 94849612 (Topic: Sale of Personal Residence)

Nicklaus is single. He sold his main residence in California and moved to Washington.
He had purchased the house over fifteen years ago for $330,000, and he sold it for
$673,000 net of selling expenses. During the time he lived in the house, he paid
$45,000 for capital improvements (to add an extra bedroom) and $18,000 for general
repairs and $1,200 for gardening supplies. Assuming that Nicklaus utilizes the
maximum available exclusion, what amount would he report as taxable gain?

 A. $30,000
 B. $93,000
 C. $48,000correct
 D. $0
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for C:

Nicklaus’s adjusted basis in the house would be the total of his original purchase price
of $330,000 plus the $45,000 cost of improvements (basis of $375,000). The cost of
general repairs or gardening supplies would not be considered in determining his
adjusted basis. Therefore, his gain on the sale would be $298,000, or the excess of his
net proceeds over his adjusted basis ($673,000 – $375,000 = $298,000). Since he met
the requirements for ownership and use of the house as his main home, he qualifies for
the maximum section 121 exclusion of $250,000 available to a single taxpayer, and the
taxable portion of his gain would be $48,000.

17. Question ID: 94849554 (Topic: Sale of Personal Residence)

Keith purchased his home seven years ago for $175,000. This year, he added another
bedroom and a sunroom to the property at a cost of $28,000. He also repaired two
broken windows at a cost of $650. His basis in the home is now:

 A. $28,000.
 B. $175,000.
 C. $203,000.correct
 D. $203,650.
 Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

Keith's adjusted basis in the home is $203,000, the combined amount of his original
basis plus the value of the new additions to the house. The cost of the repairs are not
added to basis, because repairs do not “materially increase the value” or “substantially
prolong the useful life” of the home.

20. Question ID: 94849552 (Topic: Sale of Personal Residence)

Mitchell purchased his primary residence for $350,000 six years ago. On January 3,
2024, he sold the home for $320,000, incurring a loss of $30,000. How is this
transaction reported?

 A. Mitchell has a long-term capital loss that must be reported on Schedule D.

 B. Mitchell has a deductible casualty loss.
 C. Mitchell cannot deduct any loss from the sale of his main home.correct
 D. Mitchell has a short-term capital loss that must be reported on Schedule D.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

Mitchell has a loss on the sale of his primary residence, and since it is "personal-use"
property, he cannot deduct it on his tax return. Losses from the sale of a main home are
never tax-deductible.

21. Question ID: 94849613 (Topic: Sale of Personal Residence)

Ophelia bought her principal residence in California for $250,000 on January 3, 2024.
She sold it on December 23, 2024, (less than 12 months later) for $276,000 because
she wanted to move in with her boyfriend. She also paid $14,000 in mortgage interest
during the year. What is the amount and character of her gain on the sale?

 A. Short-term capital gain of $26,000.correct

 B. $0 gain or loss, she qualifies for the Section 121 exclusion.
 C. Long-term capital gain of $12,000.
 D. Short-term ordinary gain of $25,000.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.
 This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

Ophelia did not own the home for more than one year, so the gain is reported as a
short-term capital gain ($250,000 - $276,000 = $26,000 gain). She would start counting
her holding period on the day after the date of purchase. She cannot exclude any of the
gain under section 121 because she did not meet the “ownership” and “use” tests.
During the five-year period ending on the date of the sale, Ophelia must have owned
the home for at least two years and lived in it as her main home for at least two years.
The two-year period does not need to be continuous. In order to qualify for the
exclusion, the taxpayer must not have excluded gain on the sale of another home
during the previous two years. She also does not qualify for a “reduced exclusion”,
because moving in with her boyfriend is not one of the circumstances that would allow
her to qualify for a reduced exclusion.

22. Question ID: 94849616 (Topic: Sale of Personal Residence)

Elaine and Chandler are married and file jointly. They owned and lived in a home as
their primary residence for 18 years. They purchased it for $119,000 and sold it for
$703,000 on March 1 of the taxable year. Also during the year, the couple sold a
vacation home for $433,000. They had purchased the vacation home five years ago for
$459,000. What amounts of taxable gain (or loss) result from both of these
transactions?

 A. $84,000 capital gain.correct

 B. $584,000 capital gain.
 C. $26,000 capital gain.
 D. $84,000 capital gain; $3,000 ordinary loss.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for A:

Under the section 121 exclusion, Elaine and Chandler can exclude up to $500,000 of
the gain on their primary residence, so they must recognize $84,000 of long-term capital
gain ($703,000 - $119,000 = $584,000). The exclusion may be claimed only on a main
home and not on a second home, and is subject to both ownership and occupancy
tests. A loss on a personal residence, regardless of whether it is a main home or a
second home, is not deductible. The loss on the vacation home is therefore not
deductible and cannot offset the gain on the sale of the primary residence.

26. Question ID: 94849586 (Topic: Like-Kind Exchange)

 Smitty and Jaime own competing farm businesses. Smitty has decided to focus
exclusively on growing flowers and Jaime exclusively grows vegetables. In 2024, they
agree to swap Smitty's inventory of flowers for Jamie's inventory of vegetables. The Fair
Market Value of the vegetables equals approximately the Fair Market Value of the
flowers. How should this transaction be treated?

 A. This transaction should be treated as a gift for both parties.

 B. This transaction is not a like-kind exchange. It is a taxable event. correct
 C. This transaction is an involuntary conversion, and it is not a taxable event.
 D. This transaction is a like-kind exchange, and not a taxable event.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for B:

This is not a like-kind exchange, because inventory can never be exchanged under the
rules for Section 1031 exchanges. This is a taxable event, and would likely be treated
as a barter transaction. Under the Tax Cuts and Jobs Act, Section 1031 now applies
only to exchanges of real property and not to exchanges of personal property or
intangible property. (This question is based on a prior-year EA exam question).

31. Question ID: 94849609 (Topic: Like-Kind Exchange)

Noelle exchanged a residential rental property with her brother, Randall, who owned a
commercial building. The FMV of both properties was similar, and no cash was
exchanged between them. Both properties were used for business purposes. How
should this transaction be reported?

 A. Since Noelle and her brother are related parties, this transaction is treated as a
taxable event.
 B. Since Noelle and her brother are related parties, this transaction is treated as an
involuntary conversion.
 C. This is a Section 1031 exchange, both parties should report the exchange
on Form 8824, Like-Kind Exchanges.correct
 D. This is a prohibited transaction.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

 This is a Section 1031 exchange, both parties should report the exchange
on Form 8824, Like-Kind Exchanges. Exchanges between related parties are permitted,
as long as both parties hold the replacement property for a minimum of two years
following the exchange.

32. Question ID: 94849636 (Topic: Like-Kind Exchange)

Nhan exchanged a rental duplex in Boise, Idaho for an apartment four-plex in Houston,
Texas; both are investment properties. The exchange is a qualified Section 1031
exchange. Nhan’s original purchase cost for the duplex was $65,000, and he had made
$20,000 of capital improvements prior to the exchange. The apartment four-plex’s fair
market value at the time of the exchange was $110,000. After the exchange is
completed, what is Nhan's basis in the new Houston four-plex?

 A. $65,000
 B. $110,000
 C. $85,000correct
 D. $20,000
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

This is a Section 1031 exchange. Nhan does not recognize any gain from the like-kind
exchange on his individual tax return. Nhan’s adjusted basis in the Boise duplex was
$85,000 ($65,000 purchase cost + $20,000 capital improvements), so this is also the
basis of the apartment four-plex he received in the exchange.

Note: A section 1031 like-kind exchange occurs when a taxpayer exchanges business
or investment property for similar property. If the exchange qualifies under section 1031,
he does not pay tax on a resulting gain and cannot deduct a loss until he disposes of
the property. The basis of the property received is generally the adjusted basis of the
property transferred. (Note: Because of the Tax Cuts and Jobs Act, now only exchanges
of real property (i.e., real estate) qualifies for like-kind exchange treatment).

35. Question ID: 95850167 (Topic: Involuntary Conversions)

How can a taxpayer defer reporting the gain from an involuntary conversion under
Section 1033?

 A. By selling the converted property to a related party.

 B. By deducting the loss immediately.
 C. By reinvesting the proceeds in similar property.correct
 D. By donating the gain to a charitable organization.
 Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for C:

A taxpayer can defer reporting the gain from an involuntary conversion under Section
1033 by reinvesting the proceeds in similar property.

Show Other Explanations

37. Question ID: 94849585 (Topic: Involuntary Conversions)

Melody’s main home, located in Florida, was completely destroyed by a hurricane. She
had no homeowner's insurance at the time, because she had let it lapse. The area was
later designated a Presidentially Declared Disaster. On which of the following forms
would she report her casualty loss?

 A. Form 4797
 B. Form 1045
 C. Form 4684correct
 D. Schedule B
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for C:

Taxpayers can report casualty and theft losses on Form 4684, Casualties and Thefts.
Section A of the form is for personal-use property (like a main home) and Section B for
business or income-producing property. To see more information about casualty losses,
see Topic No. 515 Casualty, Disaster, and Theft Losses.

41. Question ID: 94849536 (Topic: Rental Property and Income)

Which of the following rental activities would be listed on Schedule C, rather than
Schedule E?

 A. Rental of a rental home to long-term tenants.

 B. Rental of personal property, such as vehicles and equipment. correct
 C. Rental of an office building to business tenants.
 D. Rental of an empty lot for parking overflow.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

 Correct Answer Explanation for B:

Taxpayers generally use Schedule E, to report income and expenses related to real
estate rentals. "Real estate" can mean a residential rental home, an office building, or
an empty lot. The rental of personal property (such as vehicles, equipment, etc.) is
reported differently, however.

 Taxpayers should report income and expenses related to personal property

rentals on Schedule C, (if they are in the business of renting personal property).
 Taxpayers should report income and expenses on Schedule 1 (as "other
income"), if they are not in the business of renting personal property (this might
include someone who rented their own vehicle, RV, or a boat for a short time).
Study Tip: "Personal property" is an accounting term that is commonly defined as any
property that is not attached to the land or to structures on real estate. The main
characteristic of personal property is that it is movable, unlike real property or real
estate. To see more information about personal property rentals, see IRS Topic No. 414
Rental Income and Expenses.

43. Question ID: 98939168 (Topic: Rental Property and Income)

Jenny and Blaze are married and file jointly. Jenny earns $80,000 as a registered nurse.
Blaze earns $92,000 as a school administrator. They co-own and manage a residential
rental together. They actively participate in the rental activity, but neither is a real estate
professional. The rental activity is not profitable, and Jenny and Blaze incur a ($29,000)
loss on Schedule E. Based on these facts, what is the maximum amount of rental
losses that Jenny and Blaze can deduct from their nonpassive income (their wages)?

 A. $0correct
 B. $12,500
 C. $29,000
 D. $25,000
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for A:

They cannot deduct any of their rental losses. Under the passive activity rules, you can
deduct up to $25,000 in passive losses against your ordinary income (W-2 wages) if
your modified adjusted gross income (MAGI) is $100,000 or less. This deduction
phases out $1 for every $2 of MAGI above $100,000 until $150,000 when it is
completely phased out. Blaze and Jenny's wages exceed the maximum threshold
($80,000 wages + $92,000 wages = $172,000). Their passive loss must be carried
forward to future tax years to offset any passive income.
 Note: If their income drops below the threshold in future years, (for example, if one of
them stops working) or, if they decide to dispose of the activity (they sell the rental) then
the carryover losses will be released at that time. Learn more about the special rules for
rental losses in Publication 925, Passive Activity and At-Risk Rules.

49. Question ID: 94849637 (Topic: Rental Property and Income)

Athene has a cabin in Lake Tahoe that she uses as a vacation home to go skiing, and
also a rental. She rented out her ski home for 80 days during the year and used it
personally for 20 days. She paid $2,000 for repairs and $4,000 for utilities. She received
rental income of $16,000. What was Athene’s net rental income, after applying her
allowable expenses?

 A. $10,000
 B. $16,000
 C. $11,200correct
 D. $0
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for C:

Athene's property is subject to special tax treatment because it is not strictly a rental, it
is also a personal home. When a taxpayer has a residence (whether a main home or a
second home) that is used personally at certain times and rented out at other times, she
must divide her expenses between rental use and personal use. Rental expenses
generally will be no more than a taxpayer’s total expenses multiplied by the following
fraction: the denominator is the total number of days the dwelling is used and the
numerator is the total number of days actually rented at a fair rental price. In this case,
the home was used a total of 100 days and was rented for 80 days (80%). Only 80%
($6,000 × .80 = $4,800) of the expenses are deductible, so Athene’s net rental income
after applying her allowable expenses is $11,200.

51. Question ID: 94849675 (Topic: Rental Property and Income)

Deandre owns a residential rental tri-plex and actively participates in the rental activity.
The cost basis of the building is $164,000. According to the property tax rolls, the value
of the property is allocated as follows:

 $124,000 allocated to the building.

 $40,000 allocated to the land.
The building was placed into service four years ago. Deandre chose to depreciate the
building using MACRS straight-line depreciation. Residential rental property is always
depreciated over 27.5 years. Based on this information, how much depreciation
expense can Deandre claim per year?
 A. $4,509correct
 B. $5,964
 C. $1,456
 D. $0
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for A:

The depreciable basis for the building is limited to the value of the building ($124,000).
The basis of land is never depreciated. Since residential rental property is depreciated
over 27.5 years, a basis of $124,000 would generate depreciation of $4,509 per year
($124,000/27.5 years). Rental activity is reported on Schedule E, Supplemental Income
and Loss. The depreciation of rentals is reported on Form 4562, Depreciation and
Amortization.

54. Question ID: 94849516 (Topic: Rental Property and Income)

Geraldine owns three rental properties, which all have long-term tenants. She also has
a full-time job as a teacher. Which form would she use to report her rental income and
losses?

 A. Schedule C
 B. Schedule A
 C. Schedule Ecorrect
 D. Schedule D
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for C:

Rental income and expenses are reported on Schedule E, which is then attached to the
taxpayer's Form 1040. Rental income is any payment received for the use or occupation
of property, and is generally passive activity income.

56. Question ID: 94849526 (Topic: Rental Property and Income)

Stephen, a landlord, made several repairs and improvements to his rental house. He
spent $13,500 to install permanent tile in all of the bedrooms, $1,200 to repaint the
exterior of the home, $170 to replace the broken faucet in the bathroom, and $590 to
replace several damaged shingles on the roof. How much of these costs must he
depreciate?

 A. $14,200
 B. $14,960
 C. $13,500correct
 D. $14,790
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Only the cost of the flooring would have to be depreciated, and it would be depreciated
over 27.5 years. The rest of the costs can be expensed as repairs, including the
painting of the exterior. Most flooring is considered to be permanently affixed. These
types of flooring include hardwood, tile, vinyl and glued-down carpet. Per Publication
527 Residential Rental Property, permanent flooring such as tile or hardwood is
depreciated over a period of 27.5 years. However, flooring subject to more wear and
tear, such as carpeting, can be depreciated over 5 years.

61. Question ID: 94850305 (Topic: Rental Property and Income)

Joshua is unmarried and works full time as a college professor. He is not a real estate
professional, but he does own a residential rental that he manages himself. Joshua
earned $120,000 in salary at his job, and a ($31,000) loss from his rental real estate
activities in which he actively participated. He reports the rental on Schedule E. He had
no other income or loss for the year. Based on this information, figure out his passive
loss carryover.

 A. $6,000
 B. $31,000
 C. $16,000correct
 D. $15,000
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 23% of students.

Correct Answer Explanation for C:

When Joshua files his return, he can deduct only $15,000 of his passive activity loss.
He must carry over the remaining $16,000 passive activity loss to the following year. He
must figure his deduction and carryover as follows:

Adjusted gross income $120,000

Minus amount not subject to phaseout ($100,000)
Amount subject to phaseout rule $20,000
 Multiply by 50% X 50%
Reduction to "special allowance" $10,000
Maximum "special allowance" $25,000
Minus reduction $10,000
Adjusted "Special allowance" $15,000
Passive loss from rental activity $31,000
Deduction allowable in the current year ($15,000)
Amount of losses that must be carried forward $16,000
Based directly on an example in Publication 925.

62. Question ID: 95033973 (Topic: Rental Property and Income)

Roque, who is single, owns a rental duplex. He actively participates in the rental activity
by collecting rent and performing repairs, but he is not a real estate professional. In the
current year, Roque had a loss of $29,000 on this rental activity on Schedule E. He had
no other passive income. His income from wages was $90,000. How much of the rental
loss can Roque deduct on his current year tax return?

 A. $29,000
 B. $4,000
 C. $25,000correct
 D. $0
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Roque can deduct $25,000 of rental losses. The remaining amount, $4,000 ($29,000 -
$25,000), can be carried over to the following year. A special rule allows taxpayers
deduct up to $25,000 of rental losses from rental real estate activities in which they
actively participate. This “special allowance” is an exception to the general rule
disallowing losses in excess of income from passive activities. The $25,000 deduction is
phased out when a taxpayer’s MAGI is from $100,000 to $150,000 and phased out
completely when a taxpayer's MAGI is over $150,000.

64. Question ID: 98939161 (Topic: Rental Property and Income)

Thomas is unmarried and works full-time as a bank manager, earning $82,000 a year.
He also owns a residential rental which he reports on Schedule E. He actively
participates in the rental activity, but he is not a real estate professional. This year, he
was forced to evict his tenants from his rental, which ended up costing him thousands of
 dollars in legal fees. Thomas ends up incurring a ($32,000) loss on Schedule E. Based
on these facts, what is the maximum amount of rental losses that Thomas can deduct
from his nonpassive income?

 A. $32,000
 B. $25,000correct
 C. $12,500
 D. $0
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

The maximum amount of rental losses that he can deduct from nonpassive income
would be $25,000. Under the passive activity rules you can deduct up to $25,000 in
passive losses against your ordinary income (W-2 wages) if your modified adjusted
gross income (MAGI) is $100,000 or less. Since Thomas earned less than $100,000 in
wages and had no other income sources for the year, he is permitted to deduct up to
$25,000 of his rental losses in the current year. The remaining rental losses would be
carried to the following year, where the same rules and limits would apply. Learn more
about the special rules for rental losses in Publication 925, Passive Activity and At-Risk
Rules.

65. Question ID: 94849517 (Topic: Rental Property and Income)

Fantine owns a residential rental property in addition to her primary residence. She pays
mortgage interest and property taxes on both properties and receives a separate Form
1098 for each. How should this mortgage interest be reported on her individual tax
return?

 A. The mortgage interest for the rental property should be listed on Schedule E. The
mortgage interest for the primary residence and the property taxes for both properties
should be listed on Schedule A.
 B. The mortgage interest and taxes for both properties should be listed as an
adjustment to income on Form 1040.
 C. The mortgage interest and taxes for the rental property should be listed as
rental expenses on Schedule E, and the mortgage interest and taxes for the
primary residence should be listed on Schedule A as itemized deductions.correct
 D. The mortgage interest and taxes for both properties should be listed as itemized
deductions on Schedule A.
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

 Correct Answer Explanation for C:

Fantine needs to report the mortgage interest and taxes that she paid on two separate
schedules. The mortgage interest and taxes for the rental property should be listed on
Schedule E. Rental income is reported on Schedule E and is offset by various
deductions, including mortgage interest and property taxes paid. The mortgage interest
and taxes for the primary residence should be listed on Schedule A as an itemized
deduction.

73. Question ID: 95850169 (Topic: Royalty Income)

How are royalties from natural resource extraction, such as mining activities, typically
reported?

 A. On Schedule C
 B. On Schedule D
 C. On Schedule Ecorrect
 D. On Schedule A
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for C:

Royalties from natural resource extraction are typically reported on Schedule E

(Supplemental Income and Loss).
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

2. Question ID: 7585019515 (Topic: Taxable Alimony)

Victoria and Colton divorced in 2017. Under their grandfathered divorce settlement,
Victoria must pay her ex-husband $15,000 in alimony per year, which she pays in equal
installments each month. She is also required to pay his ongoing medical expenses for
a heart condition he acquired during their marriage. In 2023, Colton’s medical expenses
were $11,400. She paid $10,000 of the medical expenses directly to the hospital. The
other $1,400 she gave directly to Colton after getting a copy of the doctor’s bill. How
much of these payments can be properly deducted by Victoria as alimony?

 A. $0wrong
 B. $11,400
 C. $26,400correct
 D. $15,000
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Incorrect Answer Explanation for A:

Victoria can claim $26,400 in alimony paid as an adjustment to income on her Form
1040, the total of the medical expenses, and the regular alimony paid ($15,000 +
$11,400). The payer can deduct the full amount if it is required by the divorce
agreement or divorce decree. Since Victoria’s divorce decree included a written
stipulation that she was required to pay her ex-spouse’s ongoing medical expenses,
then those payments would also qualify as alimony. Alimony is a payment to or for a
former spouse under a divorce or separation agreement. Alimony does not include
voluntary payments that are not made under a divorce or separation decree. Payments
to a third party (such as the payment directly to the hospital) on behalf of an ex-spouse
under the terms of a divorce agreement can qualify as alimony. These include
payments for an ex-spouse’s medical expenses, housing costs (rent, utilities, etc.),
taxes, and tuition. The payments are treated as received by the spouse and then paid to
the third party.

Note: The Tax Cuts and Jobs Act (TCJA) permanently eliminated the deduction for
alimony payments starting in 2019. However, divorce judgments that were
finalized before 2019 (December 31, 2018, and earlier) are considered “grandfathered,”
and the old rules (which allowed for a deduction for the payor and required the recipient
to recognize taxable income) normally apply.

Correct Answer Explanation for C:

Victoria can claim $26,400 in alimony paid as an adjustment to income on her Form
1040, the total of the medical expenses, and the regular alimony paid ($15,000 +
 $11,400). The payer can deduct the full amount if it is required by the divorce
agreement or divorce decree. Since Victoria’s divorce decree included a written
stipulation that she was required to pay her ex-spouse’s ongoing medical expenses,
then those payments would also qualify as alimony. Alimony is a payment to or for a
former spouse under a divorce or separation agreement. Alimony does not include
voluntary payments that are not made under a divorce or separation decree. Payments
to a third party (such as the payment directly to the hospital) on behalf of an ex-spouse
under the terms of a divorce agreement can qualify as alimony. These include
payments for an ex-spouse’s medical expenses, housing costs (rent, utilities, etc.),
taxes, and tuition. The payments are treated as received by the spouse and then paid to
the third party.

Note: The Tax Cuts and Jobs Act (TCJA) permanently eliminated the deduction for
alimony payments starting in 2019. However, divorce judgments that were
finalized before 2019 (December 31, 2018, and earlier) are considered “grandfathered,”
and the old rules (which allowed for a deduction for the payor and required the recipient
to recognize taxable income) normally apply.

Show Other Explanations

3. Question ID: 98939106 (Topic: Taxable Alimony)

Which of the following payments is never subject to income tax?

 A. Payments received from an ex-spouse.

wrong
 B. Alimony payments.
 C. Payments made to a third party pursuant to a divorce decree.
 D. Child support payments.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Incorrect Answer Explanation for A:

Child support payments are never subject to income tax, and they are not deductible by
the payor.

Alimony payments can be taxable, if the divorce decree is considered "grandfathered."

Divorce and separation agreements entered into before 2019 are; grandfathered, so
there will continue to be alimony deductions and taxable alimony income for individuals
with divorce agreements that were finalized prior to 2019.

Payments made to a third party can be considered alimony in some cases.

Correct Answer Explanation for D:

 Child support payments are never subject to income tax, and they are not deductible by
the payor.

Alimony payments can be taxable, if the divorce decree is considered "grandfathered."

Divorce and separation agreements entered into before 2019 are; grandfathered, so
there will continue to be alimony deductions and taxable alimony income for individuals
with divorce agreements that were finalized prior to 2019.

Payments made to a third party can be considered alimony in some cases.

Show Other Explanations

4. Question ID: 98939109 (Topic: Taxable Alimony)

For which type of divorce agreements will there continue to be alimony deductions and
taxable alimony income?

 A. Divorce agreements with a repayment of a loan clause.wrong

 B. Divorce agreements finalized after 2019.

 C. Divorce agreements executed before 2019.correct

 D. Divorce agreements with significant noncash property settlements included.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Incorrect Answer Explanation for A:

Alimony payments can be taxable to the recipient and deductible by the payor, if the
divorce decree is considered "grandfathered." Divorce and separation agreements
entered into before 2019 are grandfathered, so there will continue to be alimony
deductions and taxable alimony income for individuals with divorce agreements that
were finalized prior to 2019.

Correct Answer Explanation for C:

Alimony payments can be taxable to the recipient and deductible by the payor, if the
divorce decree is considered "grandfathered." Divorce and separation agreements
entered into before 2019 are grandfathered, so there will continue to be alimony
deductions and taxable alimony income for individuals with divorce agreements that
were finalized prior to 2019.

Show Other Explanations

5. Question ID: 98939108 (Topic: Taxable Alimony)

Regardless of what is outlined in the divorce decree, when do alimony
payments cease to be considered "alimony" for federal tax purposes?
 A. When the payor makes the payments in cash.wrong
 B. When the receiving spouse dies.correct
 C. When the payor becomes disabled.
 D. When the payor itemizes deductions.

Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for A:

Regardless of what is outlined in the divorce decree, alimony payments cease to be

considered "alimony" after the death of the receiving spouse. Any payments made after
death (by the estate) will not be considered alimony for federal tax purposes.

Correct Answer Explanation for B:

Regardless of what is outlined in the divorce decree, alimony payments cease to be

considered "alimony" after the death of the receiving spouse. Any payments made after
death (by the estate) will not be considered alimony for federal tax purposes.

Show Other Explanations

11. Question ID: 94815822 (Topic: Taxable Government Benefits)

Which of the following payments are generally taxable?

 A. Combat pay.
 B. Unemployment compensation.correct
 C. Qualified disaster relief payments.
 D. VA disability benefits.wrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

Unemployment compensation is taxable and must be reported on a taxpayer's federal

income tax return. The other items listed are not taxable.

12. Question ID: 94849602 (Topic: Taxable Government Benefits)

Trina cares for her disabled son in her home. She receives Qualified Medicaid waiver
payments from the government totaling $17,000 during the year. She received a Form
1099-NEC reporting these payments as non-employee compensation. She does not
care for anyone else, other than her son, and does not have any other employment.
How should these amounts be reported on Trina's tax return?
 A. She should report the amounts as "other income" on Form 1040. wrong
 B. She should report the amounts on Schedule C and deduct any related business
expenses.
 C. She should report the amounts as royalty payments on Schedule E.
 D. The amounts are not taxable. In order to offset the income that was reported to her
on 1099-NEC, Trina should report the amount of those payments as income on
Schedule C and also report the excludable amount as a Schedule C expense.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for D:

The amounts are not taxable. Qualified Medicaid waiver payments are treated as
"difficulty of care" payments and are excludable from gross income. These are
payments generally issued by the state.

If the taxpayer received Qualified Medicaid waiver payments as described in IRS Notice
2014-7, they may receive a Form 1099-MISC, 1099-NEC, or even a Form W-2 reporting
the payments as non-employee compensation.

IRS Notice 2014-7 addresses the income tax treatment of certain payments to an
individual care provider under a state Home and Community-Based Services Waiver
(Medicaid waiver) program. The notice provides that "qualified Medicaid waiver
payments" as difficulty-of-care payments are excludable from gross income. If the
taxpayer chooses to exclude the payments received from gross income, the IRS
suggests reporting the amount of those payments as income on Schedule C and also
report the excludable amount as a Schedule C expense (this question is based on an
example in the IRS' VITA courseware). Most software programs now have an override
to ease reporting for this type of income.

13. Question ID: 94849508 (Topic: Taxable Government Benefits)

Herschel was unemployed during the entire year and received $14,200 in state
unemployment compensation. He also received $200 per month in food stamps and
$500 in emergency utility bill assistance from the government. What is the taxable
status of the assistance that he received?

 A. Only the utility bill assistance is taxable; the food stamps are not.wrong
 B. The food stamps and utility bill assistance are non-taxable, but only if Herschel
provides receipts as proof that they were used for food and utilities.
 C. The food stamps and utility bill assistance are non-taxable. The unemployment
compensation is taxable.correct
 D. The unemployment compensation and utility bill assistance are fully taxable.
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for C:

Both the food stamps and utility bill assistance are considered non-taxable.
Unemployment compensation is taxable for IRS purposes.

14. Question ID: 94815860 (Topic: Taxable Government Benefits)

Edgar is a forklift operator. He suffered severe injuries while working when a heavy
pallet fell on top of him. As a result of his injuries, he received the following payments in
the current year:

1. Worker's compensation: $85,000

2. Reimbursement from his employer’s accident and health plan for medical
expenses not deducted by him: $6,500
3. Damages for personal injuries: $28,000
Edgar must include _______________ of the payments in gross income:

 A. $34,500wrong
 B. $0correct
 C. $28,000
 D. $119,500
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for B:

None of the payments is taxable income. Compensation for physical injuries or sickness
is always excluded from income, regardless of the form of payment. Workers'
compensation benefits are not taxable, because they are treated as non-taxable
benefits paid to workers injured or disabled on the job.

15. Question ID: 94849542 (Topic: Taxable Government Benefits)

Which of the following types of employee compensation are exempt from federal
income tax?

 A. Vacation pay.wrong
 B. Severance pay.
 C. Worker's compensation.correct
 D. Garnished wages.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

 Correct Answer Explanation for C:

Of the types of income listed, only worker's compensation is exempt from federal
taxation. Garnished wages, which may occur when an employee owes child support,
back taxes, or other debts, are fully taxable to the employee, even though he does not
receive them in his paycheck.

16. Question ID: 94849711 (Topic: Taxable Government Benefits)

Supplemental wages are compensation paid in addition to an employee’s regular
wages. They do not include payments for:

 A. Payments for non-deductible moving expenses.

 B. Retroactive wage increases.wrong
 C. Worker's compensation.correct
 D. Accumulated sick leave.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

Supplemental wages are compensation paid to an employee in addition to regular

wages and include, but are not limited to, bonuses, commissions, overtime pay,
accumulated sick leave, severance pay, retroactive wage increases, and payments for
non-deductible moving expenses. Worker's compensation is not taxable to the recipient
at the state or federal level.

17. Question ID: 758501785 (Topic: Social Security Income)

Jamal turned 65 during the year and has started collecting Social Security benefits. He
has a filing requirement, because he is also still working and has wages from a part-
time job. Jamal wants to know, which form should he look for at tax time, that he should
use to report the Social Security income he has received?

 A. Form 1099-R
 B. Form W-2wrong
 C. Form SSA-1099correct
 D. Form W-2G
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for B:

Social Security income is reported to taxpayers on Form SSA-1099, Social Security

Benefit Statement.
 Correct Answer Explanation for C:

Social Security income is reported to taxpayers on Form SSA-1099, Social Security

Benefit Statement.

Show Other Explanations

19. Question ID: 94849496 (Topic: Social Security Income)

Clarence is 67 and unmarried. He has no dependents and lives alone. During the year,
he sold investments and realized a taxable capital gain of $96,050. He also received
$11,500 of Social Security benefits. He has no other taxable income for the year. What
is the maximum taxable amount of his Social Security benefits?

 A. $0, none of his benefits would be taxable.

 B. Insufficient information to determine the answer.wrong
 C. $9,775, a maximum of 85% of his benefits would be taxable. correct
 D. $11,500, all of his benefits would be taxable.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

Regardless of a taxpayer’s other taxable income, the maximum amount that can ever
be taxable on net Social Security benefits is 85%. Therefore, the answer is $9,775
($11,500 × 85%). This is the maximum amount of his Social Security that would be
taxed.

20. Question ID: 94815828 (Topic: Social Security Income)

Toby switched jobs in the middle of the year and ends up working for two different
employers. He earns $200,000 in total wages. Social Security taxes are collected on the
entire amount. What is true about Toby's situation?

 A. Toby can claim a refund of the excess Social Security taxes on his Form
1040.correct
 B. Toby needs to speak with his employers so that they refund excess Social
Security taxes to him.wrong
 C. There is no refund for excess Social Security taxes in this case.
 D. Both, Toby and his employers are entitled to a refund of excess Social Security
taxes.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for A:

 Toby has the option to claim a refund on the excess Social Security taxes, since he
worked for more than one employer during the year. In this type of scenario, the
overpaid Social Security tax will be refunded when Toby files his individual return and
claims the excess Social Security withholding as a credit.

Overpayments of Social Security tax are discussed in IRS Tax Topic 608, Excess Social
Security and RRTA Tax Withheld.

21. Question ID: 94849503 (Topic: Social Security Income)

Willie is 62-years-old and married. He files Married Filing Separately, and lives apart
from his wife for the entire year. What is Willie's “base amount” for computing the
taxable portion of his Social Security benefits?

 A. $32,000
 B. $0wrong
 C. $50,000
 D. $25,000correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for D:

There are two relevant base amounts for figuring the taxable portion of Social Security.
The lower base is $25,000 if the taxpayer is single or MFS (but lives apart from their
spouse), and $32,000 if married filing jointly. The base amount is zero for married
persons filing separately who lived together at any time during the year. (This question
is based on an actual EA exam question released by the IRS).

22. Question ID: 94849611 (Topic: Social Security Income)

Which of the following is not taxable as "earned income"?

 A. Social security and railroad retirement benefitscorrect

 B. Union strike benefits.
 C. Self-employment income of a statutory employee.wrong
 D. Long-term disability benefits received prior to minimum retirement age.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for A:

Social security and railroad retirement benefits are not considered "earned income".
Earned income includes all the taxable income and wages a taxpayer receives from
working. Taxable earned income includes:
  Wages, salaries, tips, and other taxable employee pay.
 Union strike benefits.
 Long-term disability benefits received prior to minimum retirement age.
 Net earnings from self-employment.
Most government welfare benefits including food stamps, heating assistance programs,
and non-federal assistance benefits from states or local agencies are exempt from
federal taxation and not treated as "earned income." Worker’s compensation, which
provides wage replacement and medical benefits to injured workers, is also not taxable.

23. Question ID: 758501787 (Topic: Social Security Income)

Which of the following is included in the calculation to determine the taxability of Social
Security benefits?

 A. One-half of Social Security benefits plus all other income, including tax-exempt
interestcorrect
 B. Only earned incomewrong
 C. One-half of Social Security benefits plus all other income, excluding tax-exempt
interest
 D. Only unearned income
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Incorrect Answer Explanation for B:

To determine the taxability of Social Security benefits, a taxpayer must add one-half of
their Social Security benefits to all other income, including tax-exempt interest.

Correct Answer Explanation for A:

To determine the taxability of Social Security benefits, a taxpayer must add one-half of
their Social Security benefits to all other income, including tax-exempt interest.

Show Other Explanations

24. Question ID: 758501786 (Topic: Social Security Income)

Hrithika is unmarried and does not have any dependents. She turned 65 this year and
has started collecting Social Security. She has other income sources, as well, including
a rental property that she manages herself, so she has a filing requirement. What is the
base amount that Hrithika must use for calculating the taxability of her Social Security
benefits?

 A. $250,000wrong
 B. $25,000correct
 C. $32,000
 D. $0
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Incorrect Answer Explanation for A:

Hrithika is single, so her base amount is $25,000.

Note: The base amount for calculating the taxability of Social Security benefits for a
taxpayer filing as single, head of household, qualifying surviving spouse, or married
filing separately (and lived apart from their spouse all year) is $25,000. For married
couples, it is $32,000.

Correct Answer Explanation for B:

Hrithika is single, so her base amount is $25,000.

Note: The base amount for calculating the taxability of Social Security benefits for a
taxpayer filing as single, head of household, qualifying surviving spouse, or married
filing separately (and lived apart from their spouse all year) is $25,000. For married
couples, it is $32,000.

Show Other Explanations

26. Question ID: 95015379 (Topic: Gambling Winnings)

Perry had $20,000 in lottery winnings during the year. He must report his winnings as
taxable. He spent $6,000 on lottery tickets during the year and kept his receipts. Can he
deduct the cost of his lottery tickets?

 A. He may not deduct the cost of lottery tickets.

 B. He may deduct the cost of lottery tickets as an adjustment to income on Form
1040.wrong
 C. He may deduct the cost of lottery tickets on Schedule A as a miscellaneous itemized
deduction.correct
 D. He may deduct the cost of lottery tickets on Schedule A. This miscellaneous itemized
deduction is subject to the 2% limit.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for C:

He may deduct the cost of lottery tickets on Schedule A, but only if he itemizes
deductions. This miscellaneous itemized deduction is limited to gambling winnings, but
 no other limitations. Since his gambling winnings totaled $20,000, he may deduct the
full amount of $6,000 on Schedule A.

27. Question ID: 94815887 (Topic: Gambling Winnings)

On which form are gambling winnings reported to the winner?

 A. Form W-2.
 B. Form 1099-MISC.
 C. Form 1099-B.wrong
 D. Form W-2G.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

Gambling winnings are reported to the recipient on Form W-2G. Gambling income is
covered in IRS Topic No. 419, Gambling Income and Losses.

29. Question ID: 94849672 (Topic: Gambling Winnings)

Usman regularly bets on horse racing. During the current year, he receives Forms W-
2G for gambling winnings that total $85,000. His losses from horse racing are $93,000.
He also occasionally gambles at a casino and wins $600 playing cards, but loses
another $800. He does not receive Forms W-2G from the casino winnings. What
amounts of gambling income and loss must Usman report on his Form 1040?

 A. $85,600 income; $85,600 loss.correct

 B. $85,000 income; $93,000 loss.
 C. $85,600 income; $93,800 loss.wrong
 D. $8,200 net losses from gambling, no income needs to be reported.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

Usman must report all his gambling winnings on his federal income tax return, even for
the amounts for which he did not receive Forms W-2G. He can deduct his gambling
losses on Schedule A, but the deduction is limited to the amount of his winnings. In
other words, the MOST that he would be able to deduct in losses is the amount of his
winnings (you can't deduct more gambling losses than you win in a single year). He
must report his winnings as income and claim his allowable losses separately; he
cannot reduce his winnings by his losses and report the difference.

31. Question ID: 758501774 (Topic: Cancellation of Debt Income)

 Under which of the following circumstances would canceled debt not be taxable?

 A. The debt is unsecured credit card debt

 B. The amount of the canceled debt is less than $600
 C. The taxpayer is insolvent immediately before the debt is canceledcorrect
 D. The debt is secured by real propertywrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for D:

Canceled debt is not taxable if the taxpayer is insolvent immediately before the
cancellation of the debt. If a taxpayer can exclude their canceled debt due to insolvency,
they must attach Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness to their individual return and check the appropriate box. See IRS Topic
no. 431, Canceled debt.

Correct Answer Explanation for C:

Canceled debt is not taxable if the taxpayer is insolvent immediately before the
cancellation of the debt. If a taxpayer can exclude their canceled debt due to insolvency,
they must attach Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness to their individual return and check the appropriate box. See IRS Topic
no. 431, Canceled debt.

Show Other Explanations

32. Question ID: 94850120 (Topic: Cancellation of Debt Income)

Isaac has canceled debt from a foreclosure on his vacation home. The mortgage on the
property was a recourse debt. What does this mean?

 A. A recourse debt means that Isaac is personally liable for the loan.correct
 B. It means that the lender cannot pursue anything other than the collateral.wrong
 C. A recourse debt means that the debt is unsecured.
 D. A recourse debt means that Issac must file a civil action.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

A recourse debt holds the borrower personally liable. This means that Isaac is
personally liable for the mortgage. All other debt is considered nonrecourse. A
nonrecourse debt (loan) does not allow the lender to pursue anything other than the
 collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank
can only foreclose on the home. The bank generally cannot take further legal action to
collect the money owed on the debt. Whether a debt is recourse or nonrecourse may
depend on state law.

34. Question ID: EA P1 944 (Topic: Cancellation of Debt Income)

If a taxpayer defaults on a credit card debt or some other loan, what form will the
taxpayer typically receive when the debt is canceled by the lender?

 A. Form 1099-MISC
 B. Form 982wrong
 C. Form 1099-NEC
 D. Form 1099-Ccorrect
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

Any creditors and lenders must send a Form 1099-C to borrowers and the IRS if $600
or above in debt was forgiven or canceled.

35. Question ID: 94850179 (Topic: Cancellation of Debt Income)

A nonrecourse debt (loan) does not allow the lender to pursue anything other than:

 A. Personal and business assets.

 B. The collateral on the loan.correct
 C. Personal assets only.wrong
 D. Wages or bank accounts.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for B:

A nonrecourse debt (loan) does not allow the lender to pursue anything other than the
collateral. For example, if a borrower defaults on a nonrecourse home loan, the bank
can only foreclose on the home. The bank generally cannot take further legal action to
collect the money owed on the debt. If a lender cancels a debt and issues Form 1099-C
to the taxpayer, the lender will indicate on the form if the borrower was personally liable
(recourse) for repayment of the debt. The tax impact depends on the type of debt -
recourse or nonrecourse. See IRS Tax Topic No. 431, Canceled Debt.

36. Question ID: 94849728 (Topic: Cancellation of Debt Income)

 Joel’s primary residence is subject to a $320,000 mortgage debt. His basis in the home
is $340,000. Joel loses his job and is unable to make his mortgage payments, so his
bank forecloses on the home on January 10, 2024. Due to declining real estate values
in his city, Joel's former residence is sold for $280,000 on December 15, 2024, as a
short-sale. The debt was canceled by the mortgage lender and Joel receives a Form
1099-C reporting the cancellation. Joel was not insolvent at the time. What amount of
taxable income from cancellation of debt must Joel report on his tax return?

 A. $30,000wrong
 B. $0correct
 C. $40,000
 D. $60,000
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for B:

Joel has $40,000 of cancelled debt from the discharge of indebtedness. However, none
of the canceled debt is taxable to Joel because it is excluded from income because it is
primary residence indebtedness. Qualified principal residence indebtedness can be
excluded from income. Generally, if a taxpayer excludes canceled debt from income,
the taxpayer must attach Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness, to report the amount of debt qualifying for exclusion. To learn more about
cancellation of debt, see IRS Topic No. 431, Canceled Debt.

37. Question ID: 95003697 (Topic: Cancellation of Debt Income)

Shane fell on hard times and stopped paying his mortgage in the prior year. His home
was later foreclosed. At the time of foreclosure, he owed a balance of $190,000 to the
lender and the FMV of the property was $150,000 at the time of the foreclosure. For tax
purposes, the foreclosure is treated as a sale. Shane's mortgage loan was nonrecourse.
Based on this information, what would the "sale price" be for reporting this transaction?

 A. The sale price would be $190,000.correct

 B. The sale price would be $150,000.wrong
 C. The sale price would be $40,000.
 D. The sale price would be $0.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 30% of students.

Correct Answer Explanation for A:

Since Shane is not personally liable for the debt (a nonrecourse loan), the "selling price"
would be $190,000. Nonrecourse debt is satisfied by the surrender of the secured
 property regardless of the FMV at the time of surrender, and the borrower is not
personally liable for the debt. If property that is subject to nonrecourse debt is
abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the
circumstances are treated as a sale of the property by the taxpayer. In determining the
gain or loss on the disposition of the property, the balance of the non-recourse debt at
the time of the disposition of the property is included in the amount realized (generally
the selling price). Since Shane is not personally liable for the debt, the difference
between the FMV of the property and the balance of the loan is not included in his gross
income (see detailed example in Publication 4491).

38. Question ID: 94849513 (Topic: Cancellation of Debt Income)

Janine had $5,000 of credit card debt, which she did not pay. She received a Form
1099-C from her credit card company showing canceled debt of $5,000 at the end of the
year. Immediately before the cancellation, her total liabilities from all sources were
$15,000 and the FMV of her total assets was $7,000. How much of the canceled debt is
taxable to Janine?

 A. $0correct
 B. $2,000wrong
 C. $5,000
 D. $7,000
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

At the time the debt was canceled, Janine was insolvent to the extent of $8,000
($15,000 total debt minus $7,000 FMV of her total assets). She can exclude the entire
$5,000 canceled debt from income. She must file Form 982 to report the canceled debt,
and she should mark the box for insolvency.

39. Question ID: 94815960 (Topic: Cancellation of Debt Income)

Canceled debt is generally taxable, but there are several exclusions from the general
rule for reporting canceled debt as income. Which of the following types of canceled
debt would NOT qualify for exclusion in 2024?

 A. Recourse debt on a car that was repossessed by a lender.correct

 B. Discharge of debt through bankruptcy.wrong
 C. Discharge of debt of insolvent taxpayer.
 D. Discharge of qualified principal residence indebtedness.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

 Correct Answer Explanation for A:

The recourse debt on a vehicle would likely be taxable canceled debt. If a lender
forecloses on property subject to a recourse debt and cancels the portion of the debt in
excess of the fair market value (FMV) of the property, the canceled portion of the debt is
treated as ordinary income from cancellation of indebtedness. This amount must be
included in gross income unless it qualifies for an exception or exclusion. The
exclusions are:

 Discharge of debt through bankruptcy.

 Discharge of debt of insolvent taxpayer.
 Discharge of qualified farm indebtedness.
 Discharge of qualified real property business indebtedness.
 Discharge of qualified principal residence indebtedness.
To learn more about this topic, see IRS Topic No. 431, Canceled Debt.

40. Question ID: EA P1 933 (Topic: Cancellation of Debt Income)

Gary is having severe financial difficulties and his main home is being lost to
foreclosure. He owes the bank more than the house is currently worth. The bank sends
Gary a Form 1099-C reporting canceled debt from the foreclosure. Gary believes that
he can exclude this canceled debt from his income. What form would should he attach
to his individual return, in order to properly exclude the canceled debt?

 A. Form 982correct
 B. Schedule Jwrong
 C. Form 2210
 D. Form 843
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Incorrect Answer Explanation for B:

Gary must attach Form 982 to his individual return. Qualified principal residence
indebtedness can be excluded from income in some circumstances. Form
982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to
determine the amount of discharged indebtedness that can be excluded from gross
income. This includes canceled debt from a main home.

Correct Answer Explanation for A:

Gary must attach Form 982 to his individual return. Qualified principal residence
indebtedness can be excluded from income in some circumstances. Form
982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to
 determine the amount of discharged indebtedness that can be excluded from gross
income. This includes canceled debt from a main home.

Show Other Explanations

41. Question ID: 758501775 (Topic: Cancellation of Debt Income)

Which form must a taxpayer attach to their federal income tax return to exclude
canceled debt from income due to bankruptcy?

 A. Schedule B
 B. Form 1099-Cwrong
 C. Form 4681
 D. Form 982correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Incorrect Answer Explanation for B:

Taxpayers must attach Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness, to their federal income tax return to exclude any debt canceled in
bankruptcy. See IRSTopic no. 431, Canceled debt.

Correct Answer Explanation for D:

Taxpayers must attach Form 982, Reduction of Tax Attributes Due to Discharge of
Indebtedness, to their federal income tax return to exclude any debt canceled in
bankruptcy. See IRSTopic no. 431, Canceled debt.

Show Other Explanations

44. Question ID: 94849548 (Topic: Cancellation of Debt Income)

Rhonda had to give up her main home to foreclosure. She has a Form 1099-C, which
shows the cancellation of her mortgage loan. Despite facing financial difficulties, she did
not declare bankruptcy. She is also not insolvent because she has a retirement plan at
work, but she does not want to withdraw from her retirement account. Rhonda
confirmed that the entirety of the mortgage loan was used to buy the house. According
to her Form 1099-C, $60,000 worth of debt was forgiven. How should this cancelled
debt be reported on Rhonda's tax return?

 A. The cancelled debt is not taxable. She must report the amount qualifying for
exclusion on Form 982 and attach the form to her tax return.correct
 B. No income or loss to report.wrong
 C. The cancellation of debt may be taxable, but only if she is required to file a tax return.
 D. The cancellation of debt is fully taxable and must be reported as "other income"
because she is not insolvent or in bankruptcy.
 Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for A:

Rhonda's debt is a cancellation of "qualified principal residence indebtedness," and is

therefore not taxable. Rhonda should report the full amount as qualifying for the
principal residence exclusion on Form 982, Reduction of Tax Attributes Due to
Discharge of Indebtedness, and attach the form to her tax return.

45. Question ID: 94849617 (Topic: Cancellation of Debt Income)

When Danny and June married five years ago, June's parents loaned them $30,000 for
a down payment on their first house. Danny and June made regular payments on the
loan until June's parents were killed in an accident in 2024. When they died, Danny and
June still owed $17,500 on the balance of the loan. One of the terms of June's parents’
will was that any balance remaining on the loan would be forgiven at their death and
would be considered a gift. How should this be reported on Danny and June's joint tax
return?

 A. Danny and June do not have to recognize income due to the forgiveness of the debt.
No reporting is required.correct
 B. Danny and June do not have to recognize income due to the forgiveness of the debt,
but they are required to file a gift tax return.
 C. Danny and June have to recognize income due to the forgiveness of the debt,
but only the amount above the gift limit.wrong
 D. Danny and June have to recognize $17,500 in income due to the forgiveness of the
debt.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 33% of students.

Correct Answer Explanation for A:

Danny and June do not have to recognize income due to the forgiveness of the debt. No
reporting is required. Loans forgiven as gifts are not taxed. If a debt is canceled by a
private lender, such as a relative or friend, and the cancellation is intended as a gift,
there is no income that has to be reported. Danny and June are not required to file gift
tax returns, because any gift tax reporting is always done by the donor (not the donee,
or the recipient of the gift).

47. Question ID: 94849729 (Topic: Cancellation of Debt Income)

Jurek owed $23,000 to his credit card company, which agreed to accept $14,000 as
payment in full to settle the debt. Jurek was not insolvent and not in bankruptcy when
the credit card debt was canceled. What amount should he report as "canceled debt
income” on his return?
 A. $23,000
 B. $14,000wrong
 C. $0
 D. $9,000correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

Jurek must report $9,000 ($23,000 - $14,000) on his Form 1040 as cancellation of debt
income. The amount is fully taxable because he does not qualify for an exclusion. To
learn more about cancellation of debt, see IRS Topic No. 431, Canceled Debt.

48. Question ID: 94849601 (Topic: Cancellation of Debt Income)

What type of loan holds that the borrower is NOT personally liable, and therefore, any
debt cancellation is not taxable to the borrower?

 A. Nonrecourse loanscorrect
 B. Mortgage loanswrong
 C. Credit card debt
 D. Recourse loans
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for A:

Nonrecourse loans are not taxable and are treated differently from recourse loans. In
the case of nonrecourse debt, there will be no ordinary income due to debt cancellation.
See IRS Topic no. 431, Canceled debt.

49. Question ID: 94849756 (Topic: Cancellation of Debt Income)

Ambrose made a deal with his credit card company to pay $2,000 on his $7,000
balance, and the company agreed to take it as payment in full. In January of the current
year, he received a Form 1099-C from his credit card company reporting the amount of
debt canceled. Ambrose was solvent immediately before the debt was canceled. How
much should Ambrose report on his Form 1040 as taxable income?

 A. Ambrose must include $5,000 as "other income" on his tax return.correct

 B. Ambrose must include $2,000 as "other income" on his tax return.
 C. Ambrose must include $7,000 as "other income" on his tax return.wrong
 D. Ambrose does not have to include the cancelled debt on his tax return.
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

Ambrose has $5,000 in cancellation of debt income ($7,000 - $2,000). Since Ambrose
was not insolvent at the time of the cancellation, he must include the entire $5,000 as
"other income" on his tax return (example from Publication 4491).

50. Question ID: 758501778 (Topic: Hobby Income)

What is the primary factor that distinguishes an activity as a hobby or a business?

 A. Whether the taxpayer depends on income from the activity for their livelihood
 B. Whether the taxpayer has a bona fide intent to make a profitcorrect
 C. Whether the taxpayer has attempted similar activities in the past
 D. Whether the taxpayer enjoys the activitywrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Incorrect Answer Explanation for D:

IRS guidance indicates that the most important distinguishing factor between a business
and a hobby is the taxpayer's profit intent. A hobby is classified as any activity that a
person pursues because they enjoy it and with no intention of making a profit. Other
factors, such as businesslike conduct and past profitability can also be considered.

See the IRS page on Hobby Activities.

Correct Answer Explanation for B:

IRS guidance indicates that the most important distinguishing factor between a business
and a hobby is the taxpayer's profit intent. A hobby is classified as any activity that a
person pursues because they enjoy it and with no intention of making a profit. Other
factors, such as businesslike conduct and past profitability can also be considered.

See the IRS page on Hobby Activities.

Show Other Explanations

51. Question ID: 94850351 (Topic: Hobby Income)

Which of the following activities would be classified as a hobby activity (rather than a
business)?

 A. An activity that is carried on primarily for pleasure and recreation and occasionally
turns a profit. correct
 B. A rental activity that is profitable but one in which the taxpayer does not materially
participate.
 C. A business activity that is carried on to make a profit but incurs losses for multiple
years.
 D. A new business activity that incurs a net operating loss in the current
year. wrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for A:

An activity must have a profit motive in order to be considered a business. A key

feature of a business is that people do it to make a profit. People engage in a hobby for
sport or recreation, not to make a profit. See the IRS detail page on hobby activities for
more information.

52. Question ID: 758501777 (Topic: Hobby Income)

What is one benefit of hobby income, compared to self-employment income?

 A. Hobby income can be reported on Schedule F

 B. Hobby income is not subject to self-employment taxcorrect
 C. Hobby income is not taxablewrong
 D. Hobby income is not subject to income tax
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Incorrect Answer Explanation for C:

Although expenses related to a hobby activity are not deductible, one benefit is that
hobby income is not subject to self-employment tax, unlike other types of business
income.

Correct Answer Explanation for B:

Although expenses related to a hobby activity are not deductible, one benefit is that
hobby income is not subject to self-employment tax, unlike other types of business
income.

Show Other Explanations

54. Question ID: 758501776 (Topic: Hobby Income)

Aishwarya has a hobby making baskets out of yarn and other crafting materials. She
sells the baskets for $35 each at craft fairs sometimes, but mostly she just gives them
 out to family and friends as gifts. This year, she earned $1,200 from selling her baskets,
and she spent $250 on materials to make the baskets. How much net income should
she report from her hobby activity, and how should the income be reported?

 A. She should report the full amount of $1,200 on Schedule C. None of her
expenses are deductible, because it is a hobby.wrong
 B. She should report the full amount of $1,200 as "other income" on Schedule 1 of her
individual tax return.
 C. She should report $950 on Schedule C of her individual tax return.
 D. She should report $950 as "other income" on Schedule 1 of her individual tax
return.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Incorrect Answer Explanation for A:

Aishwarya should report $950 ($1,200 - $250) as "other income" on Schedule 1 of her
individual tax return. Income earned from a hobby must be reported on Form 1040,
Schedule 1. This form is used to report additional income, such as hobby income, that is
not reported on other forms.

Note: Expenses related to a hobby are not deductible, however, a taxpayer can deduct
Cost of Goods Sold from gross receipts to calculate hobby income. Since Aishwarya
spent $250 on supplies to actually build her baskets, these would be classified as
COGS, and therefore deductible from her gross receipts to arrive at her taxable hobby
income.

Correct Answer Explanation for D:

Aishwarya should report $950 ($1,200 - $250) as "other income" on Schedule 1 of her
individual tax return. Income earned from a hobby must be reported on Form 1040,
Schedule 1. This form is used to report additional income, such as hobby income, that is
not reported on other forms.

Note: Expenses related to a hobby are not deductible, however, a taxpayer can deduct
Cost of Goods Sold from gross receipts to calculate hobby income. Since Aishwarya
spent $250 on supplies to actually build her baskets, these would be classified as
COGS, and therefore deductible from her gross receipts to arrive at her taxable hobby
income.

Show Other Explanations

55. Question ID: 94849577 (Topic: Hobby Income)

Morty works full-time as a lifeguard. He is also a competitive surfer and has regularly
participated in surfing competitions for the past six years with the intent to earn prize
 winnings. He has devoted significant time and effort to developing expertise in surfing,
and he keeps good records that track his income and expenses associated with the
surfing competitions. Morty has not yet earned a profit through the surfing competitions.
As his tax preparer, what would you advise Morty?

 A. Morty does not have to claim any of the surfing competition income, but he is
allowed to capitalize the expenses to a future year, for when he starts to make a
profit. wrong
 B. The surfing competitions constitute a business activity, so he can report his income
and deduct his expenses on Schedule C.
 C. Morty is likely engaging in a hobby. His hobby-related expenses are not deductible,
but his hobby income is taxable. correct
 D. Morty can choose to forego claiming the income and the expenses, since the activity
is just a hobby.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

The IRS is likely to determine that Morty is engaging in a hobby and the surfing
competitions are not a true business activity engaged in for profit. Although he
maintains adequate records and enters surf competitions with the intent to earn money,
he continues to enter competitions despite sustaining losses over several years,
suggesting the lack of a true profit motive. A hobby is an activity typically undertaken
primarily for pleasure. The IRS presumes that an activity is “carried on for a profit” if it
makes a profit during at least three of the last five tax years, including the current year.
Income from a hobby is taxable and reported on Form 1040 as “other income”.
Expenses related to a hobby activity are no longer deductible due to changes
implemented by the Tax Cuts and Jobs Act.

See the IRS detail page on how to distinguish between a business and a hobby.

56. Question ID: 758501779 (Topic: Hobby Income)

Prisha works full-time as a cashier, but she also has a hobby as a landscape artist. She
sells her paintings mostly at county fairs. Sometimes she gives them to friends and
family, but she mostly paints for pleasure and would continue painting, even if she did
not make any money selling her paintings. She had various expenses related to her
hobby, such as travel and meals to the county fairs where she would display her artwork
for sale. Prisha’s hobby generates some income, but her expenses exceed her income
this year. What can Prisha do with her hobby losses?

 A. She can deduct the hobby loss from other income, but only if the income is from
passive sources.
 B. She can carry the hobby loss forward to future years, for when her hobby
earns more revenue.wrong
 C. Her hobby loss cannot be deducted.correct
 D. She can deduct the hobby loss against capital gains income.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for B:

Her hobby loss cannot be deducted, because hobby losses are not deductible. If
expenses related to the hobby exceed the income generated, the taxpayer will have a
loss from the activity. However, this loss cannot be deducted from other forms of
income.

Note: Expenses related to a hobby are not deductible, however, a taxpayer can deduct
Cost of Goods Sold from gross receipts to calculate hobby income. See the IRS page
on Hobby Activities

Correct Answer Explanation for C:

Her hobby loss cannot be deducted, because hobby losses are not deductible. If
expenses related to the hobby exceed the income generated, the taxpayer will have a
loss from the activity. However, this loss cannot be deducted from other forms of
income.

Note: Expenses related to a hobby are not deductible, however, a taxpayer can deduct
Cost of Goods Sold from gross receipts to calculate hobby income. See the IRS page
on Hobby Activities.

Show Other Explanations

57. Question ID: 94849502 (Topic: Hobby Income)

The IRS presumes that an activity is "carried on for profit" if it makes a profit for:

 A. Two years in a row.

 B. Two of the last three tax years, including the current year.wrong
 C. Three years in a row.
 D. Three of the last five tax years, including the current year.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

 The IRS presumes that an activity is carried on for profit if it makes a profit during at
least three of the last five tax years, including the current year. In the case of breeding,
showing, training, or racing horses, at least two of the last seven years must show a
profit. If an activity is later determined to not be for profit, the losses from that activity
may be disallowed. This happens when the IRS reclassifies a business as a hobby.

See the IRS detail page on how to distinguish between a business and a hobby.

58. Question ID: 94850381 (Topic: Hobby Income)

A key feature of a business is that people do it to make a profit. People engage in a
hobby for sport or recreation, not to make a profit. The IRS presumes that an activity is
carried on for profit if it:

 A. Makes a profit during at least 3 of the last 10 tax years, including the current year.
 B. Makes a profit during at least 3 of the last 7 tax years, including the previous
year.wrong
 C. Makes a profit during at least 2 of the last 5 tax years, including the previous year.
 D. Makes a profit during at least 3 of the last 5 tax years, including the current
year.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for D:

The IRS presumes that an activity is “carried on for profit” if it makes a profit during at
least 3 of the last 5 tax years, including the current year. The general rule is 2 of the last
7 years for activities that consist primarily of breeding, showing, training or racing
horses. The hobby loss rules apply to individuals, S corporations, trusts, estates, and
partnerships but not to C corporations.

59. Question ID: 94849708 (Topic: Taxation of Court Awards and Damages)
Which type of court damages are always taxable?

 A. Damages for wrongful incarceration.

 B. Damages awarded for pain and suffering.
 C. Damages awarded for the reimbursement of medical expenses.wrong
 D. Payments for punitive damages.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for D:

 Court awards for punitive damages are always taxable income, regardless of the reason
or the cause of the lawsuit. Court awards for pain and suffering or the reimbursement of
medical expenses are not taxable. Wrongful incarceration awards are also not taxable.

60. Question ID: 94849649 (Topic: Taxation of Court Awards and Damages)
Zoey sued her employer during the year. She eventually wins a court award for
emotional distress caused by unlawful discrimination. The emotional distress resulted in
her hospitalization for a nervous breakdown. The court awarded Zoey total damages of
$80,000, including $30,000 to refund the costs of her medical care for the nervous
breakdown. How much of her court award is taxable?

 A. $50,000correct
 B. $0
 C. $80,000 wrong
 D. $30,000
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for A:

In this case, $50,000 ($80,000 - $30,000) would be considered a taxable court award.
The $30,000 of damages for her medical care would not be taxable.

61. Question ID: 758501782 (Topic: Taxation of Court Awards and Damages)
Which of the following types of court awards is generally taxable as ordinary income?

 A. Compensatory damages for physical illness

 B. Reimbursements for medical care related to emotional distress
 C. Compensatory damages for personal physical injurywrong
 D. Punitive damages awarded by a court when the underlying claim is for physical
injurycorrect
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Incorrect Answer Explanation for C:

Punitive damages are always taxable, regardless of the nature of the underlying claim.
They are primarily intended to punish the defendant for outrageous or malicious
conduct.

Note: Compensatory damages for personal physical injury or physical sickness are not
taxable, whether they are from a legal settlement or an actual court award.
Reimbursements for medical care are not taxable.
 Correct Answer Explanation for D:

Punitive damages are always taxable, regardless of the nature of the underlying claim.
They are primarily intended to punish the defendant for outrageous or malicious
conduct.

Note: Compensatory damages for personal physical injury or physical sickness are not
taxable, whether they are from a legal settlement or an actual court award.
Reimbursements for medical care are not taxable.

Show Other Explanations

62. Question ID: 94849688 (Topic: Taxation of Court Awards and Damages)
Dinar received a settlement of $2 million after contracting mesothelioma from exposure
to asbestos. He will receive installment payments of $200,000 per year for ten years.
How should Dinar report the damages he is awarded on his income tax return?

 A. He must report the settlement on his tax return, but it is not taxable income.
 B. He must include the entire amount of his settlement in his gross income for the
tax year.wrong
 C. He must include in his gross income only the portion of the settlement paid to him
each year when it is received.
 D. He can exclude the payments from his gross income.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 43% of students.

Correct Answer Explanation for D:

Dinar does not have to report any taxable income from the settlement. Gross income
does not include the amount of damages received due to physical injuries or to
sickness, regardless of whether the damages are paid as lump sums or as periodic
payments. If any of the settlement includes interest, then only the interest would be
taxable.

To learn more about legal settlements, see the IRS webpage for Tax Implications of
Settlements and Court Judgments.

64. Question ID: 758501784 (Topic: Taxation of Court Awards and Damages)
Which of the following statements is TRUE regarding the tax treatment of court awards
for lost wages or profits?

 A. They are not taxable, regardless of the nature of the underlying settlement
 B. Court awards for lost wages or profits are generally taxable as ordinary
incomecorrect
 C. Court awards for lost wages or profits are not taxable if received as part of a
settlementwrong
 D. Court awards for lost wages or profits are not taxable if received as a lump sum
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Incorrect Answer Explanation for C:

Court awards for compensation for lost wages or profits are generally taxable as
ordinary income, regardless of how they are received. Interest payments and punitive
damages are also taxable, regardless of the origin of the claim.

Note: Only compensatory damages directly related to a personal physical injury or

physical sickness are not taxable, and this is true whether they are from a legal
settlement or an actual court award.

Correct Answer Explanation for B:

Court awards for compensation for lost wages or profits are generally taxable as
ordinary income, regardless of how they are received. Interest payments and punitive
damages are also taxable, regardless of the origin of the claim.

Note: Only compensatory damages directly related to a personal physical injury or

physical sickness are not taxable, and this is true whether they are from a legal
settlement or an actual court award.

Show Other Explanations

65. Question ID: 94849659 (Topic: Taxation of Court Awards and Damages)
Heidi, age 22, suffered major physical injuries after a serious car accident. The auto
manufacturer was found negligent for having faulty equipment installed on her car. A
jury awarded Heidi the following damages from the lawsuit:

 $750,000 for physical injuries

 $200,000 for emotional distress as a direct result of the injuries
 $1 million for punitive damages against the auto manufacturer for faulty
equipment
What amount of the damages is taxable to Heidi?

 A. $200,000wrong
 B. $1,200,000
 C. $1 millioncorrect
 D. $1,950,000
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

Only the punitive damages are taxable. Settlements for personal physical injuries or
physical illness are not taxable. Damages received for emotional distress due to
physical injury or sickness are treated the same way as damages for physical injury or
sickness, so they are not included in income. If emotional distress is not due to a
physical injury (for example, an employment lawsuit in which a taxpayer suffers
emotional distress for injury to reputation), the proceeds are taxable, except for any
damages received for medical care due to that emotional distress. Emotional distress
includes physical symptoms such as headaches, insomnia, and stomach disorders.

To learn more about this topic, see the IRS webpage for Tax Implications of Settlements
and Court Judgments.

66. Question ID: 758501780 (Topic: Taxation of Court Awards and Damages)
Aiyana received a court award against her employer for sexual harassment at her
workplace. The sexual harassment caused her to have depression, and she had to see
a psychiatrist to diagnose and treat her mental condition arising from this harassment.
As part of the court's ruling, Aiyana was granted $95,000 in total damages, which
included $20,000 to cover the costs of her medical care. She also received an additional
$4,000 in interest on the award. How much of this court award would be taxable to
Aiyana?

 A. $95,000 would be taxable

 B. Only the $4,000 in interest would be taxable
 C. $75,000 would be taxablewrong
 D. $75,000 would be taxable as a court award, and $4,000 would be taxable as interest
incomecorrect
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Incorrect Answer Explanation for C:

$75,000 would be taxable as a court award ($95,000 damages - $20,000

reimbursement for her medical care), and $4,000 would be taxable separately, as
interest income.

Note: Damages for harassment and emotional distress would generally be taxable, if
the damages were not directly related to a "physical injury or physical illness."
However, any damages received for medical care directly related to the harassment or
emotional distress are not taxable. Interest payments on any settlement award are also
taxable.
 Correct Answer Explanation for D:

$75,000 would be taxable as a court award ($95,000 damages - $20,000

reimbursement for her medical care), and $4,000 would be taxable separately, as
interest income.

Note: Damages for harassment and emotional distress would generally be taxable, if
the damages were not directly related to a "physical injury or physical illness."
However, any damages received for medical care directly related to the harassment or
emotional distress are not taxable. Interest payments on any settlement award are also
taxable.

Show Other Explanations

67. Question ID: 758501783 (Topic: Taxation of Court Awards and Damages)
Compensatory damages received for personal physical injury or physical sickness are:

 A. Taxable only if received in multiple installments

 B. Not taxablecorrect
 C. Taxable only if not awarded by a court of lawwrong
 D. Always taxable
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Incorrect Answer Explanation for C:

Compensatory damages for personal physical injury or physical sickness are not
included in gross income, and are therefore not taxable. This is regardless of how they
are paid to the recipient of the award.

Correct Answer Explanation for B:

Compensatory damages for personal physical injury or physical sickness are not
included in gross income, and are therefore not taxable. This is regardless of how they
are paid to the recipient of the award.

Show Other Explanations

68. Question ID: 94850056 (Topic: Tax-Free Education Assistance (including

Coverdell))
When Lonnie was born, three separate Coverdell Education Savings Accounts were set
up for him: one by his parents, one by his grandmother, and one by his uncle. In 2024,
what is the maximum amount of contributions that can be made to Lonnie’s Coverdell
ESA accounts?
 A. $6,000 total in all three accounts combined.
 B. $2,000 per each account.
 C. $1,000 per each account.wrong
 D. $2,000 total in all three accounts combined.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for D:

In 2024, the total amount of contributions to all Coverdell ESA’s for one designated
beneficiary cannot be more than $2,000. So, for instance, if Lonnie’s parents contribute
$1,000 to his account and his grandmother contributes $800, his uncle could contribute
no more than $200, for a combined total of $2,000. If more than $2,000 is contributed to
the accounts, it is considered an excess contribution. If an excess contribution is made,
then the penalty is imposed on the beneficiary (the child). The beneficiary must pay a
6% excise tax each year on excess contributions that are in a Coverdell ESA at the end
of the year if the amount is not corrected or withdrawn.

See IRS Topic No. 310 Coverdell Education Savings Accounts.

70. Question ID: 94850059 (Topic: Tax-Free Education Assistance (including

Coverdell))
Distributions from a Coverdell ESA are tax-free if they are used for:

 A. Higher education expenses as well as elementary and secondary education

expenses.correct
 B. Medical expenses only.
 C. Higher education expenses as well as qualifying medical expenses.wrong
 D. College tuition and required textbooks only.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

Distributions from a Coverdell ESA are tax-free if they are used for higher education
expenses as well as elementary and secondary education expenses. Contributions to
Coverdell ESAs are not deductible. The contribution is treated as a gift to the
beneficiary. See IRS Topic No. 310 Coverdell Education Savings Accounts.

71. Question ID: 94850161 (Topic: Tax-Free Education Assistance (including

Coverdell))
Russo is 26 and a full-time college student. He lives on campus. He received a $25,000
scholarship during the year. The scholarship was specially designated that $10,000 was
 for tuition and $15,000 was for room and board. Russo's tuition costs for the year is a
total of $10,000. His costs for room and board totaled $18,000. He paid the remaining
$3,000 owed for the room and board out of his own personal savings. How much of his
scholarship is taxable?

 A. $10,000 of the scholarship is taxable.

 B. $15,000 of the scholarship is taxable.correct
 C. $18,000 of the scholarship is taxable.wrong
 D. None of the scholarship is taxable.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

Russo has a partially-taxable scholarship; $10,000 of the scholarship is not taxable,

because it was used for tuition, which is a qualifying educational expense. The
remaining $15,000, which was designated for room and board, must be included in
income, because room and board is not a qualifying educational expense. For more
information and to see similar examples, see Publication 970, Tax Benefits for
Education.

72. Question ID: 94849666 (Topic: Tax-Free Education Assistance (including

Coverdell))
Vinita is a 28-year old graduate student at a university pursuing a doctoral degree in
biochemistry. During the current year, she received the following:

 $8,000 research fellowship.

 $5,500 scholarship that requires her to teach two undergraduate courses a year,
of which $3,000 is designated as income for teaching.
Her qualified educational expenses for tuition, required books, and required laboratory
fees were $12,000. What amount is excluded from Vinita’s taxable income?

 A. $8,000
 B. $16,500wrong
 C. $0
 D. $10,500correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

 Vinita can exclude the full $8,000 of the fellowship and $2,500 of the scholarship. The
$3,000 portion of the scholarship that is designated for her teaching is taxable income,
because it is compensation for teaching two classes. A scholarship or fellowship is tax-
free only if it meets all of the following requirements:

 The taxpayer must be a degree candidate at an eligible educational institution

that has been nationally accredited.
 It does not exceed qualified educational expenses.
 It is not designated for other purposes, such as room and board.
 It does not represent payment for teaching, research, or other services.
73. Question ID: 94850169 (Topic: Tax-Free Education Assistance (including
Coverdell))
Which of the following statements is not correct about a Coverdell education savings
account (ESA)?

 A. Total annual contributions to a beneficiary’s account cannot exceed $2,000 per year.
 B. Contributions to a Coverdell ESA are deductible.correct
 C. A Coverdell ESA is a custodial account set up to pay qualified education
expenses for a designated beneficiary.wrong
 D. The beneficiary of an ESA can receive distributions to pay qualified education
expenses. The distributions are tax-free if the amount does not exceed the beneficiary’s
adjusted qualified education expenses.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for B:

Contributions to a Coverdell ESA are not deductible. An ESA is a trust or custodial

account set up to pay qualified education expenses for a designated beneficiary who
must be under age 18 or a special needs beneficiary when the account is first
established. Qualified education expenses are those required for the enrollment or
attendance of the beneficiary at an eligible educational institution, which may include
either qualified higher education expenses or qualified elementary and secondary
education expenses. For more information, see IRS Topic No. 310 Coverdell Education
Savings Accounts.

74. Question ID: 95003636 (Topic: Tax-Free Education Assistance (including

Coverdell))
Kimberly is an 18 year old student who is claimed as a dependent by her parents. She
is the designated beneficiary of a 529 plan set up for her by her grandparents. She
withdraws $10,000 from the 529 plan during the year. Which of the following would not
be an allowable expense with the distribution, causing it to become a taxable event?
 A. Kimberly uses the $10,000 for tuition and books at a Florida State University.
 B. Kimberly uses the $10,000 for an apprenticeship program to be a dental
technician.wrong
 C. Kimberly uses the $10,000 for tuition and fees at a private Christian University.
 D. Kimberly uses the $10,000 for travel and expenses of being a missionary in a
qualified religious organization.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

The $10,000 for travel and expenses of being a missionary in a qualified religious
organization would not be a qualifying expense. A 529 plan is also called a Qualified
Tuition Program. It is an investment account that offers tax benefits when used to pay
for qualified education expenses for a designated beneficiary. Withdrawals from
education savings plan accounts can generally be used at any college or university.
Education savings plans can also be used to pay up to $10,000 per year per beneficiary
for tuition at any public, private or religious elementary or secondary school (K-12). In
2019, student loan payments and costs of apprenticeship programs were added as
qualified education expenses.

However, if 529 account withdrawals are not used for qualified education expenses,
they will be subject to state and federal income taxes and an additional 10% federal tax
penalty on earnings. Learn more about 529 plans, see IRS Topic No. 313 Qualified
Tuition Programs (QTPs).

75. Question ID: 94849706 (Topic: Tax-Free Education Assistance (including

Coverdell))
When are scholarships excluded from taxable income?

 A. When the scholarship is used for college tuition, required fees and books.correct
 B. When the scholarship is used for tuition, books, and college dorm costs.
 C. When the scholarship is used for tuition or emergency health care costs.wrong
 D. When the scholarship is used for tuition and room and board.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

Scholarships are not taxable when they are used for tuition, required fees, and books.
Scholarships for room and board or other living expenses are taxable and must be
included in taxable income.
 77. Question ID: 94850136 (Topic: Tax-Free Education Assistance (including
Coverdell))
A Coverdell ESA is a type of educational savings account set up for the purpose of
paying qualified education expenses for a designated beneficiary. The balance in a
Coverdell ESA is required to be distributed in which of the following scenarios?

 A. When the individual for whom the account was established dies.
 B. When the individual for whom the account was established reaches age 65, or
dies, whichever is earlier.wrong
 C. When the individual for whom the account was established reaches age 24, or dies,
whichever is earlier.
 D. When the individual for whom the account was established reaches age 30, or dies,
whichever is earlier.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for D:

Coverdell ESA is a type of educational savings account set up exclusively for the
purpose of paying qualified education expenses for the designated beneficiary.
However, the funds in a Coverdell cannot remain in the account forever. Generally, the
balance in a Coverdell ESA must be distributed within 30 days after the individual for
whom the account was established reaches age 30, or dies, whichever is earlier. The
treatment of the Coverdell ESA at the death of an individual under age 30 depends on
who acquires the interest in the account. The age 30 limitation doesn't apply if the
individual for whom the account was established is an individual with special needs.
See IRS Topic No. 310 Coverdell Education Savings Accounts.

78. Question ID: 94850074 (Topic: Tax-Free Education Assistance (including

Coverdell))
When can a designated beneficiary start taking distributions from an educational
savings account, like a Coverdell or a 529 Plan?

 A. When they turn 21.wrong

 B. Only when they begin attending a qualified educational institution.
 C. When they turn 18.
 D. Anytime.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 22% of students.

Correct Answer Explanation for D:

 A designated beneficiary of a Coverdell ESA or a 529 Plan (also called a "QTP" or a
"Qualified Tuition Program") can take a distribution at any time. However, in order for
the distribution to be tax-free, distributions from the plan must not exceed qualified
educational expenses.

See IRS Topic 313 for Qualified Tuition Programs (QTPs). For Coverdell accounts, see
IRS Topic No. 310 Coverdell Education Savings Accounts.

79. Question ID: 94850170 (Topic: Other Taxable Income)

All of the following types of settlements from lawsuits are taxable income except:

 A. Punitive damages.
 B. Interest on a lawsuit settlement.wrong
 C. Unlawful discrimination award.
 D. Settlements for loss in value of property that are less than the adjusted basis of the
property.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for D:

Settlements for loss in value of property that are less than the adjusted basis of a
taxpayer’s property are not taxable and generally do not need to be reported. A
taxpayer must reduce his basis in the property by the amount of the settlement. If the
property settlement exceeds the adjusted basis in the property, the excess is taxable
income. The taxability of other types of settlements varies. For instance, in employment-
related lawsuits such as unlawful discrimination or involuntary termination, the portion of
the proceeds that is for lost wages is taxable. Punitive damages and interest on
settlements also are generally taxable. Settlements for physical injuries or illness are
generally not taxable, although the proceeds for emotional distress often are (unless the
emotional distress originates from physical injury or illness).

81. Question ID: 94849754 (Topic: Other Taxable Income)

Kristen earns $35,000 in wages during the year. She also earned $650 in jury duty pay
for serving on a jury. How should the jury duty pay be reported on her Form 1040?

 A. She must report the jury duty pay as "other income"correct

 B. Jury duty pay is not taxablewrong
 C. She must report the jury duty pay on Schedule E
 D. The amount is over $600, so she must report the jury duty pay on Schedule C
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

 Correct Answer Explanation for A:

Jury pay is taxable income, but it is not subject to self-employment tax. The taxpayer
must report the jury duty pay as "other income" on Form 1040.

82. Question ID: 94849685 (Topic: Other Taxable Income)

Taylor received the following income and benefits during the year:

 Self-employment income: $9,000.

 Unemployment benefits: $4,500.
 Lottery prize from a scratch-off ticket: $12,000.
 Lottery ticket losses: $1,000
 Child support payments from her former spouse: $18,000.
What amount would be taxable income?

 A. $21,000wrong
 B. $43,500
 C. $13,500
 D. $25,500correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

Self-employment income, unemployment benefits, and lottery prizes are all taxable
income ($9,000 + $4,500 + $12,000 = $25,500). Child support is not taxable income to
the receiver and is not deductible by the payer because it is viewed as a payment a
parent makes simply to support a child. The lottery ticket losses (gambling losses)
would only be deductible on Schedule A.

83. Question ID: 94849755 (Topic: Other Taxable Income)

Which of the following should be reported as "other income" on Form 1040?

 A. Alaska Permanent Fund dividendscorrect

 B. Wages
 C. Royalties
 D. Self-employment incomewrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

 Alaska Permanent Fund dividends are taxable as "Other Income" on Form 1040. Other
examples of "other income" include:

 Prizes and awards

 Gambling winnings, including lotteries and raffles
 Jury duty pay
 Hobby income
 Nonbusiness credit card debt cancellation
84. Question ID: 94849669 (Topic: Other Taxable Income)
Khalila hosts an Illuminating Candles party in her home for a group of 18 women. An
Illuminating Candles consultant provides free demonstrations to the women in
attendance. At the end of the evening, the women order $650 worth of products, this
entitles Khalila to hostess gifts worth $125 from Illuminating Candles. How should
Khalila handle this gift on her tax return?

 A. Khalila must report the $125 value of the hostess gifts as income.correct
 B. No reporting is required.
 C. Khalila will owe gift tax on the $125.wrong
 D. Reporting is required only when hostess gifts total more than $500.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

Khalila must report the $125 value of the hostess gifts as income. Gifts or gratuities
received by a hostess of a party or event where sales are made are taxable. They must
be reported on Form 1040 as "other income".

85. Question ID: 94849668 (Topic: Other Taxable Income)

Bento received the following items of income during the current year. What is the total
taxable amount of these items?

 60 gallons of free gas from a radio station contest, valued at $400.

 Court award for an auto accident, with $75,000 awarded for physical injury and
$80,000 for punitive damages.
 Strike benefits of $2,000 from his union.
 Veterans’ educational benefits of $4,000 that Bento used to pay tuition expenses
at a qualified educational institution.
 $3,500 fiduciary fee for serving as the executor of his deceased uncle’s estate.

 A. $85,900correct
 B. $83,900wrong
 C. $5,900
 D. $2,400
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

All the items of income are taxable with the exception of the veterans’ educational
benefits and the portion of the court settlement that was awarded for physical injury
($400 radio contest prize + $80,000 punitive damages + $2,000 strike benefits + $3,500
executor’s fee = $85,900). Court settlements and awards for a physical injury or
sickness are generally excluded from taxation, but punitive damages are always
taxable.

86. Question ID: 94849569 (Topic: Other Taxable Income)

Quan is divorced and has sole custody of his 4-year-old son. He received the following
income during the year:

 Wages $26,000
 Interest earned on a savings account: $30
 Child support from his ex-wife: $12,000
 Dividends: $4,000
 Inheritance: $20,000
 Worker's compensation: $2,000
 Gambling winnings: $10,000
 Gambling losses: $3,000
What amount of his income is taxable?

 A. $26,030wrong
 B. $37,030
 C. $40,030correct
 D. $60,030
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for C:

The wages, interest, dividends, and lottery winnings are taxable income ($26,000 + $30
+ $4,000 + $10,000 = $40,030). Child support, inheritances, and worker's compensation
 are nontaxable income. The gambling losses would be deductible, but only as an
itemized deduction on Schedule A.

1. Question ID: 7585019513 (Topic: Taxable Alimony)

Beverly received the following income during the year:

Source Taxable?
Wages $26,200
Interest income $5,400
Child support payments $6,200
Taxable alimony income (her divorce was finalized in 2017) $7,400
Inheritance from her deceased brother $12,600
Worker’s compensation $2,300
Hobby income from selling two paintings $5,300
Based on the amounts above, what is Beverly’s gross income before any adjustments
and deductions are applied?

 A. $44,300correct
 B. $63,100
 C. $41,300
 D. $52,800
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

The wages, interest, alimony, and hobby income are all taxable income and will be
reported on Beverly’s tax return ($26,200 + $5,400 + $7,400 + $5,300 = $44,300). Child
support, inheritance, and worker’s compensation are nontaxable income and will not be
shown on Beverly’s tax return. Worker’s compensation is not taxable, because it is a
form of insurance providing wage replacement and medical benefits to employees
injured in the course of employment.

Note: The Tax Cuts and Jobs Act (TCJA) permanently eliminated the deduction for
alimony payments for divorces occurring in 2019 or later. However, divorce judgments
that were finalized before December 31, 2018, are considered “grandfathered” and the
old rules apply.

Show Other Explanations

 6. Question ID: 94815858 (Topic: Taxable Alimony)
Belinda is married to Jesse. They are both U.S. citizens and live in Montana, a non-
community property state. They have no children. Because of financial problems
caused by her first husband, Belinda refuses to file a joint return with anyone, including
Jesse. Belinda files her own tax return separately. Belinda receives her W-2 from her
employer. She earned $83,000 from her job. She also receives Form 1099-INT from her
credit union, reporting $357 in interest earned on her savings account. She also paid
$5,000 in alimony to her ex-husband, who she divorced in 2015. She has no other
income or adjustments. Based on this information, what is her AGI?

 A. $78,357correct
 B. $78,000
 C. $83,000
 D. $83,357
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

Her AGI (adjusted gross income) is $78,357, figured as follows:

$83,000 Wages +
$357 Interest income
$83,357 (this is Belinda's "gross income")
-$5,000 Alimony paid (this is an adjustment to income)
=$78,357 AGI

Note: Belinda's gross income includes her wages, interest, capital gains, income from
retirement accounts. This total is then adjusted downward by specific deductions
(including alimony paid) to arrive at AGI, or "adjusted gross income." Under the TCJA,
an individual whose divorce was finalized in 2019 and pays alimony to an ex-spouse will
no longer be able to deduct those payments. However, any divorce decree that was
finalized before 2019 is considered “grandfathered” which means that those alimony
payments remain deductible to the payor. Since Belinda's divorce was finalized in 2015,
her decree is considered "grandfathered" and her alimony payments are still
deductible.

7. Question ID: 98939107 (Topic: Taxable Alimony)

What law changed the tax treatment of alimony starting in 2019?

 A. The Grandfather Clause.

 B. The Divorce Engagement Act.
 C. The Tax Cuts and Jobs Act.correct
 D. The Payor's Liability Bill.
 Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

The Tax Cuts and Jobs Act changed the treatment of alimony starting in 2019, making it
nondeductible to the payor and nontaxable to the recipient. Divorce and separation
agreements entered before 2019 are "grandfathered," so there will continue to be
alimony deductions and taxable alimony income for individuals with divorce agreements
that were finalized prior to 2019.

Show Other Explanations

8. Question ID: 94849650 (Topic: Taxable Government Benefits)

Vitally fell ill after a chemical accident that occurred at his work. After the accident, he
left his job and received several types of benefit payments during the year. Which of the
following would be taxable to Vitally?

 A. $500 monthly payments received under an accident insurance policy (Vitally paid the
premiums on the policy).
 B. $12,700 in unemployment compensation.correct
 C. $10,000 in worker's compensation.
 D. A $32,000 legal settlement for physical sickness from his former employer.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

Vitally must report the $12,700 in unemployment compensation, because

unemployment compensation is always taxable. Worker's compensation is not taxable.
Legal settlements for personal physical injuries or physical sickness are non-taxable. If
a taxpayer pays the premiums on an accident or health insurance policy, the benefits
later received under the policy aren’t taxable. See IRS Publication 525, Taxable and
Nontaxable Income, for more information.

9. Question ID: 94849632 (Topic: Taxable Government Benefits)

Which of the following statements regarding unemployment compensation is true?

 A. Unemployment compensation is not taxable.

 B. Unemployment compensation is taxable unless the taxpayer is disabled.
 C. Unemployment compensation must be included in a taxpayer's gross
income.correct
 D. Unemployment compensation is taxable to the state, but not to federal.
 Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

Any unemployment compensation received must be included in a taxpayer's gross

income. Unemployment compensation is always taxable, regardless of the taxpayer's
situation. Unemployment compensation generally includes any amounts received under
the unemployment compensation laws of the United States or of a state. It includes
state unemployment insurance benefits and benefits paid to you by a state or the
District of Columbia from the Federal Unemployment Trust Fund. It also includes
railroad unemployment compensation benefits, but NOT worker's compensation.
Worker's compensation (often called "worker's comp") is not taxable to the recipient.

10. Question ID: 94849625 (Topic: Taxable Government Benefits)

Which of the following would NOT be a type of taxable compensation to an employee?

 A. Strike benefits.
 B. Sick pay.
 C. Worker's compensation.correct
 D. Vacation pay.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for C:

Workers' compensation benefits are not taxable income at the state or federal level. All
of the other choices would be taxable forms of compensation (types of supplemental
wages) and would be taxable in the year the compensation is received.

18. Question ID: 758501788 (Topic: Social Security Income)

Bishakha is age 66 and separated from her husband in the middle of the year. They are
not "legally" separated and they have not filed for divorce. Bishakha doesn't have any
dependents, and plans to file MFS (married filing separately). She is still working, and
also collects Social Security. What is the base amount that Bishakha must use to
calculate the taxable portion of her Social Security?

 A. $0correct
 B. $50,000
 C. $25,000
 D. $32,000
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for A:

Bishakha is filing MFS, and separated from her spouse in the middle of the year, which
means her base amount is zero.

Note: For a taxpayer who is married filing separately and lived with their spouse at any
time during the year, the base amount for calculating the taxability of Social Security
benefits is $0, meaning that Bishakha's Social Security benefits are likely to be at least
partially taxable.

Show Other Explanations

25. Question ID: 94849501 (Topic: Social Security Income)

What is the maximum percentage of taxable Social Security benefits?

 A. 100%
 B. 85%correct
 C. 0%
 D. 50%
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

Up to 85% of Social Security benefits may be taxable. No taxpayer pays taxes on more
than 85% of their benefits, regardless of their income.

28. Question ID: 94849759 (Topic: Gambling Winnings)

Ishmael is in the United States visiting his sister, who lives in Nevada. Ishmael entered
the U.S. on a visitor's visa. He visits the strip in Las Vegas and happily wins $100,000
on a slot machine. Ishmael is considered a nonresident alien for U.S. tax purposes. The
casino automatically withholds a large sum from his winnings. Ishmael is a citizen of
Canada, which has a beneficial tax treaty with the United States. What does Ishmael
have to do if he believes that he is owed a refund for the withheld amounts?

 A. He can do nothing, since he is a nonresident alien.

 B. He should file a Form 1040-NR to report his gambling winnings, and see if he is
entitled to a refund for the withheld amounts.correct
 C. Ishmael's gambling winnings are illegal and must be forfeited to U.S. customs.
 D. He should file a Form 1040-SR to report his gambling winnings, and see if he is
entitled to a refund for the withheld amounts.
Study Unit 10: Other Taxable Income covers the information for this question.
 This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for B:

He should file a Form 1040-NR to report his gambling winnings, and see if he is entitled
to a refund for the withheld amounts. The IRS requires nonresidents of the U.S. to
report gambling winnings on Form 1040-NR. Gambling winnings, are considered to be
"not effectively connected" and must generally be reported on Form 1040-NR. Such
income is generally taxed at a flat rate of 30%, (although a tax treaty with the taxpayer's
home nation may allow for a lower tax rate).

30. Question ID: 97503506 (Topic: Gambling Winnings)

Lisa had the following income and losses during the year:

 Wages $14,000
 Interest income $425
 Gambling winnings $1,000
 Gambling losses (3,000)
 Discrimination lawsuit settlement $10,000
 Legal fees related to the lawsuit ($4,000)
 Child support payments $9,000
 Food stamp benefits $5,000
How much gross income must she report on her tax return?

 A. $25,425correct
 B. $35,425
 C. $21,425
 D. $14,000
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for A:

Lisa must report her wages, interest income, gambling income, and settlement from a
discrimination lawsuit in her gross income ($14,000 + $425 + $1,000 + $10,000 =
$25,425). The child support payments and the food stamp benefits are not taxable. The
legal fees would be deductible as an adjustment to income, but she still must report the
entire gross amount of the settlement. The gambling losses do not affect the inclusion of
the gambling income within gross income. However, if Lisa chooses to itemize
deductions, her gambling losses may be deducted on Schedule A to the extent of her
gambling income. If Ginny does not itemize, the gambling losses are not deductible.
 33. Question ID: 94849571 (Topic: Cancellation of Debt Income)
A taxpayer whose debt is canceled, forgiven, or discharged generally will receive from
the creditor:

 A. Form 8606.
 B. Form W-2G.
 C. Form 1099-C.correct
 D. Form 1099-MISC.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for C:

A taxpayer whose debt is canceled, forgiven, or discharged will generally receive a

Form 1099-C, Cancellation of Debt, from the creditor. The canceled amount must be
included in gross income, unless it qualifies for a specific exclusion (such as debt
canceled during insolvency or a Title 11 bankruptcy case), or an exception to inclusion
(such as cancellation of certain qualified student loans). None of the other answers are
correct. The Form 1099-MISC reports miscellaneous income to a taxpayer. The Form
W-2G reports gambling winnings. Form 8606 reports nondeductible contributions to an
IRA.

42. Question ID: 94849736 (Topic: Cancellation of Debt Income)

Pandora stopped paying on several credit cards last year. This year, she received a
1099-C showing $5,430 in canceled credit card debt. Pandora is not insolvent or in
bankruptcy. How should she report this income?

 A. The canceled debt is not taxable because credit card debt is unsecured debt.
 B. The canceled debt must be included on Form 1040 as "other income".correct
 C. The canceled debt must be included on Schedule C as self-employment income.
 D. The canceled debt must be included on Schedule E as passive income.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for B:

If a taxpayer receives Form 1099-C for canceled credit card debt and was not insolvent
or in bankruptcy, all the canceled debt will be taxable as "other income" and must be
included on Form 1040.

To learn more about this topic, see IRS Topic No. 431, Canceled Debt.
 43. Question ID: EA P1 932 (Topic: Cancellation of Debt Income)
What is Form 982 used for?

 A. Form 982 is used to request a penalty abatement for late payment of self-
employment tax.
 B. Form 982 is used to determine the amount of taxable scholarships a student may
have.
 C. Form 982 is used to determine the amount of discharged indebtedness that
can be excluded from gross income.correct
 D. Form 982 is used to report passive income earned from rental activities.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to

determine the amount of discharged indebtedness that can be excluded from gross
income.

Generally, debt is considered canceled when the lender either forgives or discharges
the debt for less than the full amount owed. If the taxpayer can exclude the income, they
should file Form 982 along with their Form 1040 to report the exclusion.

46. Question ID: 94849607 (Topic: Cancellation of Debt Income)

Kendra bought a new car for $30,000. She made a $5,000 down payment and borrowed
the remaining $25,000 from her bank via a recourse loan. After she stopped making
payments, the bank repossessed the car. The balance due on the loan at the time of the
repossession was $15,000. The FMV of the car when repossessed was $12,000. She
later receives a 1099-C for the canceled debt. She was not insolvent when the debt was
canceled, because she has $40,000 in a traditional IRA account. What amount is
Kendra’s loss and what amount must she report as cancellation of debt income?

 A. $18,000 nondeductible loss; $3,000 COD.correct

 B. $13,000 deductible loss; $0 COD.
 C. $15,000 nondeductible loss; $12,000 COD.
 D. $13,000 nondeductible loss; $3,000 COD.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 37% of students.

Correct Answer Explanation for A:

 A taxpayer is personally liable for a recourse loan. Since a repossession is treated as a
sale, the gain or loss must be computed. Kendra compares the amount realized
($12,000) with her adjusted basis ($30,000) in the vehicle to determine that she has
an $18,000 nondeductible loss. She also has ordinary income from cancellation of
debt. That income is $3,000 ($15,000 canceled debt − $12,000 FMV). Kendra must
report the canceled debt as income on her Form 1040.

53. Question ID: 94850408 (Topic: Hobby Income)

The hobby loss rules do not apply to which of the following entity types?

 A. Trusts.
 B. C Corporations.correct
 C. Individuals.
 D. S Corporations.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for B:

The hobby loss rules apply to individuals, partners in a partnership, estates, trusts, and
shareholders of S corporations. The hobby loss rules do not apply to C corporations. In
other words, the "hobby loss" rules of the Internal Revenue Code (IRC) §183 attempt to
curb perceived loss deduction abuses by activities that are not entered into for profit.

63. Question ID: 758501781 (Topic: Taxation of Court Awards and Damages)
Aahana was injured in a car accident where she was not at fault. She suffered serious
physical injuries. She received a monetary settlement from the other driver’s insurance
for her injuries, totaling $550,000. She settled out of court, with the help of an attorney.
She also received $5,500 in interest on the award. How much of this legal settlement, (if
any) is taxable to Aahana?

 A. $5,500 is taxable as interestcorrect

 B. $550,000 is taxable
 C. The entire $550,000 court award as well as $5,500 in interest is taxable
 D. None of the award is taxable, because it is related to her physical injury
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

The $550,000 settlement is nontaxable because it is settlement payment for her

physical injuries. The $5,500 interest on the award is taxable.
 Note: Compensatory damages for personal physical injury or physical sickness are not
taxable, whether they are from a legal settlement or an actual court award. Interest
payments as well as any punitive damages awarded by a court are always taxable.

Show Other Explanations

69. Question ID: 94850002 (Topic: Tax-Free Education Assistance (including

Coverdell))
Angela, age 25, is a full-time student who earns $29,000 in wages during the year. She
paid $6,000 in college tuition during the year. She also receives a Form 1099-Q
reflecting $4,000 was paid to her. What type of income does a 1099-Q represent?

 A. Angela received a distribution from a Health Savings Account.

 B. Angela received a distribution from a qualified retirement plan.
 C. Angela received a distribution from a qualified tuition program.correct
 D. Angela received a taxable grant from the government.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

Angela received a distribution from a qualified tuition program. Form 1099-Q is used to
report distributions from qualified education programs, including 529 plans and
Coverdell Education Savings Accounts (ESAs). Distributions from 529 plans and
Coverdell ESAs are not taxable if used for qualified educational expenses, but the
amounts may be taxable if used for non-qualified expenses. In other words, if Angela
used the amounts to pay for her college tuition and required books and materials, she
would not have to report the amounts as taxable income. Learn more about Form 1099-
Q, Payments from Qualified Education Programs.

76. Question ID: 94849671 (Topic: Tax-Free Education Assistance (including

Coverdell))
Which of the following statements is correct about Series EE savings bonds?

 A. The interest only becomes taxable when the bonds are sold to another taxpayer.
 B. Their interest is nontaxable and does not have to be reported on a tax return.
 C. Their interest is nontaxable, but must be reported on a tax return.
 D. Their interest is taxable and must be reported on Schedule B. However, the
interest may be excluded if used to pay qualified higher education
expenses.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

 Correct Answer Explanation for D:

Generally, the interest earned on U.S. savings bonds is taxable. If a taxpayer does not
include the interest in income in the years it is earned, he must include it in his income
in the year in which he cashes in the bonds. However, when a taxpayer cashes in
qualified Series EE savings bonds, he does not have to include in his income some or
all of the interest earned on the bonds if he meets the following conditions:

 He pays qualified education expenses for himself, his spouse, or a dependent for
which he can claim an exemption on his tax return.
 His MAGI is less than the amount specified for his filing status.
 His filing status is not married filing separately.
A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond.
The bond must be issued in the taxpayer’s name (as the sole owner) or in the names of
he and his spouse (as co-owners). The owner must be at least 24 years old before the
bond’s issue date.

80. Question ID: 94815930 (Topic: Other Taxable Income)

Garland has a partial interest in several partnerships. He is merely a passive investor
and does not materially participate in any of the businesses. The income is reported to
Garland on (multiple) Schedules K-1. During the year, Garland had the following results
from these passive activities:

 French-style Cafe: $56,000 loss.

 Ice cream store: $32,000 loss.
 Nutrition supplement store: $18,000 loss.
 Doughnut shop: $90,000 income.
What is the tax treatment of Garland's ownership of these businesses, and how would
the amounts be reported on his Form 1040?

 A. No taxable income; carryover of passive activity losses of $16,000 to the

following year. The amounts would be reported on Schedule E. correct
 B. Taxable income of $90,000; carryover of passive activity losses of $106,000 to the
following year. The amounts would be reported on Schedule E.
 C. Deductible capital loss of $16,000 in the tax year. The amounts would be reported on
Schedule D.
 D. Taxable income of $90,000 and deductible losses of $106,000. The amounts would
be reported on Schedule C.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

Under the passive activity limitation rules, Garland cannot deduct the full amount of his
losses against taxable income from other sources. Since he had passive activity income
of $90,000 during the year, he can offset losses up to that amount. He can carry over
the remaining passive activity losses of $16,000 to the following year. Schedule E is
used to record income and loss for partners in a partnership, whether the activity is
passive or not.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 98939110 (Topic: Qualified Educator Expenses)

What is the maximum amount an eligible educator can deduct for qualified educator
expenses?

 A. $250wrong
 B. $300correct
 C. $100
 D. $500
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for A:

An eligible educator is allowed to deduct up to $300 of unreimbursed expenses in 2024.

If both taxpayers are teachers, the couple may deduct up to a maximum of $600 on a
joint return.

Correct Answer Explanation for B:

An eligible educator is allowed to deduct up to $300 of unreimbursed expenses in 2024.

If both taxpayers are teachers, the couple may deduct up to a maximum of $600 on a
joint return.

Show Other Explanations

2. Question ID: 98939111 (Topic: Qualified Educator Expenses)

Which of the following is NOT a qualified expense for the educator expense deduction?

 A. Computer equipment and related software

wrong
 B. Materials used for homeschoolingcorrect
 C. Supplementary materials used in the classroom
 D. Professional development expenses
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Incorrect Answer Explanation for A:

Materials used for homeschooling are not a qualifying expense for this deduction.
 Qualified expenses include books, supplies, computer equipment (including related
software and services), other equipment, and supplementary materials used in the
classroom. Professional development expenses are also allowed.

Correct Answer Explanation for B:

Materials used for homeschooling are not a qualifying expense for this deduction.

Qualified expenses include books, supplies, computer equipment (including related

software and services), other equipment, and supplementary materials used in the
classroom. Professional development expenses are also allowed.

Show Other Explanations

4. Question ID: 98939114 (Topic: Qualified Educator Expenses)

Who qualifies for the educator expense deduction?

 A. School teachers, grades K-12, including instructors, counselors, principals, or

aidescorrect
 B. Any public school teacher, from kindergarten to college.wrong
 C. College professors

 D. Only private school teachers, grades K-12, as well as junior college instructors.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Incorrect Answer Explanation for B:

An eligible educator must work at least 900 hours a school year in a school that
provides elementary or secondary education (K-12). College instructors do not qualify.
For the purposes of this credit, an “educator” may include a teacher, counselor,
principal, classroom aide, or a school coach.

Correct Answer Explanation for A:

An eligible educator must work at least 900 hours a school year in a school that
provides elementary or secondary education (K-12). College instructors do not qualify.
For the purposes of this credit, an “educator” may include a teacher, counselor,
principal, classroom aide, or a school coach.

Show Other Explanations

5. Question ID: 94849923 (Topic: Qualified Educator Expenses)

 Karen is a full-time teacher at a junior high school. She frequently purchases supplies
for the classroom with her own money. Which of the following supplies would not be
deductible?

 A. Educational software for use in the classroom. wrong

 B. Supplies for courses in health.correct
 C. Professional development courses related to her curriculum.
 D. Hand soap and hand sanitizer.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

The supplies for health courses do not qualify for the educator expense deduction.
Educators can deduct the unreimbursed cost of:

 Books, supplies and other materials used in the classroom.

 Equipment, including computer equipment, software and services.
 COVID-19 protective items to stop the spread of the disease in the classroom.
This includes face masks, disinfectant for use against COVID-19, hand soap,
hand sanitizer, disposable gloves, tape, paint or chalk to guide social distancing,
physical barriers, such as clear plexiglass, air purifiers and other items
recommended by the Centers for Disease Control and Prevention.
 Professional development courses related to the curriculum they teach or the
students they teach.
Qualified expenses do NOT include the cost of home-schooling supplies or for non-
athletic supplies for courses in health or physical education. An "eligible educator" is a
kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who
worked in a school for at least 900 hours during a school year. The required minimum is
900 hours during the school year.

For 2024, an eligible educator can deduct up to $300 of qualifying expenses. If they're
married and file a joint return with another eligible educator, the limit rises to $600. But
in this situation, not more than $300 for each spouse.

To review more information on this topic, see Topic No. 458 Educator Expense
Deduction and also see Publication 970, Tax Benefits for Education, particularly
Chapter 3.

6. Question ID: 98939112 (Topic: Qualified Educator Expenses)

Where should eligible educators claim the Educator Expense deduction on their tax
return?
 A. Schedule A
 B. Schedule Bwrong
 C. Schedule C
 D. Schedule 1correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Incorrect Answer Explanation for B:

Eligible educators can claim the deduction on Form 1040, Schedule 1. This is an
adjustment to income, so teachers can deduct qualifying educator expenses even if
they do not itemize deductions.

Correct Answer Explanation for D:

Eligible educators can claim the deduction on Form 1040, Schedule 1. This is an
adjustment to income, so teachers can deduct qualifying educator expenses even if
they do not itemize deductions.

Show Other Explanations

7. Question ID: 94849921 (Topic: Qualified Educator Expenses)

Benny and Terry are married and file jointly. They are both 9th grade teachers at a
private religious high school. Benny incurs $300 in supplies expenses for his classroom.
Terry incurs $450 in supplies for her classroom. Neither one was reimbursed by their
district. What is the maximum amount that they can deduct for educator expenses on
their joint tax return for 2024?

 A. $0, they cannot deduct any expenses because the school is a private school. Private
schools are not qualifying educational institutions.
 B. $500wrong
 C. $600correct
 D. $250
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Benny and Terry are both eligible for the credit. They can deduct a maximum of $300
each as an adjustment to income, because both of them are teachers. An "eligible
educator" is a kindergarten through grade 12 teacher, instructor, counselor, principal, or
aide who worked in a school for at least 900 hours during a school year. The required
minimum is 900 hours during the school year.
 For 2024, an eligible educator can deduct up to $300 of qualifying expenses. If they're
married and file a joint return with another eligible educator, the limit rises to $600. But
in this situation, not more than $300 for each spouse.

To review more information on this topic, see Topic No. 458 Educator Expense
Deduction.

8. Question ID: 98939113 (Topic: Qualified Educator Expenses)

Which of the following expenses is eligible for the Educator Expense deduction?

 A. Expenses related to reproductive health courses

 B. Expenses reimbursed by the employer
wrong
 C. Personal travel expenses
 D. Athletic supplies for physical education courses
correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Incorrect Answer Explanation for B:

Athletic supplies for physical education courses are qualifying expenses. All the other
items listed would not qualify. Qualified expenses include books, supplies, computer
equipment (including related software and services), other equipment, and
supplementary materials used in the classroom. Professional development expenses
are also allowed.

For courses in health and physical education, expenses are deductible only if they are
related to athletics. Nonathletic supplies for physical education, and any expenses
related to health courses do not qualify for this deduction. Materials used for
homeschooling also cannot be deducted.

Correct Answer Explanation for D:

Athletic supplies for physical education courses are qualifying expenses. All the other
items listed would not qualify. Qualified expenses include books, supplies, computer
equipment (including related software and services), other equipment, and
supplementary materials used in the classroom. Professional development expenses
are also allowed.

For courses in health and physical education, expenses are deductible only if they are
related to athletics. Nonathletic supplies for physical education, and any expenses
related to health courses do not qualify for this deduction. Materials used for
homeschooling also cannot be deducted.
 Show Other Explanations

10. Question ID: 758501773 (Topic: Health Savings Accounts)

Kavish starts a new job in the middle of the year, and accidentally makes an excess
contribution to his HSA by contributing $900 over the maximum allowable amount. What
is the penalty on excess contributions if Kavish does not withdraw the overcontribution?

 A. 50% penalty
 B. 10% penaltywrong
 C. 20% penalty
 D. 6% penaltycorrect
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Incorrect Answer Explanation for B:

Kavish will have to pay a 6% excise penalty if he does not properly correct the
overcontribution. A 6% penalty applies to excess contributions to a health savings
account.

Note: To correct an over-contribution, the taxpayer must withdraw the excess amount
before the filing deadline (including extensions) and also must include any income
earned on the excess contribution on their tax return for that year. This process is also
known as a "corrective" distribution.

Correct Answer Explanation for D:

Kavish will have to pay a 6% excise penalty if he does not properly correct the
overcontribution. A 6% penalty applies to excess contributions to a health savings
account.

Note: To correct an over-contribution, the taxpayer must withdraw the excess amount
before the filing deadline (including extensions) and also must include any income
earned on the excess contribution on their tax return for that year. This process is also
known as a "corrective" distribution.

Show Other Explanations

13. Question ID: 95396590 (Topic: Health Savings Accounts)

What is an HSA?

 A. A type of educational savings account.

 B. A type of pension.wrong
 C. A type of retirement account.
 D. A type of health savings account.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 98% of students.

Correct Answer Explanation for D:

An HSA or "Health Savings Account" is a tax-exempt trust or custodial account that a

taxpayer sets up for qualified medical expenses. An HSA is always paired with a high
deductible health plan. The HSA is owned by the employee and can be funded by both
the employee and the employer. See Publication 969, Health Savings Accounts, for
more information.

17. Question ID: 95396591 (Topic: Health Savings Accounts)

In the case of married individuals, how must they participate in an HSA?

 A. In the case of married individuals, the spouses must have a joint HSA if they file
jointly.
 B. In the case of married individuals who file jointly, neither spouse may participate in an
HSA.
 C. HSA accounts are for dependents and minor children only.wrong
 D. In the case of married individuals, each spouse who wants to have an HSA must
have their own, separate HSA.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for D:

In the case of married individuals, each spouse who is an eligible individual who wants
to have an HSA must have a separate HSA, regardless of the couple's filing status.
Married couples cannot have a joint HSA, even if they are covered by the same HDHP
(High Deductible Health Plan); however, distributions can be used to cover the qualified
expenses of the other spouse. In the event of the death of one of the married
individuals, the HSA will be treated as the surviving spouse’s HSA if the spouse is the
designated beneficiary of the HSA. See Publication 969, Health Savings Accounts, for
more information.

18. Question ID: 95002939 (Topic: Health Savings Accounts)

Jaqueline, age 70, withdraws $2,500 from her HSA funds to pay for a Hawaiian
vacation. What are the consequences of this action?

 A. The withdrawal is subject to income tax, but not a 20% penalty.correct

 B. The withdrawal is tax-free and there is no penalty.
 C. The withdrawal is subject to income taxes and a 20% penalty.wrong
 D. The withdrawal is subject to income taxes and a 10% penalty.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 33% of students.

Correct Answer Explanation for A:

An HSA is a health savings account. Any amounts withdrawn from the account that are
not used for qualifying medical expenses are subject to income tax, and usually, a 20%
penalty. However, Jaqueline's age allows her to avoid a penalty. Her withdrawal is
subject to income tax (because it was used for a vacation, instead of medical
expenses), but not a 20% penalty. Because she is older than 65, she will not need to
pay a penalty for the withdrawal.

20. Question ID: 98939118 (Topic: Moving Expenses for Armed Forces)
What form should be used by Armed Forces personnel to calculate their moving
expense deduction?

 A. Schedule A
 B. Form 3903correct
 C. Schedule Cwrong
 D. Form 1040-X
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Incorrect Answer Explanation for C:

Armed Forces personnel should use Form 3903, Moving Expenses, to calculate their
moving expense deduction.

Correct Answer Explanation for B:

Armed Forces personnel should use Form 3903, Moving Expenses, to calculate their
moving expense deduction.

Show Other Explanations

21. Question ID: 98939116 (Topic: Moving Expenses for Armed Forces)
Which types of expenses can NOT be deducted as a qualifying moving expense for
active-duty military personnel?

 A. Airfare to their new home.

 B. The costs of moving a spouse
 C. Expenses already reimbursed by the governmentcorrect
 D. The costs of moving household goodswrong
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Incorrect Answer Explanation for D:

Active-duty members of the Armed Forces may deduct unreimbursed moving expenses
if the move was due to a military order and a permanent change of station. Eligible
moving expenses include the costs of moving household goods, personal effects,
storage during the move, and travel expenses (including airfare or lodging) to the new
home. The cost of moving a spouse and dependents are also deductible. However,
expenses already reimbursed by the government are not deductible.

Correct Answer Explanation for C:

Active-duty members of the Armed Forces may deduct unreimbursed moving expenses
if the move was due to a military order and a permanent change of station. Eligible
moving expenses include the costs of moving household goods, personal effects,
moving their pets, temporary storage costs during the move, and travel expenses
(including airfare or lodging) to the new home. However, expenses already reimbursed
by the government are not deductible.

Show Other Explanations

23. Question ID: 98939117 (Topic: Moving Expenses for Armed Forces)
Can Armed Forces personnel deduct moving expenses covered by government
reimbursements?

 A. It depends on the specific facts and circumstances.

 B. Only if the reimbursements do not exceed $600.

wrong
 C. No, moving expenses covered by government reimbursements are not deductible.
correct
 D. Yes, all government reimbursements are deductible.

Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Incorrect Answer Explanation for B:

Active-duty members of the Armed Forces may deduct unreimbursed moving expenses
if the move was due to a military order and a permanent change of station. However,
 expenses already reimbursed by the government are not deductible (no double-dipping
is allowed!).

Correct Answer Explanation for C:

Active-duty members of the Armed Forces may deduct unreimbursed moving expenses
if the move was due to a military order and a permanent change of station. However,
expenses already reimbursed by the government are not deductible (no double-dipping
is allowed!).

Show Other Explanations

24. Question ID: EA1 S2 IA SET1 (Topic: Self-Employment Tax Deductions)

Which of the following types of income would likely be subject to self-employment tax?

 A. Income earned by a direct seller.

correct
 B. Traditional IRA distribution.

 C. Wages earned by a statutory employee.

wrong
 D. Punitive damages from an employee harassment lawsuit.

Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

Income earned by a direct seller would be reported on Schedule C and subject to self
employment tax. Examples of direct sellers include distributors selling products or
services directly to consumers (such as Avon, Mary Kay, or Amway sellers). Traditional
IRA distributions and punitive damages would be subject to INCOME tax, but not self-
employment tax. Wages earned by a statutory employee would be subject to Social
Security and Medicare taxes, which would be withheld by the employer.

25. Question ID: 95396233 (Topic: Self-Employment Tax Deductions)

Self-employed taxpayers can subtract ______ of their self-employment tax as an
adjustment to gross income.

 A. 50%correct
 B. 100%
 C. Zero. Self-employment tax is not deductible.wrong
 D. 15.3%
Study Unit 11: Adjustments to Gross Income covers the information for this question.
 This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

A self-employed taxpayer can subtract one-half (50%) of his or her self-employment tax
as an adjustment to gross income. This is equal to the amount of Social Security tax
and Medicare tax that an employer normally pays for an employee, which is also
excluded from an employee's income. Self-employment tax is calculated on Schedule
SE, Self-Employment Tax. To learn more about the Self-Employment Tax, see the
IRS Self Employed Individuals Tax Center on the IRS website.

26. Question ID: 94849600 (Topic: Self-Employment Tax Deductions)

Which of the following is NOT a deductible business expense for self-employed
individuals?

 A. Personal vacationscorrect
 B. Self-employed health insurance premiums
 C. Home office expenseswrong
 D. Business travel expenses
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Personal vacations are not considered a deductible business expense. Self-employed

individuals can deduct expenses that are directly related to their business, such as
home office expenses, business travel expenses, and health insurance premiums
(health insurance premiums for a self-employed person are deductible as an adjustment
to income).

27. Question ID: 95396229 (Topic: Self-Employment Tax Deductions)

A self-employed taxpayer may be able to take an adjustment to income on Form 1040
for which of the following expenses?

 A. Excess Social Security and tier 1 Railroad Retirement tax.

 B. 50% of their self-employment tax as reflected on Schedule SE.correct
 C. Home office expenses.wrong
 D. Property taxes.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for B:

 A self-employed taxpayer can subtract from income 50% of self-employment tax, equal
to the amount of Social Security and Medicare taxes that an employer normally pays for
an employee, which is excluded from the employee's income. The deduction is figured
on Schedule SE and claimed as an adjustment to income on Form 1040.

28. Question ID: 94850185 (Topic: Self-Employment Tax Deductions)

A taxpayer can make an adjustment to income on Form 1040 for which of the following?

 A. Prior year federal income tax paid.wrong

 B. Medical expenses.
 C. Hobby losses.
 D. Deductible part of self–employment tax.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

Taxpayers with self-employment income (and, thus, self-employment tax liability) may
take a deduction on Form 1040 for one-half of self-employment tax as an adjustment to
income. Taxpayers who have net earnings from self-employment of $400 or more
typically must pay self-employment tax on their earnings and file Schedule SE to report
their self-employment tax. See Tax Topic No. 554, Self-Employment Tax, for more
information.

29. Question ID: 94849981 (Topic: Self-Employment Tax Deductions)

Roger is unmarried and owns his own business. During the year, he paid health
insurance premiums of $7,000. After adding up his income and losses for the year, his
Schedule C shows a profit of $5,500 and his self-employment tax deduction is $389 for
a net of $5,111 ($5,500 – $389). He also has an additional $35,000 in income from a
residential rental. He is not a real estate professional. What is his allowable deduction
for self-employed health insurance?

 A. $0wrong
 B. $7,000
 C. $5,111correct
 D. $5,500
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 43% of students.

Correct Answer Explanation for C:

 Roger's allowable deduction for self-employed health insurance is limited to $5,111. The
self-employed health insurance deduction is limited to the net self-employment profit
shown on the return reduced by the deduction for one-half of the self-employment tax.
The rental income is not self-employment income, so it is irrelevant to the calculation.

32. Question ID: 94815847 (Topic: Penalty for Early Withdrawal from a CD)
Sandra withdrew $5,000 from a one-year, deferred interest certificate of deposit in the
current tax year. She was forced to pay an early withdrawal penalty of $300. How
should Sandra treat this penalty on her tax return?

 A. She can deduct the penalty as an adjustment to income on Form 1040.correct

 B. She can deduct the penalty on Schedule D.
 C. She can claim the penalty on Schedule A as an investment expense, but only if
she itemizes deductions.wrong
 D. She cannot deduct the early withdrawal penalty. Penalties are never deductible.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

Sandra can deduct the early withdrawal penalty amount as an adjustment to income.
She does not need to itemize in order to claim this deduction. A taxpayer can adjust
income by deducting penalties paid for withdrawing funds from a deferred interest
account before maturity.

33. Question ID: 94815848 (Topic: Penalty for Early Withdrawal from a CD)
Hader, 20 and single, has one Form W-2 for $30,000 and one Form 1099-INT for $40
and no other income. His Form 1099-INT shows the interest he earned and an early
withdrawal penalty of $50 he paid that year. Hader has no children, does not itemize
deductions, and cannot claim any credits. Which form(s) can he use if he wants to
deduct the early withdrawal penalty?

 A. Schedule L.
 B. No deduction is allowed for an early withdrawal penalty.wrong
 C. Schedule D.
 D. Form 1040.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Hader may use Form 1040 to claim the adjustment to income for the early withdrawal
penalty he paid. He does not need to itemize deductions in order to deduct the penalty.
 35. Question ID: 98939121 (Topic: Alimony Paid)
Which of the following statements regarding alimony is CORRECT?

 A. Child support payments are includible in the gross income of the payee and are
deductible from the gross income of the payor.
 B. Alimony and child support payments are always are included in the gross
income of the payee and are deductible from the gross income of the payor.
wrong
 C. Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible from the gross income of the payor if the divorce was finalized
after January 1, 2019.
 D. Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible from the gross income of the payor if the divorce was finalized
prior to January 1, 2019.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Incorrect Answer Explanation for B:

Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible for income tax purposes from the gross income of the payor if
the divorce was finalized prior to January 1, 2019.

Child support payments, however, are not deductible and are never included in income.

Correct Answer Explanation for D:

Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible for income tax purposes from the gross income of the payor if
the divorce was finalized prior to January 1, 2019.

Child support payments, however, are not deductible and are never included in income.

Show Other Explanations

36. Question ID: 94815845 (Topic: Alimony Paid)

Karina and Herbert legally divorced in 2017. Under the terms of their divorce
agreement, Herbert must pay Karina $22,000 of alimony per year, which he pays in
equal installments each month. He is also required to pay her ongoing medical
expenses. In the current year, Karina’s medical expenses were $19,500. Herbert paid
$14,500 of the medical expenses directly to the hospital. He gave the other $5,000
directly to Karina after getting a copy of the doctor’s bill. How much can Herbert deduct
for alimony in the CURRENT tax year?
 A. Herbert can claim $22,000 of alimony paid as an adjustment to income, and
$14,500 as a medical expense on Schedule A.wrong
 B. Herbert can claim $41,500 of alimony paid as an adjustment to income on his Form
1040.correct
 C. Herbert can claim $41,500 of alimony paid as a deduction on Schedule A.
 D. Herbert can claim $36,500 of alimony paid as an adjustment to income on his Form
1040.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for B:

Herbert can claim $41,500 of alimony paid as an adjustment to income on his Form
1040, the total of the medical expenses and the regular alimony paid ($22,000 +
$19,500). He can deduct the full amount because it is required by the divorce
agreement. Alimony paid is an adjustment to income, and is claimed on Form 1040. A
taxpayer does not need to itemize deductions in order to claim an adjustment for
alimony paid. Alimony is a payment to or for a spouse or former spouse under a divorce
or separation agreement. Alimony does not include voluntary payments that are not
made under a divorce or separation decree. Payments to a third party (such as the
payment directly to the hospital) on behalf of an ex-spouse under the terms of a divorce
or separation agreement can qualify as alimony. These include payments for an ex-
spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, and tuition. The
payments are treated as received by the spouse and then paid to the third party.

Note: Under the TCJA, an individual whose divorce was finalized in 2019 (or any
subsequent tax year) will no longer be able to deduct alimony payments. However, any
divorce decree that was finalized before 2019 (so, 2018 or earlier) is considered
“grandfathered” which means that those alimony payments remain deductible to the
payor and taxable to the payee.

38. Question ID: 98939120 (Topic: Alimony Paid)

Edwin was divorced from his wife, Julie, in December 2018. Julie received custody of
their only child, Sally, age 5. Edwin was ordered to pay $5,000 in alimony per month to
Julie until Sally reaches age 18. At that time, per their divorce agreement, the payments
are to decrease to $2,000 per month. What portion of each payment, if any, is
deductible by Edwin as an adjustment to income (as alimony paid)?

 A. No portion of each payment is deductible

 B. $3,000 per month is deductible as alimony by Edwin
wrong
 C. $5,000 per month is deductible as alimony by Edwin
 D. $2,000 per month is deductible as alimony by Edwin
correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 50% of students.

Incorrect Answer Explanation for B:

A total of $2,000 per month is deductible by Edwin as alimony. Child support payments,
for federal tax purposes, is specifically defined as a payment contingent on an event
related to the child. Child support payments, however, are not deductible. Since the
alimony payments are to decrease based on a "contingency related to a child," i.e.,
Sally turning 18, then that portion is not treated as "alimony" and is instead treated as
child support.

Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible for income tax purposes from the gross income of the payor if
the divorce was finalized prior to January 1, 2019. Since their divorce was finalized in
2018, their divorce is "grandfathered."

Correct Answer Explanation for D:

A total of $2,000 per month is deductible by Edwin as alimony. Child support payments,
for federal tax purposes, is specifically defined as a payment contingent on an event
related to the child. Child support payments, however, are not deductible. Since the
alimony payments are to decrease based on a "contingency related to a child," i.e.,
Sally turning 18, then that portion is not treated as "alimony" and is instead treated as
child support.

Alimony or separate maintenance payments are includible in the gross income of the
payee and are deductible for income tax purposes from the gross income of the payor if
the divorce was finalized prior to January 1, 2019. Since their divorce was finalized in
2018, their divorce is "grandfathered."

Show Other Explanations

39. Question ID: 94815862 (Topic: Alimony Paid)

Dimitri paid $14,000 of alimony to his ex-wife, Melinda, in 2024. Their divorce became
final on October 10, 2016. Which of the following statements is correct?

 A. Dimitri can no longer deduct any alimony paid.

 B. Dimitri can deduct alimony paid, even if he does not itemize deductions.correct
 C. Dimitri can deduct alimony only if he itemizes deductions on his tax
return.wrong
 D. The deduction for alimony is entered on Schedule A as an itemized deduction.
Study Unit 11: Adjustments to Gross Income covers the information for this question.
 This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for B:

Dimitri can deduct alimony paid even if he does not itemize deductions. He must file
Form 1040 and enter the amount of alimony paid as an adjustment to income.

Note: Under the TCJA, an individual whose divorce was finalized in 2019 or later will no
longer be able to deduct alimony payments. However, any divorce decree that was
finalized before 2019 (so, 2018 or earlier) is considered “grandfathered” which means
that those alimony payments remain deductible to the payor and taxable to the payee.
See the rules for alimony on IRS Topic No. 452 Alimony and Separate Maintenance.

40. Question ID: 98939123 (Topic: Alimony Paid)

When can alimony payments be deducted by the payor spouse?

 A. For any divorce agreements executed on or after January 1, 2019

 B. For divorce agreements executed before January 1, 2019

correct
 C. For all divorce agreements, regardless of execution date
 D. For all divorce agreements, as long as the payor is paying their child support
in a timely manner.wrong
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Incorrect Answer Explanation for D:

For divorce agreements executed before January 1, 2019. Alimony or separate

maintenance payments are deductible by the payer spouse if executed before 2019, but
not for agreements executed after 2018 or modified to repeal the deduction.

Note: Under the Tax Cuts and Jobs Act, an individual whose divorce was finalized in
2019 (or any subsequent tax year) will no longer be able to deduct alimony payments.
However, any divorce decree that was finalized before 2019 (so, 2018 or earlier) is
considered “grandfathered” which means that those alimony payments remain
deductible to the payor and taxable to the payee.

Correct Answer Explanation for B:

For divorce agreements executed before January 1, 2019. Alimony or separate

maintenance payments are deductible by the payer spouse if executed before 2019, but
not for agreements executed after 2018 or modified to repeal the deduction.
 Note: Under the Tax Cuts and Jobs Act, an individual whose divorce was finalized in
2019 (or any subsequent tax year) will no longer be able to deduct alimony payments.
However, any divorce decree that was finalized before 2019 (so, 2018 or earlier) is
considered “grandfathered” which means that those alimony payments remain
deductible to the payor and taxable to the payee.

Show Other Explanations

41. Question ID: 98939124 (Topic: Student Loan Interest Deduction)

What is the maximum amount of student loan interest that can be deducted annually?

 A. $2,500 per qualifying student, up to a maximum of $10,000 per year.

 B. $2,500 per tax return, per year.correct
 C. $2,500 for unmarried taxpayers, and $5,000 for couples filing jointly.
 D. $5,000 per taxpayer, per year.wrong
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Incorrect Answer Explanation for D:

The maximum deduction for student loan interest is $2,500 per tax return, per year. This
is the maximum deduction, regardless of filing status, so the limit is the same for
unmarried taxpayers as well as MFJ filers. The deduction is claimed as an adjustment
to income.

Correct Answer Explanation for B:

The maximum deduction for student loan interest is $2,500 per tax return, per year. This
is the maximum deduction, regardless of filing status, so the limit is the same for
unmarried taxpayers as well as MFJ filers. The deduction is claimed as an adjustment
to income.

Show Other Explanations

43. Question ID: 94849820 (Topic: Student Loan Interest Deduction)

Selma and Harry are married and file jointly. They each are paying down their student
loans. Their joint AGI is $88,000 in 2024. Selma pays $2,650 in student loan interest
during the year, and Harry pays $4,900 in student loan interest on his loan. What is the
maximum student loan interest deduction that they can claim on their joint tax return?

 A. $5,000 ($2,500 each)

 B. $2,000 wrong
 C. $2,500correct
 D. $7,550
 Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

The student loan interest deduction is limited to $2,500 per tax return, per year. To see
more information on this deduction, see IRS Topic No. 456 Student Loan Interest
Deduction.

44. Question ID: 94849942 (Topic: Student Loan Interest Deduction)

Which of the following payments would be deductible as qualifying student loan
interest?

 A. Student loan interest paid by a dependent who is claimed on their parent's return.
 B. Student loan Interest paid to a related party.wrong
 C. Loan interest paid by someone who is not legally obligated to repay the loan.
 D. Voluntary interest payments on a student loan.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 38% of students.

Correct Answer Explanation for D:

Voluntary interest payments are tax-deductible. Individuals may deduct up to $2,500 of

interest paid in the current year on student loans. Interest paid to a related party is not
deductible as student loan interest. A person who is claimed as a dependent cannot
deduct student loan interest on their return, even if they paid the interest themselves. To
claim a deduction, the taxpayer must be legally obligated to repay the loan.

45. Question ID: 98939125 (Topic: Student Loan Interest Deduction)

Which of the following is NOT a requirement to claim the student loan interest
deduction?

 A. The taxpayer is legally obligated to pay interest on a qualified student loan.

 B. Neither the taxpayer (or their spouse, if filing jointly), were claimed as dependents on
someone else's return.
 C. The taxpayer paid interest on a qualified student loan in the tax year.
wrong
 D. The taxpayer must be a full time student at the time the deduction is taken.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

 Incorrect Answer Explanation for C:

The taxpayer does not need to be a full-time student in order to claim the student loan
interest deduction. A taxpayer may deduct up to $2,500 of the interest paid on a
qualified student loan. This deduction phases out as income rises above a specified
amount based on filing status.

To qualify, the taxpayer must have a legal obligation to make interest payments on the
loan, which must have been used for higher education expenses. The education must
have been for the taxpayer, a spouse, or a dependent. The loan must have been taken
out within a reasonable period of the education expenses being paid or incurred.

The taxpayer claiming this deduction cannot be filing as "married filing separately" or be
claimed as a dependent by another taxpayer.

Correct Answer Explanation for D:

The taxpayer does not need to be a full-time student in order to claim the student loan
interest deduction. A taxpayer may deduct up to $2,500 of the interest paid on a
qualified student loan. This deduction phases out as income rises above a specified
amount based on filing status.

To qualify, the taxpayer must have a legal obligation to make interest payments on the
loan, which must have been used for higher education expenses. The education must
have been for the taxpayer, a spouse, or a dependent. The loan must have been taken
out within a reasonable period of the education expenses being paid or incurred.

The taxpayer claiming this deduction cannot be filing as "married filing separately" or be
claimed as a dependent by another taxpayer.

Show Other Explanations

46. Question ID: 98939128 (Topic: Other Adjustments to Income)

At 65 years of age, Rosalie is still working full time as an employee for a large regional
hospital. One day, she overhears her supervisor, Jim, saying that she is "too old" for her
job and he plans to fire her in order to hire a younger person for less pay. Rosalie is
understandably upset and hires a lawyer the next day. The lawyer files an unlawful
discrimination lawsuit against the hospital on behalf of Rosalie. In order to avoid risking
a loss in court, the hospital agrees to settle with Rosalie in arbitration for $300,000. Out
of this settlement, Rosalie pays her lawyer $95,000 in legal fees. Where can Rosalie
deduct the $95,000 in legal fees related to her unlawful discrimination claim?

 A. On Schedule 1, Form 1040correct

 B. On Schedule A, Form 1040wrong
 C. On Schedule C, Form 1040
 D. Legal fees related to unlawful discrimination claims are no longer deductible.
 Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Incorrect Answer Explanation for B:

Rosalie can deduct the $95,000 in legal fees related to her unlawful discrimination claim
on Schedule 1, Form 1040.

Individuals may claim deductions for any attorney fees and court expenses related to
cases involving specific types of discrimination, but only up to the amount of income
earned from these actions. The deduction is claimed as an adjustment to income on
Schedule 1. The amount of the deduction is limited to the amount of the judgment or
settlement included in income for the tax year.

Correct Answer Explanation for A:

Rosalie can deduct the $95,000 in legal fees related to her unlawful discrimination claim
on Schedule 1, Form 1040.

Individuals may claim deductions for any attorney fees and court expenses related to
cases involving specific types of discrimination, but only up to the amount of income
earned from these actions. The deduction is claimed as an adjustment to income on
Schedule 1. The amount of the deduction is limited to the amount of the judgment or
settlement included in income for the tax year.

Show Other Explanations

50. Question ID: 94815889 (Topic: Other Adjustments to Income)

Gustavo is a full-time foreign-language teacher at a U.S. high school, where he teaches
German and French. During the summer, Gustavo spends six weeks in Germany to
experience the culture and keep his language skills sharp. The entire trip cost $3,500.
What is the correct statement about the deductibility of this trip?

 A. He can deduct the cost of air fare and other transportation expenses, but cannot
deduct the cost of meals or lodging.
 B. He can deduct up to $250 of his costs as an adjustment to income because he is a
teacher and therefore eligible for the educator expense deduction.
 C. He cannot deduct any of the costs of his trip to Germany.correct
 D. He can deduct 50% of the cost of meals and 100% of his travel expenses.wrong
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

 None of the expenses are deductible, because taxpayers cannot deduct leisure trips or
vacations. The IRS specifically excludes “the cost of travel that in itself constitutes a
form of education”. For more information, see IRS Publication 463, Travel, Gift, and Car
Expenses.

3. Question ID: 95399914 (Topic: Qualified Educator Expenses)

Which of the following teachers would NOT be eligible for the Educator Expense
Deduction (the Teacher Credit)?

 A. Melissa, a part-time elementary school teacher that worked 600 hours during
the year for a public school district.correct
 B. Peyton, a part-time high school guidance counselor that worked 950 hours during the
year
 C. Rafael, a teacher's aide that worked full-time for a high school
 D. Quinn, a full-time school coach and PE teacher that works for a religious middle
school
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

Melissa would not qualify for the deduction. Melissa only worked 600 hours during the
year for a public school district. An "eligible educator" must be a kindergarten through
grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours during
the school year. Melissa cannot take the deduction because she did not work the
minimum number of hours. To review more information on this topic, see Topic No. 458
Educator Expense Deduction.

9. Question ID: 94815843 (Topic: Health Savings Accounts)

Which of the following is true of Health Savings Accounts (HSAs)?

 A. HSAs have required minimum distributions when the owner reaches age 65.
 B. There are no income limitations that affect the HSA deduction.correct
 C. If a taxpayer is covered by a high deductible plan, but also has a supplemental
insurance policy for a specific disease, then he is not eligible to contribute to an HSA.
 D. Individuals who are enrolled in Medicare can contribute to HSAs.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for B:

 There are no income limitations that affect the HSA deduction. In other words, even
taxpayers with very high incomes can contribute to an HSA, and the amounts will still be
deductible, even if the taxpayer doesn't itemize. However, in order to have an HSA, an
employee would need to enroll through their employer and also have a high-deductible
health insurance plan in order to qualify. All of the rest of the answers are false.

11. Question ID: 95396592 (Topic: Health Savings Accounts)

Arnie has a high-deductible health plan with an HSA with his employer. His mother
contributed $200 to his HSA as a gift on his 40th birthday. Arnie withdrew the funds tax-
free and bought a pair of prescription eyeglasses. Is this an allowable contribution?

 A. No, the contribution by his mother is prohibited.

 B. No, the contribution is illegal.
 C. Yes, the contribution is allowable.correct
 D. The contribution is only allowable if it is disclosed to the HSA trustee.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

The contribution is allowable. Family members or any other person may also contribute
on behalf of an eligible individual. No additional reporting is required. See Publication
969, Health Savings Accounts, for more information on HSAs.

12. Question ID: 94815836 (Topic: Health Savings Accounts)

What types of contributions are allowable to an HSA?

 A. Property or stock may be contributed.

 B. Cash or stock contributions are allowable.
 C. Cash or property contributions are allowable.
 D. Cash contributions only.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

Contributions to an HSA must be made in cash. Contributions of stock or property are

not allowed. See Publication 969, Health Savings Accounts, for more information.

14. Question ID: 94849559 (Topic: Health Savings Accounts)

Parker has a Health Savings Account through his employer. He makes contributions
frequently throughout the year. On December 10, 2024, he discovered that he
 deposited too much into his HSA on accident and has exceeded the allowable
contribution maximum for the year. What is the penalty for excess contributions to this
type of account, if Parker does not withdraw the overcontribution?

 A. 50% penalty.
 B. 6% penalty.correct
 C. No penalty.
 D. 10% penalty.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

Excess contributions to an HSA are subject to a 6% penalty. If a taxpayer exceeds the

maximum contribution limit for a given year, the taxpayer can remove the excess funds,
without tax penalty, any time prior to the tax filing deadline. If Parker removes the
overcontributed funds before the filing deadline, he will not be subject to the 6%
penalty.

15. Question ID: 94815897 (Topic: Health Savings Accounts)

A health savings account (HSA) is a tax-favored medical savings account available to
taxpayers. HSAs enable taxpayers to pay for current medical expenses and save for
future qualified medical expenses on a tax-free basis. Contributions to an HSA may be
made by ______________.

 A. Only by the employer.

 B. Only by the taxpayer or the taxpayer's spouse.
 C. By the taxpayer, the taxpayer's employer or any other person.correct
 D. Only by the taxpayer.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for C:

HSAs are owned by individuals, but contributions may be made by an employer or any
other person. Amounts in an HSA may be accumulated over the years or distributed on
a tax-free basis to pay for or reimburse qualified medical expenses.

16. Question ID: 94815871 (Topic: Health Savings Accounts)

Barbara incurred $2,000 of unreimbursed qualified medical expenses when she bought
a pair of prescription eyeglasses and contact lenses. She received a $1,900 distribution
 from her HSA to pay for these medical expenses. What amount of Barbara’s HSA
distribution is taxable?

 A. $100
 B. $0correct
 C. $2,000
 D. $1,900
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

Her HSA distribution is not taxable. If an HSA distribution is for qualified medical
expenses, it is tax-free. If the distribution is more than the amount of qualified expenses,
the difference is then taxable income. Since Barbara spent more on the eyeglasses and
contact lenses than she actually withdrew from her HSA, then none of the distribution is
taxable. See Publication 969, Health Savings Accounts, for more information.

19. Question ID: 98939115 (Topic: Moving Expenses for Armed Forces)
What type of move qualifies for a deduction of moving expenses for military personnel?

 A. Any move within the same city

 B. A move for personal reasons

 C. A move pursuant to a military order and permanent change of station

correct
 D. A move due to divorce
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 98% of students.

Correct Answer Explanation for C:

Active-duty members of the Armed Forces may deduct unreimbursed moving expenses
if the move was due to a military order and a permanent change of station.

Show Other Explanations

22. Question ID: 94849514 (Topic: Moving Expenses for Armed Forces)
Haroun is an officer serving in the U.S. Navy. He was recently transferred overseas.
The Navy covered most of his moving costs, except for a few receipts for storage costs
while he was in transit, which he forgot to submit. Haroun decides to just deduct the
extra moving expenses on his tax return. Which form is used to report qualified moving
expenses that were not reimbursed by the military?
 A. Form 8827.
 B. Form 3903.correct
 C. Schedule A.
 D. None of the above. Moving expenses are no longer deductible.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

Haroun must fill out Form 3903 to report qualified moving expenses that were not
reimbursed by the military.

Note: Although moving expenses were disallowed as a deduction for most taxpayers by
the Tax Cuts and Jobs Act, an exception exists for active-duty members of the U.S.
Armed Forces whose moves relate to a military-ordered permanent change of station.
See the IRS detail page about Moving Expenses for members of the Armed Forces.

30. Question ID: 94850055 (Topic: Self-Employment Tax Deductions)

Torvald is a self-employed enrolled agent. He is single. After figuring his business
deductions on Schedule C, his net profit was $230,000. He does not have any other
income for the year. Which of the following statements is correct?

 A. He does not have to pay additional Medicare tax because he is self-employed.

 B. Torvald will owe the additional Medicare tax.correct
 C. Since he is self-employed, Torvald can deduct one-half of the .9% additional
Medicare tax on his income tax return.
 D. He will owe the Net Investment Income Tax.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for B:

Torvald is required to pay Additional Medicare Tax. Torvald is not able to deduct one-
half of the 0.9% tax, as he can with the FICA tax. The additional Medicare tax is applied
to earned income above certain threshold amounts. In Torvald's case, the threshold for
single filers is $200,000, so he would pay 0.9% of $30,000 ($230,000 AGI minus
$200,000 = $30,000 x .009), or $270.

To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

31. Question ID: 94815826 (Topic: Penalty for Early Withdrawal from a CD)
 Early in the year, Sylvia invested in an $18,000 one-year certificate of deposit. In July,
her car broke down and she had to liquidate the CD in order to pay for repairs. She paid
a penalty of three months' interest, which totaled $180. Can she deduct the penalty on
her tax return?

 A. She is only allowed to deduct the penalty if she itemizes her deductions using
Schedule A.
 B. Yes, she can deduct the full penalty as an adjustment to income.correct
 C. No, the penalty is not deductible.
 D. Yes, she can deduct the full penalty on Schedule D as an investment expense.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

She is allowed to deduct the full penalty as an adjustment to her income. This type of
penalty applies when a depositor withdraws funds before a time deposit account
matures. A taxpayer can still claim the deduction even if they don't itemize.

34. Question ID: 94849594 (Topic: Penalty for Early Withdrawal from a CD)
Nash withdrew $10,000 from a one-year, deferred interest certificate of deposit. He had
to pay an early withdrawal penalty of two months' interest, which totaled $112. Nash
also earned $19 of interest from his other savings account during the year. What is the
correct treatment of these transactions?

 A. He must report the $19 as interest income. He can claim the $112 penalty amount if
he itemizes deductions on Schedule A.
 B. He must report the $19 as interest income. The early withdrawal penalty is not
deductible.
 C. He must report the $19 as interest income and he can claim the $112 penalty
amount as an adjustment to income.correct
 D. He is allowed to subtract the penalty from the interest he earned during the year.
Therefore, he is not required to report the interest.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for C:

Nash must report the $19 as interest income. He can claim the $112 penalty amount as
an adjustment to income. Taxpayers can adjust their income by deducting penalties
they paid for withdrawing funds from a deferred interest account before maturity.
 37. Question ID: 98939122 (Topic: Alimony Paid)
Which of the following types of payments is not considered alimony?

 A. Payments made to a third party that are required by the divorce or separation
instrument.
 B. Payments made in cash.
 C. Voluntary payments (not required by a divorce or separation instrument)
correct
 D. Direct payments to an ex-spouse without the use of an intermediary.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for C:

Amounts paid to a spouse or a former spouse under a divorce decree, may be treated
as alimony for federal tax purposes. Payments to third parties can qualify as alimony if
they are made under the terms of the divorce or separation instrument. For example,
when one spouse pays health insurance premiums to benefit his or her ex-spouse,
these payments can qualify as alimony if they are required as part of the divorce decree
or settlement.

Alimony payments DO NOT INCLUDE the following: child support, noncash property
settlements, payments related to the payer’s property, and voluntary payments (not
required by a divorce or separation instrument).

Note: Under the TCJA, an individual whose divorce was finalized in 2019 (or any
subsequent tax year) will no longer be able to deduct alimony payments. However, any
divorce decree that was finalized before 2019 (so, 2018 or earlier) is considered
"grandfathered" which means that those alimony payments remain deductible to the
payor and taxable to the payee.

Show Other Explanations

42. Question ID: 94849608 (Topic: Student Loan Interest Deduction)

Opal started college this year. She is pursuing a degree in English, and received a
generous $6,000 scholarship from a literary organization and used it to pay most of her
educational expenses for the year. These were her expenses for the year:

 College tuition: $4,000

 Required activity fees: $100
 Books and supplies: $500
 Room and board: $2,500
 Bus pass to get to school: $70
  Student Health Center fee: $150
What portion of her scholarship, if any, is taxable to her?

 A. $1,400correct
 B. $0
 C. $2,000
 D. $1,900
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

She has $1,400 in taxable income. The answer is figured as follows:

Tuition $4,000
Fees $100
Books and supplies $500
Qualifying educational
$4,600
expenses
Scholarship $6,000
Taxable amount $1,400
Scholarships that pay for qualified educational costs at eligible educational institutions
are not considered taxable income. The scholarship can offset his qualifying educational
expenses. The amounts for room and board, student health center fees, and
transportation (the bus pass) are not qualifying educational expenses. If any part of a
scholarship was used for room and board, travel, or personal living expenses, etc., that
portion is taxable. (This question is based on a prior-year EA exam question). To see
more information, see IRS Tax Topic 421, Scholarships, Fellowship Grants, and Other
Grants.

47. Question ID: 98939126 (Topic: Other Adjustments to Income)

What is the purpose of the “other adjustments” section on Schedule 1 (Form 1040)?

 A. To itemize deductions.

 B. To report business expenses related to hobby income.

 C. To claim the standard deduction.

 D. To claim more obscure adjustments to income that are not deducted
elsewhere.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for D:

The purpose of the “other adjustments” section on Schedule 1 (Form 1040) is to claim
more obscure adjustments to income that are not deducted elsewhere. The “other
adjustments” section allows taxpayers to report various adjustments, such as: attorney
fees and court costs for actions involving certain unlawful discrimination claims.

Show Other Explanations

48. Question ID: 98939127 (Topic: Other Adjustments to Income)

Under what circumstances can a taxpayer deduct legal fees related to unlawful
discrimination claims?

 A. If the legal fees exceed $3,000.

 B. Legal fees related to unlawful discrimination are not deductible.
 C. Only if the taxpayer itemizes deductions.
 D. If the taxpayer includes the judgment or settlement in income.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

Individuals may claim deductions for any attorney fees and court expenses related to
cases involving specific types of discrimination, but only up to the amount of income
earned from these actions. The taxpayer must include the amount of the judgment (or
settlement) in their taxable income. The amount of the deduction is limited to the
amount of the judgment or settlement included in income for the tax year.

Show Other Explanations

49. Question ID: 758501772 (Topic: Other Adjustments to Income)

Harrison interviewed with a large multinational corporation, and was offered an
executive position in another state on June 1. He accepts the position, and his new
employer reimburses Harrison $9,450 for his moving expenses. Harrison submitted all
the proper receipts to his new employer. How should this reimbursement be treated for
tax purposes?

 A. The reimbursement is deductible by Harrison as an adjustment to income.

 B. The expense is nontaxable to Harrison because he submitted his expenses, but it is
not deductible by the employer as a business expense.
 C. Because this is a reimbursement of a nondeductible expense, it is treated as
taxable wages and must be included on Harrison’s Form W-2.correct
 D. His new employer can reimburse Harrison on a pre-tax basis.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

The moving expense reimbursement must be reported as wages on Harrison’s Form W-

2. If an employer pays or reimburses moving expenses, the amounts are treated as
taxable compensation to the employee.

Note: The ONLY exception to this rule is for moving expenses reimbursed by the
government on behalf of U.S. Armed Forces personnel. A member of the Armed Forces
on active duty may deduct unreimbursed moving and storage expenses incurred during
the tax year due to a military order as an adjustment to income.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94815859 (Topic: Standard Deduction)

What is the taxpayer's standard deduction primarily based on?

 A. The taxpayer's employment status.wrong

 B. The taxpayer's filing status.correct
 C. The taxpayer's age.
 D. The taxpayer's income level.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

The standard deduction is based primarily on filing status. The standard deduction is a
specific dollar amount that reduces your taxable income. For the 2024 tax year, the
standard deduction is $29,200 for joint filers, $21,900 for heads of household, and
$14,600 for single filers and those married filing separately. For more information, see
IRS Topic No. 551 Standard Deduction.

2. Question ID: 94815982 (Topic: Standard Deduction)

Anouk is an international faculty member who is teaching for a single semester at
Stanford University as a visiting scholar on a J-1 Visa. Anouk is a citizen of the
Netherlands and does not have a U.S. green card. She files a Form 1040NR to report
her U.S.-source income. Which of the following deductions is she not allowed to claim?

 A. Casualty and theft losses from a federally declared disaster.wrong

 B. Charitable gifts to U.S. charities.
 C. Standard deduction.correct
 D. State and local income taxes.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

Form 1040NR is used by nonresident aliens, who are limited as to which deductions
and credits they can claim. The standard deduction is not allowed. Nonresident aliens
are allowed the following deductions:

 State and local income taxes.

  Casualty and theft losses from a federally declared disaster.
 Qualifying charitable contributions to U.S. nonprofit organizations.
Some very limited miscellaneous itemized deductions are also allowed to nonresident
aliens. See the instructions for Form 1040NR, U.S. Nonresident Alien Income Tax
Return, for more information.

3. Question ID: 94815919 (Topic: Standard Deduction)

Vernon and Rita are married and file separately. Vernon chooses to itemize deductions
on his return. Rita does not have any itemized deductions to claim. What is the amount
of Rita’s standard deduction on her separate return?

 A. $14,600wrong
 B. $3,950
 C. $6,350
 D. $0correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

If married taxpayers file separately and one spouse itemizes deductions, the other
spouse must either itemize deductions or claim a standard deduction amount of “0.”
Since Rita does not have any deductions to itemize, she must claim “0” as her standard
deduction amount.

5. Question ID: 94850104 (Topic: Standard Deduction)

Which of the following most accurately states the rules regarding use of the standard
deduction vs. itemizing deductions?

 A. When taxpayers have a choice between the standard deduction and itemizing
deductions, they should use the type of deduction that results in the alternative
minimum tax.wrong
 B. Taxpayers do not have a choice between the standard deduction and itemizing
deductions. The choice is mandated by the IRS.
 C. When taxpayers have a choice between the standard deduction and itemizing
deductions, they should use the method that results in the lowest tax.correct
 D. When taxpayers have a choice between the standard deduction and itemizing
deductions, they are required to use the method that results in the higher tax.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 92% of students.

 Correct Answer Explanation for C:

Most taxpayers are allowed to choose between the standard deduction and itemized
deductions. When taxpayers have a choice, they should use the type of deduction that
results in the lowest tax. Deductions are subtractions from a taxpayer's adjusted gross
income (AGI) and reduce the amount of income that is taxed.

6. Question ID: 94849953 (Topic: Standard Deduction)

Rodney is age 66 and blind. He is unmarried and files Single. What is his standard
deduction amount in 2024?

 A. $16,550wrong
 B. $14,600
 C. $16,850
 D. $18,500correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for D:

Rodney is over the age of 65 and blind, so he would be entitled to a basic standard
deduction and an additional standard deduction equal to the sum of the additional
amounts for both age and blindness. In 2024, the additional Standard Deduction for Age
65 and Over and/or Blindness is $1,950 for single filers. So his standard deduction
would be $14,600 + $1,950 + $1,950 = $18,500.

2024 Standard Deduction Amounts

For 2024 federal income tax returns, the standard deduction amounts are as follows:

Filing Status 2024 Standard Deduction

Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
If you're at least 65 years old or blind, you can claim an additional 2024 standard
deduction of $1,550 ($1,950 if using the single or HOH filing status). If you're both 65
and blind, the additional deduction amount is doubled. To review more information on
the standard deduction, see IRS Topic No. 551 Standard Deduction.

8. Question ID: 94849987 (Topic: Standard Deduction)

Which of the following taxpayers is allowed to take an additional Standard Deduction?
 A. Karen, who is 32 and widowed. wrong
 B. Gina, who is age 62 and disabled.
 C. Harold, who is age 60 and retired.
 D. Teddy, who is age 26 and blind. correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

Teddy, who is age 26 and blind, would be allowed to claim an "additional" standard
deduction. Taxpayers who are over the age of 65 and/or blind qualify for an additional
standard deduction amount. For 2024, the additional standard deduction amounts for
taxpayers who are 65 and older or blind are:

 Single or Head of Household – $1,950

 Married taxpayers or Qualifying Surviving Spouse (QSS) – $1,550
To review more information on the standard deduction, see IRS Topic No. 551 Standard
Deduction.

9. Question ID: 94849989 (Topic: Standard Deduction)

Sabine is age 67 and also blind. She plans to file single in 2024, and she does not plan
to itemize. What is her allowable Standard Deduction?

 A. $29,200wrong
 B. $18,500correct
 C. $14,600
 D. $28,900
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

Sabine is over the age of 65 and blind, so she would be entitled to a basic standard
deduction and an additional standard deduction equal to the sum of the additional
amounts for both age and blindness. In 2024, the additional Standard Deduction for Age
65 and Over and/or Blindness is $1,950 for single filers. So her standard deduction
would be: $14,600 + $1,950 + $1,950 = $18,500.

The standard deduction amounts for 2024 are:

 Filing Status 2024 Standard Deduction
Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
The "additional" standard deduction: For taxpayers who are 65 years old or blind,
they can claim an "additional" 2024 standard deduction of $1,550 ($1,950 if using the
single or HOH filing status). To review more information on the standard deduction, see
IRS Topic No. 551 Standard Deduction.

10. Question ID: 94849980 (Topic: Standard Deduction)

Lanie and Donald are married and file jointly. On April 1, 2024, Lanie dies. Donald is
62, and Lanie was 64 when she died. Lanie would have turned 65 in 2024, but she did
not live until her birthday, which would have been September 1, 2024. Donald plans to
file jointly with his deceased wife. What is the standard deduction that Donald can take
on his 2024 return?

 A. $14,600
 B. $30,700wrong
 C. $29,200correct
 D. $31,050
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for C:

Donald can claim a standard deduction of $29,200 in 2024, which is the normal
standard deduction for taxpayers who are Married Filing Jointly. He cannot claim an
additional standard deduction amount for Lanie, because she did not turn 65 (she did
not make it to her 65th birthday). The standard deduction amounts for 2024 are:

Filing Status 2024 Standard Deduction

Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
The "additional" standard deduction: If you're at least 65 years old or blind, you can
claim an additional 2024 standard deduction of $1,550 ($1,950 if using the single or
HOH filing status). If you're both 65 and blind, the additional deduction amount is
doubled. To review more information on the standard deduction, see IRS Topic No. 551
Standard Deduction.
 12. Question ID: 94849857 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Cheyenne is an alcoholic. She enters an inpatient treatment facility for alcohol abuse.
Which of the following statements is true?

 A. Cheyenne can deduct the cost of the alcohol treatment center, but not the cost
of meals and lodging.wrong
 B. Cheyenne can deduct the cost of alcohol treatment only if the treatment is
administered by a medical doctor in a hospital.
 C. Cheyenne cannot deduct any of the alcohol treatment costs as a medical expense.
 D. Cheyenne can deduct the cost of the alcohol treatment center, including meals and
lodging.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for D:

Cheyenne can deduct the cost of the alcohol treatment center, including meals and
lodging. A taxpayer can include in medical expenses amounts paid for an inpatient's
treatment at a therapeutic center for alcohol addiction. This includes meals and lodging
provided by the center during treatment. To learn more about what qualifies as a
deductible medical expense, see IRS Topic No. 502 Medical and Dental Expenses.

13. Question ID: EA P1 924 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Phillip and Denise are married and file jointly. They are in the process of adopting a
child. They paid $3,200 in dental expenses for the child to get braces. The expense was
incurred before the adoption was final. Are these expenses deductible on Phillip and
Denise's joint tax return? (Choose the best answer).

 A. Phillip and Denise cannot deduct the medical expenses, because the child cannot be
claimed as their dependent until the adoption is final.
 B. Phillip and Denise can deduct the medical expenses paid, but only as a
charitable gift.wrong
 C. Phillip and Denise cannot deduct the medical expenses until the adoption becomes
final.
 D. Phillip and Denise can deduct the medical expenses on their joint tax return as an
itemized deduction, even before the adoption becomes final.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for D:

Phillip and Denise can deduct the medical expenses on their joint tax return, even
before the adoption becomes final. The expenses would be deductible as medical
expenses on Schedule A, subject to AGI limits.

Per IRS Publication 502, adoptive parents who pay medical expenses of an adopted
child that were incurred before the adoption was final may deduct those expenses in the
year paid.

14. Question ID: 94816021 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Alice earns $55,000 during the year, and paid her boyfriend's $6,000 hospital bill. Alice's
boyfriend lives with her but is not her dependent because he earns $9,700 in wages
working as a cashier and does not meet the gross income test to be claimed as a
qualifying relative. Her boyfriend is also permanently disabled, but he does provide
more than one-half of his own support with the wages that he earns. Based on this
information, which of the following statements is true?

 A. Alice can deduct the hospital bill as a medical expense on her return, and she
can claim her boyfriend as a dependent because he earns less than the standard
deduction amount.wrong
 B. Alice can deduct the hospital bill as a medical expense on her return.
 C. Alice cannot deduct the hospital bill as a medical expense on her return.correct
 D. Alice can deduct the hospital bill as a medical expense on her return, and she can
claim her boyfriend as a dependent because he is disabled.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for C:

Alice cannot deduct the hospital bill as a medical expense on her return. Her boyfriend
is not a dependent or a family member, and because of this, his disability is irrelevant.
The payment would be considered a gift. However, if they were to get married, then the
medical expense could potentially be deducted on their joint return.

16. Question ID: EA P1 927 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
The taxpayer may deduct the cost of medical expenses for the following items except:

 A. Controlled substances in violation of Federal law, as long as the substances are

permitted under state law.correct
 B. Guide dogs for the visually impaired and the cost of the dog's care.wrong
 C. Laser eye surgery, contacts, eyeglasses, and hearing aids.
 D. Doctor-prescribed drugs, including birth control pills.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for A:

Controlled substances in violation of federal law are not allowable medical expenses
under the Internal Revenue Code, regardless of whether they have been prescribed in
accordance with State law.

18. Question ID: 94849931 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
All of the following are deductible medical expenses EXCEPT:

 A. Cost of child care while a parent is in the hospital.correct

 B. Braille books and magazines for a blind person.
 C. Inpatient treatment for drug addiction.wrong
 D. Prescription drugs.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for A:

The cost of childcare is not a deductible medical expense. Taxpayers can deduct
transportation related to medical care, as well as treatment for drug and alcohol
addiction. The costs of braille books and magazines for a blind person, as well as the
cost of prescription drugs are also deductible. To learn more about medical expenses,
see IRS Topic No. 502 Medical and Dental Expenses.

19. Question ID: EA P1 930 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following may not be deducted as medical expenses on Schedule A?

 A. $3,000 in long-term care insurance.

 B. $400 for a wig for a cancer patient.wrong
 C. $750 for prescription sunglasses.
 D. $300 in nonprescription drugs and vitaminscorrect
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

 Incorrect Answer Explanation for B:

The amounts paid for nonprescription drugs and vitamins would not be a deductible
medical expense on Schedule A.

Per IRS Publication 502, except for insulin, a taxpayer cannot deduct amounts paid for
a drug that is not prescribed. A "prescribed drug" is one that requires a prescription by a
doctor for its use by an individual.

Correct Answer Explanation for D:

The amounts paid for nonprescription drugs and vitamins would not be a deductible
medical expense on Schedule A.

Per IRS Publication 502, except for insulin, a taxpayer cannot deduct amounts paid for
a drug that is not prescribed. A "prescribed drug" is one that requires a prescription by a
doctor for its use by an individual.

Show Other Explanations

20. Question ID: EA P1 929 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following medications or drugs may be deductible as a medical expense
on Schedule A, even if the taxpayer does not have a prescription from a physician?

 A. Nicotine gum and patches

 B. Maternity vitaminswrong
 C. Aspirin
 D. Insulincorrect
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for D:

Per IRS Publication 502, with the sole exception of insulin, a taxpayer cannot deduct
amounts paid for a drug that is not prescribed. A "prescribed drug" is one that requires a
prescription by a doctor for its use by an individual.

21. Question ID: 94849926 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Consuela has cerebral palsy. She cannot climb stairs or bathe herself. On her doctor's
advice and with her landlord's permission, she pays a building contractor to install a
bathroom with modifications on the first floor of the two-story house that she rents.
Although the landlord allowed the improvements, he did not pay any of the cost of
 buying and installing the special accommodations. Consuela does not own the home.
Which of the following statements is correct?

 A. Consuela cannot deduct any of the expenses as a medical expense because she
does not legally own the home.
 B. Consuela can deduct a portion of the expenses as an adjustment to income on
Form 1040.wrong
 C. Consuela can deduct the entire amount she paid for the upgrades as a medical
expense on Schedule A.correct
 D. Consuela cannot deduct any of the expenses because none were for the actual
treatment of her medical condition.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Consuela can deduct the cost as a medical expense on Schedule A. Amounts paid to
buy and install special fixtures for a person with a disability, mainly for medical reasons,
in a rented house, are deductible medical expenses.

22. Question ID: 94849849 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Antrim and Deborah are in the process of adopting a little girl from the U.S. foster care
system. The child is a U.S. citizen and was lawfully placed in their home for adoption,
but the adoption was not finalized by the end of the year. The child lived with Antrim and
Deborah for eleven months and they provided all of the child’s support. They also paid
$13,000 in medical expenses for her during the year. Which of the following statements
is correct?

 A. Antrim and Deborah cannot claim her medical expenses because the adoption is not
final.
 B. Antrim and Deborah must save their receipts for the medical expenses and
amend their tax return once the adoption becomes final.wrong
 C. A taxpayer can claim medical expenses only for a biological child or a stepchild.
 D. Antrim and Deborah can claim an itemized deduction for medical expenses paid for
the girl before the adoption was final if the child qualified as their dependent when the
medical services were provided.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

 Antrim and Deborah can include medical expenses that they paid before the adoption
becomes final, as long as the child qualified as a dependent when the medical services
were provided or paid.

23. Question ID: 95002971 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Omar properly filed his 2024 income tax return. Omar becomes ill shortly thereafter. He
died on May 1, 2025, with unpaid medical expenses of $5,500 from 2024 and $5,800 in
2025. Omar's executor is his sister, Mary. She pays all of the outstanding medical bills
on December 31, 2025, out of the estate's funds. As Omar's executor, she would like to
deduct as many medical expenses for Omar as possible. How should the medical
expenses be deducted?

 A. Omar's sister can claim a deduction for all her brother's medical expenses on her
own tax return, since she is the one who paid them.
 B. Omar's executor should file an amended return for 2024 claiming a deduction
for all the medical expenses. wrong
 C. Omar's executor can file an amended return for 2024 claiming a deduction based on
the $5,500 medical expenses. The $5,800 of medical expenses from 2025 can be
included on Omar's final return for 2025.correct
 D. The executor cannot claim any medical expenses for Omar, because the amounts
were paid after his death.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for C:

Omar's executor can file an amended return for 2024 claiming a deduction based on the
$5,500 medical expenses. The $5,800 of medical expenses from 2025 can be included
on Omar's final individual tax return for 2025 .

Note: Special rules apply to deceased taxpayers. A personal representative of a

decedent can choose to treat certain expenses paid by the decedent's estate for the
decedent's medical care as paid by the decedent at the time the medical services were
provided. The expenses must be paid within the 1-year period beginning with the day
after the date of death. This question is based on an example from Publication 502,
Medical and Dental Expenses.

24. Question ID: 94849928 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Paulette paid $8,250 of qualified medical expenses during the year, and she plans to
itemize her deductions on Schedule A. Her AGI is $75,000 and she is single. How much
of her medical expenses are deductible on Schedule A?
 A. $2,625correct
 B. $8,250
 C. $960wrong
 D. $5,625
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

Only $2,625 of her medical expenses is deductible on Schedule A. Medical expenses

are deductible to the extent that they exceed 7.5% of adjusted gross income (AGI). The
answer is figured as follows:

Taxpayer's AGI: $75,000/ Qualifying medical expenses: $8,250

$75,000 × 7.5% = $5,625 AGI limit
$8,250 Medical expenses - $5,625 AGI limit = $2,625 allowable deduction on Schedule
A.

To learn more about medical expenses, see IRS Topic No. 502 Medical and Dental
Expenses.

25. Question ID: EA P1 925 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Alexander received $4,000 in medical treatment before marrying Betty on December 1.
Betty paid for Alexander’s entire outstanding medical bill on December 15, two weeks
after they married. Betty wants to file a separate (MFS) tax return for the year. Can
Betty include Alexander’s medical expenses in her allowable medical expense
deduction on Schedule A on her separate return?

 A. Betty cannot include Alexander’s medical expenses on her Schedule A, but

Alexander can deduct them on his own return.wrong
 B. Betty cannot include Alexander’s medical expenses in her allowable medical
expense deduction on Schedule A because she is filing separately.
 C. Betty and Alexander cannot deduct the medical expenses on Schedule A unless they
file jointly.
 D. Betty can include Alexander’s medical expenses in her allowable medical expense
deduction on Schedule A.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

 Betty can include Alexander’s medical expenses in her allowable medical expense
deduction on Schedule A. This is true whether Betty chooses to file MFJ or MFS.

Per IRS Publication 502, you can deduct medical expenses you paid for your spouse.
To include these expenses, you must have been married either at the time your spouse
received the medical services, or at the time you paid the medical expenses. Since
Betty paid for the expenses after they were married, then she can deduct them on her
return, whether she files MFJ or MFS.

Note: If Alexander had paid the expenses for himself, then Betty couldn't include his
expenses on her separate return. If they file a joint return, the medical expenses both
paid during the year would be used to figure out their medical expense deduction for the
year.

26. Question ID: EA P1 926 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
On January 10, Xavier paid $8,000 in outstanding hospital expenses for his spouse,
Yasmin, who had died suddenly in the previous year. Xavier meets Zara six months
later and marries her on December 20. Xavier and Zara will file a joint tax return. Can
Xavier include the $8,000 in medical expenses that he paid for his deceased spouse,
Yasmin, on his current year's tax return?

 A. Xavier can include the medical expenses that he paid on behalf of his late wife in his
allowable medical expenses on Schedule A, even if he files jointly with his new spouse,
Zara.correct
 B. The expenses are not deductible by Xavier or Zara, but they could be
deductible on a separate tax return for Yasmin.wrong
 C. Xavier cannot include the medical expenses that he paid on behalf of his late wife in
his allowable medical expenses on Schedule A because he remarried during the year.
 D. Xavier can include the medical expenses that he paid on behalf of his late wife in his
allowable medical expenses on Schedule A, but only if he files a separate return from
his new spouse.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for A:

Xavier can include the medical expenses that he paid on behalf of his late wife in his
allowable medical expenses on Schedule A. This is true whether Xavier chooses to file
MFJ or MFS with his new wife, Zara.

Per IRS Publication 502, you can deduct medical expenses you paid for your spouse.
To include these expenses, you must have been married either at the time your spouse
received the medical services, or at the time you paid the medical expenses.
 Since Xavier paid for expenses that were incurred while he and his late wife, Yasmin,
were married, he can deduct them on his return in the year that the expenses were
paid, whether he files MFJ or MFS with his new wife.

30. Question ID: 94849859 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following dental expenses are not deductible as a medical expense?

 A. Orthodontic treatments.wrong
 B. False teeth.
 C. Preventative dental checkup fees.
 D. Teeth whitening performed by a licensed dentist.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

The cost of teeth whitening is considered a cosmetic procedure and is not deductible. In
fact, it is specifically disallowed as a medical expense in IRS Publication 502, Medical
and Dental Expenses.

36. Question ID: 94849951 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following expenses can be claimed on Schedule A as a qualifying medical
expense?

 A. Nutritional supplements
 B. Diaper servicewrong
 C. Prescription drugs shipped from another country
 D. Meals and lodging provided by a hospital during medical treatmentcorrect
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

Meals and lodging provided by a hospital during medical treatment would be a

deductible medical expense. None of the other expenses would be deductible on
Schedule A as an itemized deduction. To see a helpful list of allowable medical
expenses, see Topic No. 502 Medical and Dental Expenses.

37. Question ID: 98939135 (Topic: Deductible Taxes)

 Marina is currently married, but separated from her husband during the year. She does
not have any dependents and plans to file MFS (married filing separately). She makes
the following tax payments during the year:

 State income taxes: $9,000

 Real estate taxes on her main home: $3,900
 Annual homeowner’s association fees: $650
 DMV fees (personal property taxes) for her personal car: $750
She owns her own home, and plans to itemize her deductions on her separate return.
She does not live in a community property state. What is her allowable deduction for
state and local taxes on Schedule A?

 A. $12,900wrong
 B. $5,000correct
 C. $10,000
 D. $13,650
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 33% of students.

Incorrect Answer Explanation for A:

Her deduction for state and local taxes is limited to $5,000, because her filing status is
MFS.

Taxpayers can deduct certain taxes if they itemize deductions. In order to be deductible,
a tax must have been imposed on the taxpayer and paid by the taxpayer during the tax
year. Deductible taxes include:

 State, local, and foreign income taxes,

 State and local sales taxes,
 Real estate taxes (but not for foreign real estate),
 Personal property taxes (such as the portion of DMV fees based on the value of
the car, boat, motorcycle, etc.).
The Tax Cuts and Jobs Act instituted a temporary cap on state and local taxes (also
called the SALT cap). This deduction is capped at $10,000 (there is a reduced $5,000
limit for MFS filers) until 2025.

Correct Answer Explanation for B:

Her deduction for state and local taxes is limited to $5,000, because her filing status is
MFS.
 Taxpayers can deduct certain taxes if they itemize deductions. In order to be deductible,
a tax must have been imposed on the taxpayer and paid by the taxpayer during the tax
year. Deductible taxes include:

 State, local, and foreign income taxes,

 State and local sales taxes,
 Real estate taxes (but not for foreign real estate),
 Personal property taxes (such as the portion of DMV fees based on the value of
the car, boat, motorcycle, etc.).
The Tax Cuts and Jobs Act instituted a temporary cap on state and local taxes (also
called the SALT cap). This deduction is capped at $10,000 (there is a reduced $5,000
limit for MFS filers) until 2025.

Show Other Explanations











38. Question ID: 94815855 (Topic: Deductible Taxes)

When are property taxes paid on a primary residence deductible?

 A. In the year they are assessed and paid.correct

 B. In the year they are billed.wrong
 C. In the year they are assessed.
 D. In the year they are incurred.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

Property taxes paid on a primary residence are deductible in the year they are assessed
and paid. But limits apply. Due to the Tax Cuts and Jobs Act, the total amount of
deductible state and local income taxes, including property taxes, is capped at $10,000
per year (also called the “SALT CAP”).
 39. Question ID: 98939129 (Topic: Deductible Taxes)
Which of the following taxes can be deducted on Schedule A, by taxpayers who itemize
deductions?

 A. State and local income taxescorrect

 B. Social Security taxes
wrong
 C. Federal income taxes
 D. Estate taxes
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for B:

State and local income taxes ("SALT") can be deducted on Schedule A. Taxpayers can
deduct state and local income taxes if they itemize their deductions.

Because of the Tax Cuts and Jobs Act, currently, the maximum deduction for state and
local income, sales and property taxes is limited to a combined, total deduction of
$10,000 ($5,000 if married filing separately).

Correct Answer Explanation for A:

State and local income taxes ("SALT") can be deducted on Schedule A. Taxpayers can
deduct state and local income taxes if they itemize their deductions.

Because of the Tax Cuts and Jobs Act, currently, the maximum deduction for state and
local income, sales and property taxes is limited to a combined, total deduction of
$10,000 ($5,000 if married filing separately).

Show Other Explanations

41. Question ID: 98939134 (Topic: Deductible Taxes)

Bettina is single. She makes the following payments during the year:

 DMV fees (personal property taxes) for her personal motorcycle: $150
 State income tax: $7,000
 Real estate taxes on her main home: $900
 Annual homeowner’s association fees: $650
 Foreign real estate taxes on a personal condo in Cancun: $390
She plans to itemize her deductions. What is her allowable deduction for state and local
taxes on Schedule A?
 A. $8,700wrong
 B. $8,050correct
 C. $8,940
 D. $8,550
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 82% of students.

Incorrect Answer Explanation for A:

Her total deductible taxes on Schedule A are $8,050 ($150 + $7,000 + $900 = $8,050).
The foreign real estate taxes and the homeowner’s association fees are not deductible.

Taxpayers can deduct certain taxes if they itemize deductions. In order to be deductible,
a tax must have been imposed on the taxpayer and paid by the taxpayer during the tax
year. Deductible taxes include:

 State, local, and foreign income taxes,

 State and local sales taxes,
 Real estate taxes (but not for foreign real estate),
 Personal property taxes (such as the portion of DMV fees based on the value of
the car, boat, motorcycle, etc.).
The Tax Cuts and Jobs Act instituted a temporary cap on state and local taxes (also
called the SALT cap). This deduction is capped at $10,000 ($5,000 for MFS filers) until
2025.

Correct Answer Explanation for B:

Her total deductible taxes on Schedule A are $8,050 ($150 + $7,000 + $900 = $8,050).
The foreign real estate taxes and the homeowner’s association fees are not deductible.

Taxpayers can deduct certain taxes if they itemize deductions. In order to be deductible,
a tax must have been imposed on the taxpayer and paid by the taxpayer during the tax
year. Deductible taxes include:

 State, local, and foreign income taxes,

 State and local sales taxes,
 Real estate taxes (but not for foreign real estate),
 Personal property taxes (such as the portion of DMV fees based on the value of
the car, boat, motorcycle, etc.).
 The Tax Cuts and Jobs Act instituted a temporary cap on state and local taxes (also
called the SALT cap). This deduction is capped at $10,000 ($5,000 for MFS filers) until
2025.

Show Other Explanations











42. Question ID: 98939130 (Topic: Deductible Taxes)

What is the purpose of the “SALT cap” introduced by the Tax Cuts and Jobs Act?

 A. To limit the total deduction for state and local taxes to $10,000.
correct
 B. To apply the deduction only to foreign income taxes.
wrong
 C. To eliminate the deduction for state and local taxes.

 D. To increase the deduction for state and local taxes.

Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 93% of students.

Incorrect Answer Explanation for B:

The "SALT cap" currently restricts the deduction for state and local taxes to $10,000
($5,000 for married filing separately) until 2025. Taxpayers can deduct state and local
income taxes if they itemize their deductions on Schedule A.

Correct Answer Explanation for A:

The "SALT cap" currently restricts the deduction for state and local taxes to $10,000
($5,000 for married filing separately) until 2025. Taxpayers can deduct state and local
income taxes if they itemize their deductions on Schedule A.

Show Other Explanations

 43. Question ID: 98939131 (Topic: Deductible Taxes)
Can a taxpayer deduct both sales taxes and state and local income taxes?

 A. No, only one of these taxes can be deducted.

correct
 B. Yes, regardless of the total deduction amount.
wrong
 C. Yes, as long as the total deduction does not exceed $10,000.
 D. Yes, but only if the taxpayer takes the standard deduction.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 43% of students.

Incorrect Answer Explanation for B:

Only one of these taxes can be deducted. Taxpayers can choose to

deduct either sales/use taxes or state and local income taxes, but not both.

Correct Answer Explanation for A:

Only one of these taxes can be deducted. Taxpayers can choose to

deduct either sales/use taxes or state and local income taxes, but not both.

Show Other Explanations

45. Question ID: 94849992 (Topic: Interest Expense)

Henry and Monique are married and own a home together. They sold their home on
August 15. Up until the date of the sale, they made home mortgage interest payments
of $14,300. The settlement sheet (HUD-1) for the sale of the home showed an
additional $150 of interest for the 15-day period in August up to, but not including, the
date of sale. They also had a mortgage prepayment penalty of $5,000. In March and
April, they paid $220 in late payment fees to their mortgage lender due to missed
payments. Based on these facts, how much can they deduct for mortgage interest on
Schedule A?

 A. $19,300wrong
 B. $19,450
 C. $14,300
 D. $19,670correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for D:

All of the charges are deductible as mortgage interest on their tax return. Their
mortgage interest deduction is $19,670 ($14,300 + $150 + $5,000 + $220). Taxpayers
can deduct a late charge on a mortgage loan as mortgage interest. The taxpayers can
deduct a prepayment penalty as home mortgage interest. When taxpayers sell their
home, they can deduct home mortgage interest paid up to, but not including, the date of
the sale.

46. Question ID: 94849900 (Topic: Interest Expense)

Kristal purchased her first home this year and incurred the following expenses. Which is
deductible as an itemized expense on Schedule A?

 A. VA funding fees.
 B. Notary fees.wrong
 C. Loan points.correct
 D. Appraisal fees.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for C:

Only the loan points are deductible. Points paid for the use of money are considered
mortgage interest and can be deducted on Schedule A. Other charges paid for specific
services, such as appraisal fees, preparation fees, VA funding fees, or notary fees, are
not deductible.

48. Question ID: 94849576 (Topic: Interest Expense)

Jenny is liable for multiple loans on which she pays interest. How much of the following
interest expense is deductible on Jenny's Schedule A, before any income limitations?

 $1,200 interest paid on a loan used to purchase taxable investments.

 $750 interest paid on a qualifying student loan.
 $2,700 credit card interest on an advance used to make a down payment on a
new home.
 $625 interest on a loan used to invest in tax-free municipal bonds
Jenny is reporting $1,500 in investment income this year.

 A. $3,900wrong
 B. $0, investment interest is not deductible.
 C. $1,950
 D. $1,200 correct
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for D:

Only the $1,200 interest paid on a loan used to purchase taxable investments would be
deductible. All of the other items listed would not be deductible on Schedule A as
investment interest. The student loan interest may be deductible, but not on Schedule
A. Instead, it would be an adjustment to income on her Form 1040.

Note: Investment interest is paid on a loan that was used to purchase an investment
property or other dividends, interest, royalties, or annuities. The deduction for
investment interest expense is limited to a taxpayer's net investment income. Since she
had investment income, she is permitted to deduct her investment interest expense.

49. Question ID: 94849716 (Topic: Interest Expense)

Joseph purchased a new home on May 3 and financed the purchase with a mortgage
loan. During the year, Joseph made mortgage payments that included $4,480 in
deductible interest. The settlement sheet (HUD-1) for the purchase of the home
included interest of $620 for 29 days in May. Joseph also made one late payment on
the mortgage in December and had to pay $15 in late fees. Joseph plans to itemize this
year. What is his allowable mortgage interest deduction on Schedule A?

 A. $5,100wrong
 B. $0
 C. $4,480
 D. $5,115correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

All of the amounts are deductible as mortgage interest, including the late fee. Joseph's
qualifying mortgage interest of $5,115 ($4,480 + $620 +$15), can be deducted on
Schedule A.

50. Question ID: 94849894 (Topic: Interest Expense)

Which of the following expenses is NOT allowable as an itemized deduction on
Schedule A?

 A. Mortgage interest on a primary residence.wrong

 B. Investment interest expenses.
 C. Funeral expenses.correct
 D. DMV fees.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for C:

Funeral expenses are never deductible on an individual tax return. All of the other
expenses listed are allowable as an itemized deduction on Schedule A.

51. Question ID: 95399969 (Topic: Interest Expense)

Cindy paid the following amounts during the year:

 $9,000 in mortgage interest on a primary residence

 $1,500 mortgage interest on a vacation home
 $1,000 in loan interest on a recreational vehicle with sleeping, cooking, and toilet
facilities (an RV)
 $50 late fee on her primary mortgage for paying one month late
Cindy plans to itemize her deductions. What is Cindy's maximum mortgage interest
deduction on Schedule A?

 A. $10,500wrong
 B. $10,550correct
 C. $9,000
 D. $11,500
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for B:

Cindy can deduct the mortgage interest on a maximum of two personal homes. She can
also deduct the late fee as mortgage interest. Therefore, her mortgage interest
deduction is $10,550 ($9,000 1st home + $1,500 2nd home + $50 late fee). To see
more information about deductible mortgage interest, see IRS Tax Topic 505, Interest
Expense.

52. Question ID: 94849924 (Topic: Interest Expense)

Henrietta paid the following amounts in 2024:

 $7,500 mortgage interest on her main home.

  $50 in late fees for paying her primary mortgage late.
 $5,000 mortgage interest on her vacation home.
 $400 in mortgage interest on a timeshare.
 $495 in HOA fees on her main home.
Her AGI is $50,000 for the year. Based on these facts, what amount can she claim as a
mortgage interest deduction on Schedule A?

 A. $7,500wrong
 B. $12,550correct
 C. $12,950
 D. $13,445
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

The following amounts are deductible. ($7,500 + $5,000 +$50) = $12,550

A taxpayer can deduct mortgage interest on up to two homes. A second home can
include any other residence a taxpayer owns and treats as a home, but the taxpayer
does not have to actually use the second home during the year in order to deduct the
mortgage interest paid on the related loan. The late fees on her primary mortgage are
also treated as mortgage interest for tax purposes. The HOA fees are not deductible on
a personal residence. The interest on the timeshare is not deductible because she has
already deducted the mortgage interest on two personal homes.

53. Question ID: 94849893 (Topic: Interest Expense)

Sarah and Emmitt are married and file jointly. Sarah earns $13,000 in wages working
as a cashier. Emmitt earns $60,000 in wages working as a salesman. Neither is self-
employed. They are itemizing the following Schedule A expenses on their current year
tax return:

 Emmitt’s employee-related business expenses: $6,000.

 Mortgage interest paid: $7,000 (all acquisition debt, mortgage loan amount is
$375,000).
 Real estate taxes on a primary residence: $3,000.
 State income taxes: $13,000.
 Gambling winnings: $1,000.
 Gambling losses: ($8,000).
 What is the total amount of itemized deductions that they can deduct on their Schedule
A?

 A. $23,300wrong
 B. $24,150
 C. $30,150
 D. $18,000correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for D:

Only the mortgage interest is fully deductible. The real estate taxes and state taxes are
subject to a $10,000 cap (also called the “SALT CAP”). The gambling losses are only
deductible to the extent of gambling winnings. Thus, the answer is calculated as follows:
$7,000 mortgage interest paid + $10,000 SALT CAP [$3,000 real estate taxes + $7,000
state income taxes (capped)]+ $1,000 allowable gambling losses = $18,000.

Under the Tax Cuts and Jobs Act, most employee business expenses are no longer
deductible on Schedule A (with the exception of work-related expenses of an Armed
Forces reservist, qualified performing artist, fee-basis state or local government official,
or employee with impairment-related work expenses.)

54. Question ID: 94849936 (Topic: Interest Expense)

Nathan and Nicole are married and file jointly. Their combined AGI is $79,000. During
the year, they paid the following interest expenses:

 $14,200 in home mortgage interest.

 $2,200 in loan interest on their personal vehicle.
 $75 in late fees for paying their home mortgage late.
 $158 in credit card interest.
 $1,200 in student loan interest.
They plan to itemize their deductions. Based on these figures, what is the amount of
deductible interest that they can claim on their Schedule A?

 A. $15,475wrong
 B. $16,475
 C. $14,200
 D. $14,275correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.
 This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for D:

The answer is $14,275, calculated as follows: ($14,200 in home mortgage interest +$75
in late fees) = $14,275. Late fees on a mortgage loan are deductible as mortgage
interest. The auto and credit card interest are personal interest expenses and are not
deductible. The student loan interest would be deductible, but not on Schedule A.
Student loan interest is deducted as an adjustment to Income on Form 1040.

For more information on deductible interest expenses, see Topic 505, Interest
Expense.

56. Question ID: 94849873 (Topic: Interest Expense)

In order to be deductible on Schedule A, mortgage interest must be paid on a loan
secured by the taxpayer's ________________.

 A. Primary residence only.wrong

 B. Mortgage interest does not have to be secured debt in order to be deductible.
 C. Business property.
 D. Main home or a second home.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

In order for mortgage interest to be deductible on Schedule A (Form 1040), the interest
paid must be incurred on a loan secured by a taxpayer's main home or a second home.
See Publication 530, Tax Information for Homeowners for more information.

57. Question ID: 94849874 (Topic: Interest Expense)

Faena pays off her home mortgage early. She pays a prepayment penalty of $1,200 to
her lender. Is this penalty deductible?

 A. The penalty is only deductible if the taxpayer still owes a balance on the
mortgage debt.wrong
 B. Yes, the penalty is deductible as mortgage interest on Schedule A.correct
 C. No, the penalty is not deductible.
 D. The penalty increases the basis of the property.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 75% of students.

 Correct Answer Explanation for B:

If a taxpayer pays off their home mortgage early, the taxpayer may have to pay a
mortgage prepayment penalty. A taxpayer can deduct that penalty as home mortgage
interest on Schedule A. See Publication 530, Tax Information for Homeowners for more
information.

58. Question ID: 94849950 (Topic: Interest Expense)

Maria is unmarried and has one dependent son, age 18, who is a full-time student. She
plans to file as Head of Household. Her AGI is $79,000. During the year, she paid the
following expenses:

 $12,000 in home mortgage interest on her primary residence

 $2,200 in interest on a second home
 $2,500 in student loan interest
 $30 in late fees for paying her own home mortgage late
 $4,000 of investment interest expense. She has $5,000 of net investment income
 $600 in credit card interest, which was used for her son's college tuition
She plans to itemize her deductions. Based on these figures, what is the amount of
deductible interest that she can claim on her Schedule A?

 A. $12,030
 B. $14,230wrong
 C. $19,130
 D. $18,230correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

She can deduct $18,230 in total interest on Schedule A. The answer is figured as
follows:

 She can deduct $14,230 in mortgage interest ($12,000 + $2,200 + $30 in late
fees). She can deduct interest on up to two personal homes.
 She can also deduct $4,000 in investment interest expense (she earned $5,000
of net investment income, so her deduction for interest expense is not limited).
The credit card interest is treated as personal interest and is not deductible on Schedule
A. The student loan interest would be deductible, but not on Schedule A. Student loan
interest is deducted as an adjustment to Income on Form 1040. For more information on
deductible interest expenses, see Topic 505, Interest Expense.
 59. Question ID: 94849939 (Topic: Interest Expense)
Alexa and Randy are married and file jointly. Their combined AGI is $109,000. During
the year, they paid the following interest expenses:

 $24,200 in home mortgage interest on their primary residence.

 $12,200 in interest on their vacation home in Maui.
 $55 in late fees for paying their main home mortgage late.
 $1,158 in credit card interest, the amounts were used to install a deck on their
vacation home.
 $500 in interest on a car loan
 $2,200 in student loan interest.
 $5,000 of investment interest expense. They have $4,000 of net investment
income.
They plan to itemize their deductions. Based on these figures, what is the amount of
deductible interest that they can claim on their Schedule A?

 A. $40,455correct
 B. $36,400wrong
 C. $36,455
 D. $42,655
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for A:

Alexa and Randy can deduct $40,455 in total interest on Schedule A. The answer is
figured as follows:

 They can deduct $36,455 in mortgage interest ($24,200 + $12,200 + $55 in late
fees)
 They can also deduct $4,000 in investment interest expense (they incurred
$5,000 of investment interest expense but only have $4,000 of net investment
income, so their deduction for interest expense is limited to $4,000. The $1,000
excess can be carried over to succeeding tax years).
The auto and credit card interest are personal interest expenses and are not deductible.
The student loan interest would be deductible, but not on Schedule A. Student loan
interest is deducted as an adjustment to Income on Form 1040.

For more information on deductible interest expenses, see Topic 505, Interest
Expense.
 60. Question ID: 94849940 (Topic: Interest Expense)
Ginny is unmarried and has one dependent parent. She plans to file as Head of
Household. Her AGI is $99,000. During the year, she paid the following interest
expenses:

 $24,000 in home mortgage interest on her primary residence.

 $8,200 in interest on a second house, where her mother lives, and whom Ginny
claims as a dependent.
 $15 in late fees for paying her own home mortgage late.
 $2,500 in student loan interest.
 $3,000 of investment interest expense. They have $1,000 of net investment
income.
 $1,010 in credit card interest, which was used for medical expenses
Ginny plans to itemize her deductions. Based on these figures, what is the amount of
deductible interest that she can claim on her Schedule A?

 A. $24,015
 B. $33,215 correct
 C. $32,215wrong
 D. $24,000
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

Ginny can deduct $33,215 in total interest on Schedule A. The answer is figured as
follows:

 She can deduct $32,215 in mortgage interest ($24,000 + $8,200 + $15 in late
fees). She can deduct interest on up to two personal homes.
 She can also deduct $1,000 in investment interest expense (she incurred $3,000
of investment interest expense but only has $1,000 of net investment income, so
her deduction for interest expense is limited to $1,000. The excess can be
carried over to succeeding tax years).
The credit card interest is treated as personal interest and is not deductible. The student
loan interest would be deductible, but not on Schedule A. Student loan interest is
deducted as an adjustment to Income on Form 1040. For more information on
deductible interest expenses, see Topic 505, Interest Expense.

62. Question ID: 94849912 (Topic: Interest Expense)

 Brandy has $4,000 of investment income in the current year. She also earned $50,000
in wages. She has the following interest expense:

 Interest paid on a margin loan used to purchase stocks: $1,500.

 Credit card interest: $850.
 Interest incurred on an auto loan for her personal vehicle: $3,000
 Interest on a loan used to invest in tax-exempt muni-bonds: $475.
What amount of this interest expense can she deduct on Schedule A?

 A. $0, investment interest is not deductible.

 B. $1,975wrong
 C. $4,000
 D. $1,500correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for D:

She can deduct $1,500 as investment interest expense. Investment interest is interest
paid or incurred on debt to purchase taxable investments. It is deductible on Schedule A
but is limited to the amount of a taxpayer’s net investment income for the year.
However, no deduction is permitted for interest on debt incurred to purchase tax-exempt
muni-bonds. Credit card interest and the interest paid on her personal auto loan are not
deductible.

63. Question ID: 94849984 (Topic: Interest Expense)

Juanito and Winnie are married and file jointly. They refinanced their mortgage and
obtained a home equity loan totaling $65,000, which they used to pay off overdue credit
card payments. The fair market value of their home is $230,000, and they still have
$30,000 of outstanding acquisition mortgage debt on the home. For which loan(s) can
they deduct the related interest costs?

 A. They can deduct the mortgage interest on the acquisition debt only, but they can
deduct a portion of the home equity loan interest if their combined AGI is less than
100K.
 B. They cannot deduct the mortgage interest on either loan.wrong
 C. They can deduct only the mortgage interest on the acquisition debt. The interest paid
on the home equity loan is not deductible.correct
 D. They can only deduct the mortgage interest on the home equity loan.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.
 This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for C:

Taxpayers are only allowed to deduct the mortgage interest on acquisition debt. The
interest on the HELOC (home equity loan) is not deductible mortgage interest, because
they used the funds to pay off credit cards. If they had used the HELOC for home
improvement, they would have been able to deduct the interest.

64. Question ID: 94849932 (Topic: Interest Expense)

Elena paid the following costs during the year:

 $15,000 of mortgage interest and $2,000 property taxes on her primary

residence.
 $9,900 of mortgage interest on her vacation home in Hawaii
 $6,700 of loan interest on a cabin in Lake Tahoe that she uses occasionally
when she wants to visit her family.
None of the homes are rentals. She is single and her AGI is $90,000. What is Selena’s
maximum mortgage interest deduction on Schedule A?

 A. $15,000wrong
 B. $33,600
 C. $24,900correct
 D. $31,600
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

A taxpayer can deduct the mortgage interest on up to two personal homes. Therefore,
Elena should claim the mortgage interest on her primary residence and her second
home, since it gives her a larger deduction ($15,000 + $9,900 = $24,900). A taxpayer
cannot deduct mortgage interest for more than two homes, so the interest she pays on
the third home would not be deductible. The property taxes of $2,000 would be
deductible, but not as mortgage interest.

65. Question ID: 95003069 (Topic: Interest Expense)

Which of the following is not deductible as mortgage interest on Schedule A?

 A. Points paid on a second home.

 B. Interest paid on a loan incurred for purchasing an empty lot.correct
 C. Mortgage interest paid on a second home.
 D. Mortgage interest paid on a main home.wrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

Interest paid on a loan incurred for purchasing an empty lot would not be deductible as
mortgage interest on Schedule A. Deductible mortgage interest is any interest paid on a
loan secured by a main home or second home that was used to buy, build, or
substantially improve the home. Mortgage points represent interest paid in advance,
and may be deducted on Schedule A. See Publication 936, Home Mortgage Interest
Deduction, to understand more about the types of mortgage interest that are deductible.

66. Question ID: 94849990 (Topic: Interest Expense)

During the year, Roland paid the following expenses:

 Home mortgage interest: $4,180.

 Credit card interest: $1,400.
 Appraisal fee for his personal residence: $500.
 Interest on a car loan: $2,000.
 Late payment fees on his mortgage loan: $120.
What amount can Roland deduct on Schedule A?

 A. $4,800wrong
 B. $4,300correct
 C. $4,180
 D. $5,800
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

Roland can deduct a total of $4,300 as mortgage interest. The home mortgage interest
($4,180) is deductible. The late fees paid on a mortgage loan ($120) can also be
deducted as mortgage interest. All the other charges are considered personal expenses
and are not deductible.

67. Question ID: 97515841 (Topic: Interest Expense)

Larry owns three homes. Two of them are vacation properties and he does not rent any
of them out. He has an AGI of $89,000 for the year. His primary residence is in Miami,
 FL, where he works as a firefighter. He also owns a home in New Orleans and a condo
in Hawaii. He hasn't used the Hawaii condo this year, and it sat empty all year. He pays
the following amounts in property tax and mortgage interest on all three properties. All
of the mortgage debt is qualifying acquisition debt. He does not have any more itemized
deductions for the year. Based on the information below, how much can he deduct in
mortgage interest and property tax on his Schedule A?

Home Mortgage interest Property tax

Main home in Miami $14,000 $7,500
New Orleans home $11,000 $5,000
Hawaii condo $6,000 $4,900

 A. He can deduct $25,000 in mortgage interest and $10,000 in property tax. correct
 B. He can deduct $31,000 in mortgage interest and $10,000 in property tax. wrong
 C. He can deduct $14,000 in mortgage interest and $17,400 in property tax.
 D. He can deduct $25,000 in mortgage interest and $17,400 in property tax.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for A:

He can deduct $25,000 in mortgage interest and $10,000 in property tax. A taxpayer
can deduct mortgage interest on up to two personal homes on Schedule A. So the
interest on the third home is disallowed. Property tax is not limited by the number of
homes, but it is limited by the SALT CAP, which is $10,000. The answer is calculated as
follows:

Home Mortgage interest Property tax

Main home in Miami $14,000 $7,500
New Orleans home $11,000 $5,000
Hawaii condo $6,000 NO $4,900
Allowable deduction $25,000 Limited to $10,000 by the SALT CAP
69. Question ID: 94849848 (Topic: Charitable Contributions)
Which of the following is a qualified charitable deduction?

 A. The fair market value of blood donated to the American Red Cross.
 B. Out-of-pocket travel expenses for a volunteer to attend a church fundraiser.correct
 C. Direct contributions to a teenage runaway.wrong
 D. The cost of a raffle ticket at a church fundraiser.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for B:

For charity volunteers, transportation expenses can be deductible as an itemized

deduction on Schedule A. Expenses include bus fare, parking fees, tolls, and either the
cost of gas and oil or a standard mileage deduction for charitable activities. Raffle
tickets (or any type of gambling expense) are never deductible as a charitable
contribution, even if the event directly benefits a charity. Blood donations are not
deductible, but the cost of travel to make a blood donation is a deductible expense. A
taxpayer cannot deduct a donation that is made directly to a needy individual.

71. Question ID: 94849971 (Topic: Charitable Contributions)

Jennifer purchases 50 Bibles on sale for $1,000, using an online coupon for 50% off.
The normal retail value of the Bibles is $2,000. She contributes all the Bibles for use by
her church, which is a qualified charitable organization. The church uses the Bibles
during religious services. What is her allowable charitable contribution deduction?

 A. $2,000
 B. $0
 C. $500 (50% of $1,000)wrong
 D. $1,000correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for D:

Jennifer can claim a deduction only for the price that she paid for the Bibles. Therefore,
her charitable contribution is $1,000. For more information and similar examples, see
Publication 526, Charitable Contributions.

73. Question ID: 94849963 (Topic: Charitable Contributions)

Wilford donates his used car to a qualified charity. He bought it 5 years ago for $9,000.
A used car guide shows the fair market value for his car is $4,000. The charity auctions
the car. Wilford gets a Form 1098-C from the organization showing the car was sold for
$2,900. What is the maximum that he can claim as a charitable deduction on Schedule
A?

 A. $500, unless he has a qualified appraisal.

 B. $9,000wrong
 C. $4,000
 D. $2,900correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

If Wilford itemizes his deductions, he can deduct $2,900 for his donation, because that
was the value that was reported on Form 1098-C. Special rules apply to the donation of
vehicles. The charitable organization must file a Form 1098-C, Contributions of Motor
Vehicles, Boats, and Airplanes, with the IRS for each contribution of a qualified vehicle
that has a claimed value of more than $500. For more information, see Publication
526,Charitable Contributions.

74. Question ID: 94849809 (Topic: Charitable Contributions)

Denise, age 77, and Gary, age 78, are married and file jointly. Because of their age,
they are both required to take an IRA distribution this year. Instead of taking their
required RMDs, they would like to use money from their traditional IRA accounts to
donate directly to their favorite church. Between the two of them, what is
the maximum amount they could withdraw from their IRA as a “qualified charitable
distribution” in 2024?

 A. $210,000correct
 B. $100,000wrong
 C. $10,000
 D. $50,000
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 34% of students.

Correct Answer Explanation for A:

They can donate up to $210,000 as a married couple directly from their IRA accounts. A
"Qualified Charitable Contribution" or QCD, is when a taxpayer who is at least age 70½
directs his or her IRA trustee to make a distribution directly to a public charity. The
maximum per year is $105,000 each ($210,000 for MFJ taxpayers). The QCD is not
included in the income of the IRA owner, and the owner doesn’t receive a charitable
contribution deduction.
 The IRA trustee must make the distribution directly to the qualified charity (in other
words, the taxpayer cannot request a distribution and then donate the money later; the
trustee has to make the contribution to the charity directly).

Note: The SECURE Act increased the age at which individuals must start taking
required minimum distributions (RMDs) to 73 in 2024. However, the SECURE Act did
NOT change the age at which taxpayers can make a QCD (that is still 70½). For more
information on Retirement Distributions, see Publication 590-B, Distributions from
Individual Retirement Arrangements.

75. Question ID: 94849831 (Topic: Charitable Contributions)

The following taxpayers all made charitable contributions to the same church. Which of
the following taxpayers is required to fill out Form 8283 and attach it to his or her return
in order to claim a deduction?

 A. Abudalla, who made a single cash contribution of $650 to a qualified organization.

 B. Santos, who made a non-cash donation of furniture valued at $250.wrong
 C. Debra, whose non-cash contributions totaled $600 for the year.correct
 D. Hunter, whose deductible cash contributions totaled $550.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for C:

Debra is the only one required to fill out Form 8283, Noncash Charitable Contributions,
and attach it to her return. Any non-cash donation over $500 must be described on
Form 8283. To learn more about deducting charitable contributions, see IRS Topic No.
506 Charitable Contributions.

77. Question ID: 94849863 (Topic: Charitable Contributions)

Boyce is a self-employed carpenter. He did a pro-bono construction job for a church,
donating his labor and the materials. He normally charges $40 an hour for labor and the
materials cost $320. He worked on the project for 4 hours. Assuming he gets a written
acknowledgment for his donation, how much of his contribution is deductible on his
Schedule C?

 A. $320wrong
 B. $250
 C. $0correct
 D. $480
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.
 This question is answered correctly on the first attempt by 22% of students.

Correct Answer Explanation for C:

Boyce cannot deduct any charitable contributions on Schedule C, because the

Schedule C is for reporting business activities only. If he itemizes deductions, he may
be able to take a charitable deduction for the cost of the materials only. The value of his
labor is not a tax deductible expense for charitable purposes.

78. Question ID: 94849832 (Topic: Charitable Contributions)

Michael makes several charitable donations during the year. Which of the following
donations does NOT meet the IRS’s recordkeeping requirements?

 A. A $240 donation to an animal shelter. Michael has a canceled check for the
donation, but no receipt.wrong
 B. A $300 donation to a local church. Michael has a canceled check for the donation but
no receipt.correct
 C. A $600 donation of a car to a local charity. Michael has a Form 1098-C for the
donation.
 D. A $100 donation of clothing to Goodwill. Michael has a receipt for the donation.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

The $300 donation to his local church does not meet all the substantiation
requirements. Michael has a canceled check for the donation, but no receipt, and the
donation amount is OVER $250.

For any single contribution of $250 or more (including contributions of cash or property),
a canceled check or receipt alone is insufficient. The taxpayer must also obtain and
keep in his records a contemporaneous written acknowledgment from the qualified
organization indicating the amount of the cash and a description of any property
contributed. The acknowledgment must say whether the organization provided any
goods or services in exchange for the gift and, if so, must provide a description and a
good faith estimate of the value of those goods or services.

To learn more about deducting charitable contributions, see IRS Topic No. 506
Charitable Contributions.

79. Question ID: 94849854 (Topic: Charitable Contributions)

Colby donates an expensive oil painting to a qualified charity. He plans to deduct
$8,000 for the donation, which is the painting's FMV. What does the IRS require in order
for Colby to substantiate the painting's value?
 A. Obtain a receipt from the charity.wrong
 B. Obtain a receipt and a written statement of value from the charity.
 C. Hire a qualified appraiser to make a written appraisal of the painting. Colby must
attach a copy of the appraisal to his tax return.
 D. Hire a qualified appraiser to make a written appraisal of the painting.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 30% of students.

Correct Answer Explanation for D:

Colby must hire a qualified appraiser to make a written appraisal of the painting. If any
single donation or a group of similar items is valued at over $5,000, a qualified appraiser
is required to make a written appraisal of the donated property. The taxpayer must also
complete Form 8283, Noncash Charitable Contributions, Section B, and attach it to his
tax return. He generally does not have to attach the appraisal itself, but must retain a
copy for his records.

Note: For large donations of artwork valued at more than $20,000, or other property
valued at more than $500,000, the appraisal itself must be included with the tax return.

80. Question ID: 94849972 (Topic: Charitable Contributions)

Dulcimer's church holds a charity auction. At the fundraising auction, Dulcimer pays
$600 for a week's stay at a beach house. All of the proceeds go to the church. The
amount he pays is no more than the fair rental value. How much can he deduct as a
charitable contribution?

 A. $300wrong
 B. $600
 C. $200
 D. $0correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

In this example, the taxpayer has not made a deductible charitable contribution. That is
because the $600 that he paid for the week's stay at the beach house did not exceed
the FMV. From IRS Publication 526: If you receive a benefit as a result of making a
contribution to a qualified organization, you can deduct only the amount of your
contribution that is more than the value of the benefit you receive.
 For more information, see Publication 526, Charitable Contributions.

81. Question ID: 94849901 (Topic: Charitable Contributions)

Sonia volunteers for 15 hours in the office of a local homeless shelter, which is a
qualified 501(c)3 charity. The full-time receptionist is paid $10 an hour to do the same
work Sonia does. Sonia makes $15 per hour as a cashier at her regular job. She also
has $16 of out-of-pocket expenses for bus fare to the shelter. How much can Sonia
deduct on her taxes as a charitable contribution?

 A. $150
 B. $225wrong
 C. $241
 D. $16correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Sonia cannot deduct the value of her time or services as a charitable deduction.
However, she can deduct out-of-pocket expenses and transportation costs for getting to
and from the place where she volunteers. Sonia cannot use the standard mileage rate
because she did not use her own car for transportation.

82. Question ID: 94849965 (Topic: Charitable Contributions)

Penny donates her used car to her local animal shelter, a qualifying organization. She
bought it a few years ago for $19,000. A used car guide shows the fair market value for
her car is currently $4,100. A few months later, Penny gets a Form 1098-C from the
organization showing the car was sold for $3,900. She did not obtain any type of formal
appraisal for the car. Penny plans to itemize her deductions. What is the amount that
she can deduct on Schedule A for her donation?

 A. $19,000 (her basis in the vehicle)wrong

 B. $4,100
 C. $3,900correct
 D. $500
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for C:

 She can deduct $3,900 for her donation. She must attach Form 1098-C that she
received from the charity and Form 8283, Noncash Charitable Contributions, to her
return. This question is based directly on an example in Publication 526, Charitable
Contributions.

83. Question ID: 94849826 (Topic: Charitable Contributions)

Which of the following can a taxpayer deduct as a qualified charitable contribution on
Schedule A?

 A. Contribution to a fraternal society made for the purpose of paying burial

expenses of a member.wrong
 B. Payments made directly to an ordained member of the clergy for his personal needs.
 C. Unreimbursed expenses that relate directly to the services the taxpayer provided for
a qualified organization.correct
 D. Appraisal fee that is required to substantiate the value of a fine art painting that was
donated to a qualified charity.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 21% of students.

Correct Answer Explanation for C:

A taxpayer can deduct unreimbursed expenses that relate directly to the services the
taxpayer provided for a qualified organization. A taxpayer can deduct expenses incurred
while traveling to perform services for a charitable organization only if there is no
significant element of personal pleasure in the travel. However, a deduction will not be
denied simply because the taxpayer enjoys providing the services.

Deductible contributions may also include:

 The amount of a contribution in excess of the fair market value of items received,
such as merchandise and tickets to a charity ball.
 Transportation expenses, including bus fare, parking fees, tolls, and either the
actual cost of gas and oil or a standard mileage deduction of 14 cents per mile.
Volunteer Expenses: Volunteer hours cannot be assigned a monetary value for tax
purposes. However, individuals can claim deductions for any out-of-pocket expenses
related to their volunteer work for eligible organizations.

84. Question ID: 94849964 (Topic: Charitable Contributions)

Jimmy paid $65 for a ticket to enter a charity fun run at his local church. His entire $65
entry fee goes to the church. Jimmy also gets a t-shirt for participating in the fun run.
 The shirt has a fair market value of $15. Jimmy participates in the fun run and has a
good time. What amount of his charitable gift is deductible on Schedule A?

 A. $15wrong
 B. $0
 C. $50correct
 D. $65
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

Jimmy's donation is limited to $50. To figure the amount of his charitable contribution,
subtract the value of the benefit he received ($15 t-shirt) from his total payment ($65).
He can deduct $50 as a charitable contribution to the church. For more information and
similar examples, see Publication 526, Charitable Contributions.

89. Question ID: 94849959 (Topic: Charitable Contributions)

Charitable donations of appreciated stock are usually valued at ________________.

 A. The taxpayer's basis in the stock.

 B. The estimated value that is made by a licensed appraiser. wrong
 C. The value on the date of purchase.
 D. The fair market value of the stock on the date of the donation.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for D:

Donations of stock are usually valued at the fair market value (FMV) of the property.
When a taxpayer donates appreciated stock to charity, the taxpayer can generally take
a tax deduction for the full fair market value of the stock, and no appraisal is required
(as long as the stock is publicly traded). For more information, see Publication 526,
Charitable Contributions.

90. Question ID: 94849897 (Topic: Charitable Contributions)

Which of the following charitable gifts would be deductible on Schedule A?

 A. Out-of-pocket expenses when a taxpayer serves a 501(C)3 organization as a

volunteercorrect
 B. The cost of raffle tickets at a church charity event.
 C. A donation to a nonprofit social club. wrong
 D. A donation to a political party.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

Out-of-pocket expenses when a taxpayer serves a 501(C)3 organization as a volunteer

would be deductible. The following donations would not be deductible as charitable
gifts, even if made to a qualifying charity.

 Donations to Civic leagues, social and sports clubs, labor unions, and chambers
of commerce
 Gifts to foreign organizations (except certain Canadian, Israeli, and Mexican
charities)
 Groups that are run for personal profit
 Political groups or groups whose purpose is to lobby for law changes
 Cost of raffle, bingo, or lottery tickets
 Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar
groups
 Value of your time or services
 Value of blood given to a blood bank.
See Publication 526, Charitable Contributions for more information.

92. Question ID: 95002988 (Topic: Charitable Contributions)

Wendy donated the following amounts to the SPCA, a qualified 501(c)3 charity. All of
the following are deductible as charitable donations except:

 A. Fair market value of the hours she spent volunteering at the charity.correct
 B. The donation of 10 shares of appreciated stock.wrong
 C. Mileage costs for driving to and from her volunteer shift at the SPCA.
 D. Fair market value of the used kitchen appliances, in good condition, she donated to
the SPCA.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

 Wendy cannot deduct the value of her volunteer hours. The value of a person's time
and service is never deductible. The rest of the choices would all be deductible as a
charitable gift on Schedule A, assuming that substantiation requirements were met.

94. Question ID: 95003080 (Topic: Personal Casualty and Theft Losses)
Brandon's main home was located in the Gulf Coast and was completely destroyed by a
hurricane in 2024. His entire county was later designated a federally declared disaster
area. Brandon's insurance did not cover very much, and he wants to claim a casualty
deduction for the losses he incurred from the disaster. How must he claim this loss?

 A. He can claim the losses on his return using Form 4684.correct

 B. He can claim the losses on Schedule A, as a miscellaneous deduction.
 C. He can claim the losses on Form 4797.
 D. He can claim the losses on Schedule C. wrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for A:

Brandon must use Form 4684, Casualties and Thefts, to report his losses from the
casualty. A deductible casualty loss is an individual's casualty or theft loss of personal-
use property that is attributable to a federally declared disaster. He can deduct casualty
losses in one of two ways:

 On the tax return in the year the disaster happened, or

 File an amended return to deduct the loss in the year prior to the disaster
95. Question ID: 94815899 (Topic: Personal Casualty and Theft Losses)
Janessa and Willard are married, but they file separate tax returns. If Willard wants to
itemize his casualty losses, then _____.

 A. Janessa must take the standard deduction.

 B. Willard cannot itemize his casualty losses if he files MFS.
 C. Janessa must either itemize her deductions or claim a zero standard
deduction.correct
 D. They will have to file jointly.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for C:

 If Willard itemizes his deductions and files MFS, then Janessa is forced to itemize as
well. If one MFS spouse chooses to itemize, the other is required to itemize as well,
even if their itemized deductions are zero. However, if both spouses file MFS and BOTH
choose to take the standard deduction, that is perfectly fine.

96. Question ID: 94849998 (Topic: Personal Casualty and Theft Losses)
In order to deduct a PERSONAL casualty loss, the loss must be:

 A. Personal casualty losses are not deductible.

 B. Less than 30% of your adjusted gross income.
 C. Reduced by the amount of your standard deduction.
 D. Related to a federally declared disaster area.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

In order to deduct a PERSONAL casualty loss, the loss must be related to a federally
declared disaster area. See Publication 547, Casualties, Disasters, and Thefts for more
information on deductible casualty losses.

97. Question ID: 94849812 (Topic: Personal Casualty and Theft Losses)
Which of the following personal casualty losses would be deductible as an itemized
deduction on Schedule A?

 A. A casualty loss suffered in a federal disaster area.correct

 B. The destruction of a personal-use vehicle from an auto accident.
 C. Decline in value of a home due to graffiti.
 D. Theft of personal jewelry from a home robbery.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

A casualty loss suffered in a federal disaster area would be deductible. The Tax Cuts
and Jobs Act eliminated the deduction for personal casualty losses, with the exception
of casualty losses suffered in a federal disaster area.

Note: Casualty losses on business or rental property are still fully deductible, regardless
of whether the losses occur in a federal disaster area or not, but theft and casualty
 losses of business property do not get reported on Schedule A. For more information
about casualty losses, see Publication 547, Casualties, Disasters, and Thefts.

4. Question ID: 94849983 (Topic: Standard Deduction)

Olga is 61 and unmarried. She will file as single. She is a U.S. citizen with a valid SSN.
She is also blind. What is her standard deduction in 2024?

 A. $16,550correct
 B. $14,600
 C. $13,000
 D. $14,700
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

Olga can claim a standard deduction of $16,550 in 2024, ($14,600 + $1,950) which is
the standard deduction for taxpayers who are single, plus an additional standard
deduction amount for taxpayers who are 65 and older/or blind. The standard deduction
amounts for 2024 are:

Filing Status 2024 Standard Deduction

Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
The "additional" standard deduction: For taxpayers who are 65 years old or blind,
they can claim an "additional" 2024 standard deduction of $1,550 ($1,950 if using the
single or HOH filing status). To review more information on the standard deduction, see
IRS Topic No. 551 Standard Deduction.

7. Question ID: 94850007 (Topic: Standard Deduction)

Which of the following taxpayers cannot take the standard deduction (they are forced to
itemize)?

 A. A child with a filing requirement that is also a dependent.

 B. A nonresident alien.correct
 C. A U.S. citizen who lives outside the U.S. for an entire taxable year.
 D. A deceased taxpayer.
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for B:

Nonresident aliens cannot take the standard deduction. All the other individuals listed
are permitted to take the standard deduction or itemize (they can choose). Certain
taxpayers aren't entitled to the standard deduction:

 A married individual filing as married filing separately whose spouse itemizes

deductions
 An individual who was a nonresident alien or dual status alien during the year
 An individual who files a return for a period of less than 12 months due to a
change in his or her annual accounting period (extremely rare)
To review more information on the standard deduction, see IRS Topic No. 551 Standard
Deduction.

11. Question ID: EA P1 928 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
All of the following capital improvements may be itemized and deducted as medical
expenses except:

 A. Cost of modifying a car with special hand controls.

 B. Lowering or modifying kitchen cabinets and equipment.
 C. An elevator costing $12,000 that adds $12,000 to the appraised value of your
home.correct
 D. Cost of constructing wheelchair-accessible ramps for your home.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

An elevator costing $12,000 that adds $12,000 to the appraised value of your home
would not be a deductible medical expense. That is because the improvement
increased the value of the property. If the value of your property is not increased by the
improvement, the entire cost may be included as a medical expense.

Per IRS Publication 502, taxpayers can deduct amounts paid for special equipment
installed in a home, automobile, or other improvements if their main purpose is medical
care. The cost of permanent improvements that increase the value of your property may
 be partly included as a medical expense. The cost of the improvement is reduced by the
increase in the value of your property. The difference is a medical expense. (This
question is based on a prior-year SEE exam question released by the IRS).

Show Other Explanations

15. Question ID: 94849823 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Terrance, age 42, and Delores, age 38, are married and file jointly. Their AGI is
$93,600. Delores breaks her leg during the year and they incur $6,200 of qualified out-
of-pocket medical expenses. What amount can they deduct as medical expenses on
Schedule A?

 A. $410
 B. $0correct
 C. $9,200
 D. $6,200
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for B:

Terrance and Delores can deduct only the amount of their medical expenses that
exceeds 7.5% of their AGI ($93,600 × 7.5% = $7,020.) Since their medical expenses
are lower than 7.5% of their AGI, they are not allowed any medical expense deduction.

To learn more about medical expenses, see IRS Topic No. 502 Medical and Dental
Expenses.

17. Question ID: 94816026 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Last year, Jacob's 22 year old niece, Mary, was his dependent. In 2024, she no longer
qualifies as his dependent because she is no longer a student and she earned $6,000 in
wages, so she does not meet the gross income test to be claimed as a qualifying
relative. However, Jacob paid $1,800 this year for medical expenses Mary incurred last
year when she was his dependent. Which of the following statements is true?

 A. Jacob can claim the $1,800 as an adjustment to income on his own return.
 B. Since she is not Jacob's dependent, Mary is the only one who can claim the $1,800
in medical expenses on her own return.
 C. Jacob can include the $1,800 in figuring this year's medical expense deduction
on his Schedule A.correct
 D. Jacob cannot include his niece's medical expenses on his own tax return.
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for C:

Jacob can include the $1,800 in figuring this year's medical expense deduction on his
Schedule A. According to IRS Publication 502, "a taxpayer can deduct medical
expenses you pay for yourself, as well as those you pay for someone who was your
spouse or your dependent either when the services were provided or when you paid for
them." Since Mary was Jacob's dependent when the services were provided, the
amounts are deductible by Jacob if he is the one who paid them. (This question is
based on a prior EA exam question).

27. Question ID: 94849846 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following is NOT a deductible medical expense?

 A. Nursing home care.

 B. Nonprescription nicotine gum and patches.correct
 C. Transportation for medical care.
 D. Acupuncture treatments.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

The nonprescription nicotine gum and patches would not be a qualifying medical
expense. Taxpayers can deduct transportation related to medical care. The costs of
nursing home care, acupuncture programs, and prescription drugs are also
deductible. With the sole exception of insulin, nonprescription medicines and drugs are
not deductible as medical expenses.

28. Question ID: 94849856 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Norman is blind and has a service dog (a seeing-eye dog for the blind). He works full-
time as a physical therapist and makes $50,000 in wages for the year. Which of the
following statements is TRUE?

 A. This blind person is able to work, and is therefore not considered “disabled” for tax
purposes and therefore cannot claim medical expenses related to their condition.
 B. The veterinary care for the service animal is deductible as a medical
expense.correct
 C. The veterinary care for the service animal is not deductible as a medical expense.
 D. Norman can deduct the costs of veterinary care on Schedule C as a business
expense.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

The veterinary care for Norman's service animal is deductible as a medical expense on
Schedule A. Norman can include in medical expenses the costs of buying, training, and
maintaining his guide dog. To learn more about what qualifies as a deductible medical
expense, see IRS Topic No. 502 Medical and Dental Expenses.

29. Question ID: EA P1 931 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Which of the following expenses are not deductible as medical expenses on Schedule
A?

 A. Wheelchair used for the relief of a sickness or disability.

 B. Swimming lessons, recommended by a doctor for improvement of general
health.correct
 C. Elective vasectomy.
 D. Insulin used for diabetes. The taxpayer does not have a prescription.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

Per IRS Publication 502, swimming lessons are not a deductible medical expense, even
when recommended by a doctor for the improvement of general health. All of the other
items listed are permitted as medical expenses per Publication 502.

Show Other Explanations

31. Question ID: 94849995 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Dawn has multiple sclerosis and is in a wheelchair. She owns her home. During the
current year, she paid the following amounts for improvements to her home to make it
accessible:
  Wheelchair Ramp to front door: $400
 Wheelchair Ramp to back door: $400
 Widening entrance to front door: $600
 Chair lift on stairs: $3,000
 Walk-in bathtub: $4,500
 Decorative tile for walk-in bathtub: $1,000
She also had the following repair costs:

 Cost of repairing chair lift: $150

 Cost of repairing walk-in bathtub: $200
The improvements resulted in the following increases in value to her home:

 Ramps: $0
 Widening entrance to front door: $0
 Chair lift: $1,000
 Walk-in bathtub: $500
 Decorative tile in bathroom: $750
None of the expenses were covered by insurance. What is the amount of her qualifying
medical expenses (before the consideration of any AGI limitations)?

 A. $7,400
 B. $7,750correct
 C. $8,900
 D. $7,650
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 29% of students.

Correct Answer Explanation for B:

The total cost of the improvements is $8,900. The decorative tile is not a deductible
expense. The deductible portion of home-related capital expenditures incurred by a
handicapped individual must be further reduced by the increase in value to the existing
qualifying property ($8,900 - $1,500 = $7,400). The repairs are also deductible ($7,400
+ $350), so Dawn’s qualifying medical expenses would be $7,750 before figuring any
AGI limitation. Based on an example in Publication 502, Medical and Dental Expenses.

32. Question ID: 94849871 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
All of the following are deductible medical expenses EXCEPT _____.
 A. Transportation and lodging for medical care.
 B. Maternity clothingcorrect
 C. Inpatient drug treatment programs.
 D. Prescription drugs.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for B:

Maternity clothing is not a deductible medical expense. Taxpayers may deduct

transportation and lodging related to medical care. The cost of smoking-cessation
programs, inpatient drug treatment, and prescription drugs are also deductible. To learn
more about medical expenses, see IRS Topic No. 502 Medical and Dental Expenses.

33. Question ID: 94849956 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Gerry is self-employed and incurs the following expenses during the year. Ignoring any
income limitations, which of the following would not be allowable as an adjustment to
income on his Form 1040?

 A. One-half of his self-employment tax.

 B. Out of pocket medical expenses he paid to his dentist.correct
 C. Self-employed health insurance.
 D. His contributions to a SIMPLE IRA.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for B:

Self-employed taxpayers can subtract a deductible portion of their self-employment tax

from their income, as well as retirement contributions to a traditional IRA, SIMPLE Plan,
or other qualified plan. Self-employed health insurance is also deductible as an
adjustment to income. Out of pocket medical expenses may be deductible, but only as
an itemized deduction on Schedule A.

34. Question ID: 94849830 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
On January 10, 2024, Andrew paid $11,000 in medical expenses for his wife Louise,
who later died on February 1, 2024. Andrew later meets and marries Bella, and they get
married on December 31, 2024. Andrew and Bella will file jointly. How should the
 medical expenses that Andrew paid for Louise (his late wife) be treated for tax
purposes?

 A. The medical expenses paid for Louise are only deductible on Louise's final Form
1040.
 B. Because Andrew was married to Louise when she received the medical
services, he can include those expenses in figuring his medical expense
deduction for the year.correct
 C. The medical expenses are not deductible by either spouse.
 D. The medical expenses are only deductible by Andrew if he files a joint return with his
late wife (Louise).
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

Because Andrew was married to Louise when she received the medical services, he
can include those expenses in figuring his medical expense deduction for the year.
Andrew cannot file a joint return with his late wife because he remarried in the same
year. He may file a joint return with his NEW wife, which in turn, means that Louise's
final tax return must be filed as MFS. However, since Andrew was married to Louise
when she incurred the medical expenses, and since he paid for the medical expenses,
he is allowed to deduct them on his return, regardless of whether he files a joint return
or a separate return.

This question is based on an example in IRS Publication 502, Medical and Dental
expenses.

35. Question ID: 94849929 (Topic: Medical, Dental, Vision, and Long-Term Care
Expenses)
Katrina was diagnosed with cancer on October 1. She used her own car to go to her
medical appointments, including a long-distance trip to a cancer specialist in another
state. She incurred 2,500 medical-related miles during the year. Based on the allowable
mileage rate for 2024, what is her allowable medical expense for mileage (before
applying any AGI limits)?

 A. $669
 B. $525correct
 C. $322
 D. $554
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for B:

The mileage rate in 2024 for medical purposes is shown below the following:

Mileage Rate Changes 2024

Purpose Mileage Rate

Business 67 cents
Medical/Moving 21 cents
Charitable 14 cents
Her allowable expense for medical mileage is $525 (.21 cents X 2,500 miles). To learn
more about medical expenses, see IRS Topic No. 502 Medical and Dental Expenses.

40. Question ID: 98939133 (Topic: Deductible Taxes)

Danika makes the following payments during the year:

 State income tax: $8,000

 Real estate taxes on her main home: $900
 Charges for sewer and water service: $475
 County assessment for sewer construction: $623
 Annual homeowner's association fees: $1,550
She plans to itemize her deductions. What is her allowable deduction for state and local
taxes on Schedule A?

 A. $8,900correct
 B. $9,375
 C. $8,623
 D. $10,925
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

 Her total deductible taxes on Schedule A are $8,900 ($8,000 + $900 = $8,900). The
local benefit taxes, assessments for sewer construction, utility charges, and the
homeowner's association fees are not deductible.

Taxpayers can deduct certain taxes if they itemize deductions. In order to be deductible,
a tax must have been imposed on the taxpayer and paid by the taxpayer during the tax
year. Deductible taxes include:

 State, local, and foreign income taxes,

 State and local sales taxes,
 Real estate taxes (but not for foreign real estate),
 Personal property taxes (such as the portion of DMV fees based on the value of
the car).
The Tax Cuts and Jobs Act instituted a temporary cap on state and local taxes (also
called the SALT cap). This deduction is capped at $10,000 ($5,000 for MFS filers) until
2025.

Show Other Explanations
















44. Question ID: 98939132 (Topic: Deductible Taxes)

What type of real estate taxes are deductible?

 A. Taxes related to homeowner’s association fees

 B. Taxes based on the assessed value of real propertycorrect

 C. Foreign real property taxes
 D. Gift taxes imposed on gifted real estate.
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

Taxes based on the assessed value of real property are deductible. State and local real
estate taxes are deductible based on the assessed value of the taxpayer’s real property
(such as a house or land).

Some real estate taxes are not deductible, including taxes imposed to finance
improvements of property, such as assessments for streets, sidewalks, and sewer lines.
In addition, itemized charges for services and homeowner’s association fees are not
deductible. In addition, property taxes related to foreign real estate are
not currently deductible as an itemized deduction on Schedule A.

Show Other Explanations

47. Question ID: 94849597 (Topic: Interest Expense)

Brett borrowed $550,000 from a bank to purchase a rental property on Jan 1. He
immediately finds a tenant and the house was rented for the entire year. He paid
$11,000 of interest on the mortgage for the rental property, and an additional $13,000 in
property taxes during the year. He is not a real estate professional. How much of the
expenses can he deduct, and where should he deduct them?

 A. The mortgage interest and property taxes are deductible on Schedule C.

 B. All of the mortgage interest and property taxes are deductible on Schedule
E.correct
 C. All of the mortgage interest and property taxes are deductible on Schedule A.
 D. All of the mortgage interest and up to $10,000 of the property taxes are deductible on
Schedule A.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for B:

Since it is a rental property, and not a personal residence, all of the mortgage interest
and property taxes are deductible on Schedule E.

55. Question ID: 94849896 (Topic: Interest Expense)

Which of the following statements is correct about the mortgage interest deduction?

 A. A taxpayer can deduct mortgage interest only on a primary residence.

 B. A taxpayer can deduct mortgage interest and homeowner dues on a main home and
a second home.
 C. A taxpayer can deduct mortgage interest on up to three homes.
 D. A taxpayer can deduct mortgage interest on a main home and a second
home.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

A taxpayer can deduct mortgage interest on a main home and a second home as an
itemized deduction. A home can be a house, cooperative apartment, condominium,
mobile home, house trailer, or houseboat that has sleeping, cooking, and toilet facilities.
Homeowner dues are not deductible.

61. Question ID: 94849836 (Topic: Interest Expense)

Gina pays the following costs during the year:

 $17,000 in mortgage interest on her primary residence.

 $12,000 in mortgage interest on her vacation home in Las Vegas.
 $400 in HOA fees on her Las Vegas residence.
In November, she forgot to pay the monthly bill on her primary residence on time. Her
mortgage lender assessed a late penalty of $45. She does not rent either home, they
are both personal residences. Her AGI is $80,000. How much of these costs can she
deduct as mortgage interest on her Schedule A?

 A. $17,000
 B. $29,045correct
 C. $29,400
 D. $10,000
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

Gina may deduct the mortgage interest incurred on both homes ($17,000 + $12,000), as
well as the amounts she paid for the late fee to her mortgage lender ($45), for a total
deduction of $29,045. The HOA fees are not deductible on a personal residence. A
taxpayer can take the mortgage interest deduction on up to two homes, as well as late
 fees paid to a mortgage lender. To learn more about deductible mortgage interest,
see Publication 936, Home Mortgage Interest Deduction.

68. Question ID: 94849853 (Topic: Interest Expense)

Kendra and Richard are married and file jointly. During the year, they paid the following
amounts related to their main home:

 $4,280 home mortgage interest that was reported on Form 1098

 $40 late fee for paying the mortgage late one month
 $600 in credit card interest. They used the credit card to pay for a new roof on
their home.
 $1,500 paid for hazard insurance on the property
 $1,700 in property taxes on the home
 $450 in appraisal fees
How much can they report as deductible mortgage interest on Schedule A?

 A. $4,320correct
 B. $7,970
 C. $6,520
 D. $4,280
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for A:

They can deduct $4,320 as mortgage interest ($4,280 + $40 late fee) on Schedule A.
The property tax is deductible, but not as mortgage interest. Instead, it would be
deductible as taxes, and subject to the SALT cap. The other choices would not be
deductible on Schedule A.

70. Question ID: 94849864 (Topic: Charitable Contributions)

Harriet’s AGI is $50,000. She gave her church $2,000 cash and 300 shares of
appreciated Ford Motors stock with a fair market value of $28,000 and a basis of
$22,000. She had held the stock for ten years before deciding to donate it to her church.
She plans to itemize this year. What is her allowable deduction for charitable gifts on
Schedule A for 2024?

 A. $30,000
 B. $17,000correct
 C. $24,000
 D. $25,000
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 31% of students.

Correct Answer Explanation for B:

Harriet’s deduction is limited to $17,000 ($2,000 + $15,000).

The $2,000 cash donated to the church is fully deductible. However, the contribution of
appreciated property (the stock) is subject to a 30%-of-AGI limit. Therefore, Harriet’s
deduction for the appreciated stock is limited to $15,000 (30% limitation × $50,000 AGI).
The unused part of the gift ($13,000) can be carried over to future tax years (for up to
five years). Charitable contribution carryovers are typically limited to five years, except
for qualified conservation easement contributions, which have a carryover period of 15
years.

For more information, see IRS Publication 526, Charitable Contributions.

72. Question ID: 94849962 (Topic: Charitable Contributions)

Helen volunteers in the front office of a qualified charitable organization. The
receptionist is paid $9 an hour for the same work. She estimates that she spent 40
hours volunteering during the year. She also drives her own car to the organization and
has 200 charitable miles for the year. What is Helen's deductible contribution on
Schedule A?

 A. $116
 B. $28correct
 C. $360
 D. $0
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for B:

Helen can't deduct the value of her time or services. However, she can deduct her
charitable miles. The allowable deduction is 14 cents per mile driven in service of
charitable organizations. She had 200 charitable miles, so her allowable deduction is
(200 X 14 cents =$28). For more information, see Publication 526, Charitable
Contributions.

76. Question ID: 94849960 (Topic: Charitable Contributions)

 Barnes pays $300 a year for membership in a university's athletic scholarship program,
which is a qualified charitable organization. The only benefit of membership is that he
has the right to buy one season ticket for a seat in a designated area of the stadium at
the university's home football games. He doesn't actually purchase any football tickets
or go to any games. How much of this is a qualified charitable contribution?

 A. He can only deduct 50% as a charitable contribution ($150).

 B. He cannot deduct a charitable contribution.correct
 C. He can deduct $240 (80% of $300) as a charitable contribution.
 D. He can deduct $300 as a charitable contribution.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for B:

Because of the Tax Cuts and Jobs Act, no deduction is allowed for any amount paid for
the right to purchase tickets for seating at an athletic event in a college athletic stadium.
This is considered a "quid pro quo" contribution. A quid pro quo contribution is a
charitable donation for which the donor receives something from the recipient in
exchange for their funds. The fact that Barnes didn't take advantage of the perk and
purchase any football tickets is irrelevant. For more information, see Publication 526,
Charitable Contributions.

85. Question ID: 94849850 (Topic: Charitable Contributions)

During a fundraising auction at his local church, Lyle pays $800 for a week at a
beachfront hotel, where he spends his vacation in August. He intends his payment as a
contribution, and all the proceeds go to help the church. The FMV of the stay is $750.
What is Lyle’s charitable contribution?

 A. $800
 B. $50correct
 C. $750
 D. $0
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for B:

 Lyle can deduct only $50 because he received the benefit of staying at the property.
Only the portion of the contribution in excess of the FMV of the item qualifies as a
charitable contribution.

86. Question ID: 94849977 (Topic: Charitable Contributions)

The deduction for a motor vehicle donated to charity is usually limited to:

 A. Its appraised value.

 B. The smaller of fair market value or gross proceeds from its sale.correct
 C. Its Blue Book value.
 D. $500
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

If the taxpayer claims a deduction of more than $500 for any donation of a vehicle,
including a boat or an airplane, he can only deduct the smaller of:

 The gross proceeds from the sale of the item by the charity, or
 The fair market value on the date of the contribution.
The charitable organization should provide Form 1098-C, Contributions of Motor
Vehicles, Boats, and Airplanes, or a similar statement that shows the gross proceeds
from the sale of the vehicle donated. If the taxpayer does not attach Form 1098-C to his
return, the maximum deduction that usually can be taken for the donation is limited to
$500.

87. Question ID: 95002969 (Topic: Charitable Contributions)

Zamia pays $105 for a ticket to a church dinner. All the proceeds go to the church. The
ticket to the dinner has an FMV of $20, equal to the cost of the dinner. At the dinner,
Zamia buys $35 worth of raffle tickets, which the church is selling as a fundraiser. She
does not win any raffle prizes. She made no other charitable gifts during the year. What
is Zamia’s allowable charitable deduction on Schedule A?

 A. $85correct
 B. $140
 C. $195
 D. $120
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 72% of students.

 Correct Answer Explanation for A:

Zamia must subtract the value of the benefit received ($20) from the total payment
($105). Therefore, Zamia can deduct $85 as a charitable contribution to the church. The
cost of raffle tickets or other wagering activity is never deductible as a charitable
contribution.

88. Question ID: 94849988 (Topic: Charitable Contributions)

Taxpayers with more than $500 in total noncash contributions must:

 A. Retain a written acknowledgment from the organization. No additional forms or

appraisals are required.
 B. File Form 8283 and retain a written acknowledgment (receipt) from the
organization.correct
 C. Obtain a professional appraisal for the goods.
 D. File Form 8283 and obtain a professional appraisal for the goods.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for B:

Taxpayers with more than $500 in total noncash contributions must file Form 8283,
Noncash Charitable Contributions, and retain a written acknowledgment or receipt from
the organization. For more information, see Publication 526, Charitable Contributions.

91. Question ID: 94851038 (Topic: Charitable Contributions)

What documentation is required for a cash donation of less than $250 to a qualified
charity?

 A. A canceled check, bank or credit union statement, or credit card statement that
shows the name of the qualified organization, the date of the contribution, and the
amount of the contribution.
 B. A receipt (or letter or other written communication) from the qualified organization
showing the name of the organization, the date of the contribution, and the amount of
the contribution.
 C. A canceled check, bank or credit union statement, credit card statement, or a
receipt that shows the name of the qualified organization, the date of the
contribution, and the amount of the contribution.correct
 D. No documentation is required if the amount is less than $250.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.
 This question is answered correctly on the first attempt by 36% of students.

Correct Answer Explanation for C:

When making cash gifts of less than $250, the taxpayer may substantiate the deduction
using a canceled check, credit card statement or a simple receipt from the charity. A
receipt from the charity is also acceptable. Cash gifts of more than $250 require a note
from the charity that shows the amount, date and name of the donor.

93. Question ID: 94849844 (Topic: Charitable Contributions)

Farah volunteered to work at her church’s annual fundraiser, a yard sale. Which of the
following expenses are not allowed as a charitable deduction?

 A. Cash contribution to purchase office supplies for the yard sale.

 B. Fair market value of used kitchen appliances, in good condition, that she donated to
the church.
 C. Fair market value of the hours she spent staffing the yard sale.correct
 D. Her transportation expenses for driving to and from the church during the sale.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

The value of a person's time and service is not deductible. All of the other expenses are
allowed. To learn more about charitable contributions, see IRS Topic No. 506 Charitable
Contributions.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

3. Question ID: 94849911 (Topic: Other Itemized Deductions)

Which of the following taxes are deductible on Schedule A as an itemized deduction?

 A. State and local income taxes.correct

 B. Self-Employment taxes.wrong
 C. Federal income taxes.
 D. State inheritance tax.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

State and local income taxes are an allowable deduction on Schedule A. None of the
other taxes listed are deductible on Schedule A.

4. Question ID: 94849973 (Topic: Other Itemized Deductions)

Harinder is a self-employed therapist who sees clients in his home. He has a qualified
home office. This year, he decides to use the simplified method to calculate his home
office expenses. His home office is 210 square feet. What is the maximum amount that
he is allowed to deduct?

 A. A deduction of $5 per square foot, with a maximum allowable square footage of 210
square feet, for a maximum deduction of $1,050.correct
 B. A deduction of $1 per square foot, with a maximum allowable square footage
of 400 square feet, for a maximum deduction of $400.wrong
 C. A deduction of $1 per square foot, with a maximum allowable square footage of 210
square feet, for a maximum deduction of $210.
 D. A deduction of $5 per square foot, with a maximum allowable square footage of 350
square feet, for a maximum deduction of $1,750.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for A:

Using the simplified method, he would be allowed a deduction of $5 per square foot,
with his office’s square footage of 210 square feet, for a maximum deduction of $1,050.

Highlights of the simplified home office deduction:

  Standard deduction of $5 per square foot of home used for business (maximum
300 square feet).
 Allowable home-related itemized deductions claimed in full on Schedule A. (For
example: Mortgage interest, real estate taxes).
 No home depreciation deduction or later recapture of depreciation for the years
the simplified option is used.
Learn more about the Simplified Home Office Deduction.

5. Question ID: 94850004 (Topic: Other Itemized Deductions)

Which of the following theft losses are deductible in 2024?

 A. Theft of a diamond ring from a home safe.

 B. Theft of a car stereo from a personal-use vehicle. wrong
 C. Theft losses from Ponzi-type investment schemes.correct
 D. Theft of cash from a personal savings account from wire fraud.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

A theft loss from a Ponzi investment scheme is subject to special rules. The loss is not
subject to the normal capital loss limits on investments. The loss is deductible in the
year of discovery. For more information, see the Instructions for Form 4684.
Additionally, review Help for Victims of Ponzi Investment Schemes and Publication 547.
The other losses listed would be personal losses and not deductible.

6. Question ID: 94849895 (Topic: Other Itemized Deductions)

Which of the following is not allowed as an itemized deduction on Schedule A?

 A. Impairment-related work expenses of persons with disabilities.

 B. Charitable gifts made to qualifying charities.wrong
 C. Losses from the sale of stock.correct
 D. Gambling losses up to the extent of gambling winnings.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

Losses from the sale of stock (capital losses) are not reported on Schedule A. Capital
losses from the sale of stock are reported on Schedule D.
 7. Question ID: 94849882 (Topic: Other Itemized Deductions)
How long can investment interest expense in excess of investment income be carried
forward?

 A. The carryforward period is 20 years.

 B. You cannot carry forward investment interest expense.wrong
 C. Investment interest expense can be carried forward indefinitely.correct
 D. The carryforward period is 5 years, with a carryback of 2 years.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for C:

Investment interest expense in excess of investment income can be carried forward

indefinitely (until the taxpayer's death). For more information, see Publication 550,
Investment Income and Expenses.

8. Question ID: 94849811 (Topic: Other Itemized Deductions)

Which of the following examples would be considered a deductible non-business bad
debt?

 A. A loan to a friend to put in a new bathroom in their main home. The loan becomes
uncollectible in the current year.correct
 B. Loans to clients and suppliers.wrong
 C. Business loan guarantees.
 D. Credit sales to customers.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for A:

The loan to a friend would not be business-related, so it would be treated as a non-

business bad debt. A taxpayer may report a non-business bad debt as a short-term
capital loss (subject to limitations) on Form 8949, Sales and Other Dispositions of
Capital Assets.

To learn more about deductible bad debts, see IRS Topic No. 453 Bad Debt Deduction.

10. Question ID: 94849958 (Topic: Other Itemized Deductions)

Which of the following investment expenses is still allowable in 2024 as an itemized
deduction on Schedule A?
 A. Investment interest expensecorrect
 B. Legal fees to form a grantor trust to hold a primary residence
 C. Advisory fees paid to a financial planner
 D. The cost of a safe deposit box in a bankwrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for A:

The Tax Cuts and Jobs Act suspended certain “miscellaneous itemized deductions,”
which included investment fees and most investment expenses (i.e., tax prep fees,
advisory expenses, safe deposit box fees). However, investment interest expense is still
deductible. Investment interest expense is the interest paid on money borrowed to
purchase taxable investments.

12. Question ID: 94815857 (Topic: Other Itemized Deductions)

Paulina is married but uses the Married Filing Separately (MFS) status. She did not live
with her husband all year. However, they are not legally separated or divorced. Which of
the following deductions would Paulina be ineligible to claim due to her filing status?

 A. Traditional IRA deduction.

 B. Student Loan interest deduction. correct
 C. Deduction for casualty and theft loss(es) from a federally declared disaster.
 D. Medical expense deduction. wrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

The student loan interest deduction cannot be claimed by married taxpayers who file as
Married Filing Separately. All of the other deductions listed could potentially be claimed
by a taxpayer filing MFS.

14. Question ID: 94849713 (Topic: Other Itemized Deductions)

Finnegan owns a duplex and lives in one half while renting the other half to a tenant.
Both units have the same square footage. Last year, Finnegan paid a total of $18,000 in
mortgage interest and $1,000 in real estate taxes for the entire property. How should
this be reported on his tax return?
 A. He can deduct $9,000 in mortgage interest on Schedule E (Form 1040). If he
itemizes his deductions, he can deduct the other $9,000 in mortgage interest and
$1,000 in real estate taxes on Schedule A (Form 1040).wrong
 B. He can deduct $9,000 in mortgage interest and $500 in real estate taxes on
Schedule E (Form 1040). If he itemizes his deductions, he can deduct the other $9,000
in mortgage interest and $500 in real estate taxes on Schedule A (Form 1040).correct
 C. He can deduct $18,000 in mortgage interest and $1,000 in real estate taxes on
Schedule E (Form 1040).
 D. He should deduct $18,000 in mortgage interest and $1,000 in real estate taxes on
Schedule A (Form 1040).
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

Finnegan can deduct $9,000 in mortgage interest and $500 in real estate taxes on
Schedule E. If he itemizes his deductions, he can deduct the other $9,000 in mortgage
interest and $500 in real estate taxes on Schedule A (Form 1040). If an expense is for
both rental use and personal use, such as mortgage interest or heat for the entire
house, a taxpayer must divide the expense between rental use and personal use.

Note: This is a common rental scenario where a taxpayer who owns a duplex lives in
one unit and rents out the other side. Certain expenses apply to the entire property,
such as mortgage interest and real estate taxes, and must be split to determine rental
and personal expenses.

15. Question ID: 94849833 (Topic: Other Itemized Deductions)

Caesar itemizes deductions. The California Department of Motor Vehicles sent him an
annual vehicle registration renewal notice for his car that had the following fees:

 License fee: $124 (based on the value of the vehicle).

 Weight fee: $65 (based on the weight of the vehicle).
 Smog abatement fee: $20.
What portion of the DMV fees is Caesar allowed to deduct on his Schedule A?

 A. $189wrong
 B. $65
 C. $124correct
 D. $209
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.
 This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for C:

Caesar can deduct the portion of the registration fee that is based on the value of his
vehicle, $124. Personal property taxes are deductible if they are:

 Charged on personal property, including cars, boats, or items used in a business

such as equipment and furniture;
 Based on the value of the property; and
 Charged on a yearly basis, even if collected more or less frequently than once a
year.
16. Question ID: 94849822 (Topic: Other Itemized Deductions)
Kathy paid DMV fees on three different vehicles during the year. She also pays a
renewal fee for vanity plates. All of the vehicles were personal-use. Which of the
following is correct?

 A. She can deduct DMV fees only if she itemizes deductions. The amounts would be
deductible on Schedule A as personal property taxes.correct
 B. DMV fees are not deductible.
 C. She cannot take a deduction for fees paid on personal-use vehicles. Property
taxes are deductible only if they are related to real property.wrong
 D. The DMV fees are deductible, as well as the fees for her vanity plates, because the
fees are all paid to the DMV.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for A:

Kathy can deduct DMV fees and other personal property taxes only if she itemizes
deductions. The deduction is claimed on Schedule A. The cost of the vanity plates
would not be a deductible expense.

17. Question ID: 94849814 (Topic: Other Itemized Deductions)

Odell pays a variety of fees during the year. Which of the following are deductible on
Schedule A if he itemizes his deductions?

 A. Fees for paying a parking ticket late.

 B. A flat $2 "DMV modernization fee" when he pays his vehicle registration.
 C. Home Owners Association landscaping fees of $500 on his personal
residence.wrong
 D. DMV fees.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

The DMV fees would be the only allowable expense on Schedule A. None of the other
items listed are deductible.

18. Question ID: 94849855 (Topic: Child and Dependent Care Credit)
Penelope, age 42, and James, age 58, are married and will file jointly. They have no
dependents. Penelope's husband, James, is permanently disabled and receives SSI
(Supplemental Security Income). Penelope earns $48,000 per year as a speech
therapist. James has an in-home caregiver a few days a week to help him while
Penelope is at work. The caregiver for James was hired through an agency, and the
total cost was $4,900 in 2024. Can they claim a credit for the cost of the caregiver for
James?

 A. Yes, they can claim the Child and Dependent Care Credit on their joint return. correct
 B. Yes, they can claim the Disabled Access Credit on their joint return. wrong
 C. No, the cost of the caregiver is a personal expense.
 D. Yes, they can claim the Child Tax Credit on their joint return.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

Penelope and James can claim the Child and Dependent Care Credit on their joint
return for the cost of James' caregiver. The Child and Dependent Care Credit is a
tax credit that is typically associated with the cost of daycare for minor children, but this
credit also applies to the care expenses of other disabled dependents (such as
dependent parents) as well as disabled spouses. The credit may be claimed by
taxpayers who pay someone to take care of their qualifying person. In this scenario,
James (the husband) is permanently disabled, and Penelope is working, so they can
claim a credit for his care on their jointly-filed tax return.

To learn more about the Child and Dependent Care Credit, see Child and Dependent
Care Credit FAQs.

19. Question ID: 94850014 (Topic: Child and Dependent Care Credit)
 Benny works full-time. His wife, Marina, is disabled and does not work. Benny wants to
claim the Child and Dependent Care Credit. Assuming all of the individuals below are
listed on Benny's return, which of the following would not be a "qualifying person" for the
purposes of this credit?

 A. A 17-year-old teen attending high school full-time (not disabled)correct

 B. A disabled parent
 C. An incapacitated spouse
 D. A healthy infant that is less than 12 months oldwrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

A 17-year-old teen would not be a qualifying person for this credit (unless the child was
disabled). The Child and Dependent Care Credit is a federal tax benefit that helps
families pay expenses for child care needed to work. The credit is also available to
taxpayers who must pay for the care of an incapacitated spouse or another disabled
adult dependent. A "qualifying person" for the Child and Dependent Care Credit is: (a)A
dependent who is under age 13 when the care is provided, (b) a spouse who is disabled
or incapacitated (c) another adult dependent who is disabled (such as a parent).

20. Question ID: 94850016 (Topic: Child and Dependent Care Credit)
Franny is a 45-year-old doctor. She does not have any children. She does have people
that live with her. Which of the following may be a "qualifying person" for the Child and
Dependent Care Credit?

 A. Franny's live-in housemaid, who is 23 years old.wrong

 B. Franny's father, who is 78 years old and not disabled.
 C. Franny's disabled mother, who is 77 years old and in an adult daycare facility.correct
 D. None of these are qualifying persons for the credit because they are all over the age
of 13.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Franny's mother, who is 77 years old and in an adult daycare facility could be a
qualifying person for the purposes of the credit. The child and dependent care credit is
for (1) care for a child under age 13 or (2) care for a disabled dependent or a disabled
spouse of any age.

21. Question ID: 94849862 (Topic: Child and Dependent Care Credit)
 Betty works full-time as an insurance agent. She is unmarried and has three minor
children and an adult daughter, Serena, who is age 27 and completely disabled. Betty
has the following childcare expenses during the year:

 Daycare for her son Artair, 9 years old: $2,200.

 Summer camp for her son Ethan, 15 years old: $600.
 Daycare for her daughter Serena, 27 years old (disabled): $3,250.
 Daycare for her son Jude, 13 years old: $1,200.
Based on this information, what is the total of her qualifying childcare expenses for
determining the Child and Dependent Care Credit (before applying any limitations of the
credit)?

 A. $4,200wrong
 B. $7,050
 C. $5,450correct
 D. $6,650
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

Only the amounts paid for Artair and Serena ($2,200 + $3,250 = $5,450) are qualifying
expenses for the Child and Dependent Care Credit. The amounts paid for Jude and
Ethan do not qualify because both of those children are over the age of 13 (and not
disabled). For this credit, a qualifying person is a dependent child age 12 or younger
(UNDER the age of 13) when the care was provided, unless the qualifying person is
disabled. Since Serena is disabled, the age limits do not apply to her. For the purposes
of this credit, taxpayers can combine costs for multiple dependents.

23. Question ID: 94849938 (Topic: Child and Dependent Care Credit)
Which of the following individuals meets the qualifying person eligibility test for the Child
and Dependent Care Credit?

 A. Tasha, 13, a full-time student supported by her parents. She is not disabled.
 B. Lulu, 52, who is disabled and unable to care for herself, and is married to Alton, an
employed construction worker.correct
 C. Leroy, 80, who lives at home with his son, who pays to have Leroy's meals
delivered to the home daily.wrong
 D. Jeremy, 5, who is taken care of by his mother at home all day.
Study Unit 13: Individual Tax Credits covers the information for this question.
 This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for B:

The expenses for Lulu, 52, (who is unable to care for herself), and is married to Alton,
would be eligible expenses for the Child and Dependent Care Credit. The Child and
Dependent Care Credit also applies to spouses (if they are disabled). So, if a taxpayer
has a dependent spouse that is unable to care for herself or himself, then the cost of
care (such as a home health aide or a private nurse) would also be a qualifying cost for
the Child and Dependent Care Credit. Answer "A" is incorrect because the child is being
taken care of by his mother, not a daycare worker. Answer "B" is incorrect because only
children who are under 13 years of age qualify for the credit (unless they are disabled).
Answer "C" is incorrect because Leroy is not disabled, and the cost of meal delivery to
an otherwise healthy person is not a deductible expense.

24. Question ID: 94849834 (Topic: Child and Dependent Care Credit)
Rosalie works full time and has four dependents, for which she pays daycare and
educational costs. Her AGI is $82,000, all of which is from wages. Which of the
following expenses, listed below, would NOT be a qualifying expense for the purposes
of the Child and Dependent Care Credit?

 A. $4,000 in before-school care for Betty, her nine-year-old child daughter. wrong
 B. $3,900 in adult daycare for Rosa, who is her 72-year-old mother. Rosa is disabled.
 C. $6,000 in private school tuition for Noel, a 5-year-old kindergarten student.correct
 D. $300 in transportation costs for her 12-year-old son, Kevin, to be taken to a childcare
center after school.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

The $6,000 in private school tuition for Noel, a 5-year-old kindergarten student, would
not be a qualifying expense, because it is not for daycare, it is for private school tuition.
The Child and Dependent Care Credit is a credit for childcare expenses that allow
taxpayers to work or to seek work. It is based on a percentage of childcare expenses for
children under age 13 and for disabled dependents of any age. The following kinds of
expenses qualify for the credit:

 Education: Preschool or other programs below the level of kindergarten; or

before/after-school care for a child in kindergarten or above.
 Care outside the home for a child under 13 or in a care center for a disabled
dependent.
 Transportation for a care provider to take a qualifying person to or from a place
where care is provided.
  Fees and deposits paid to an agency or preschool to acquire childcare.
 Household services, if they are at least partly for the well-being and protection of
a qualifying person.
Examples of childcare expenses that do NOT qualify include:

 Tuition costs for children in kindergarten and above.

 Summer school or tutoring programs.
 The cost of sending a child to an overnight camp (but day camps generally do
qualify).
 The cost of transportation not provided by a care provider.
 A forfeited deposit to a daycare center (since it is not for care and therefore not a
work-related expense).
To learn more about the Child and Dependent Care Credit, see IRS Topic No. 602 Child
and Dependent Care Credit.

25. Question ID: 94849865 (Topic: Child and Dependent Care Credit)
Layla is unmarried and has one dependent child, age 7. She earned $40,000 in wages
during the year, working full-time as a cashier. Which one of the following could prevent
her from qualifying for the Child and Dependent Care Credit?

 A. Using more than one care providerwrong

 B. Unearned income of more than $5,000
 C. Not identifying the care provider on the tax returncorrect
 D. Living outside the United States for more than six months
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

Not identifying the care provider on the tax return could prevent her from qualifying for
the child and dependent care credit. To identify the care provider, the taxpayer must
give the provider’s name, address, and taxpayer identification number (TIN). The
taxpayer can use Form W-10, Dependent Care Provider’s Identification and
Certification, to request this information from the caregiver. If the care provider's
information is incorrect or incomplete, the credit may not be allowed. For more
information on this credit, see Child and Dependent Care Credit FAQs. (This question is
based on a prior-year released exam question).

26. Question ID: 94849835 (Topic: Child and Dependent Care Credit)
Daphne paid a $250 deposit with a preschool to reserve a place for her three-year-old
child. Later, she changed jobs and was unable to send her child to that particular
 preschool, so she forfeited the deposit. She found another preschool and had $4,000 of
qualifying daycare costs during the year. Which of the following is correct?

 A. Daphne can deduct the deposit because she took her child to another
preschool.wrong
 B. The forfeited deposit is deductible.
 C. The forfeited deposit is not deductible.correct
 D. The forfeited deposit is a deduction on Schedule A.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

A forfeited deposit is not actually for the care of a qualifying person, so it cannot be
deducted as a childcare expense and does not qualify for the Child and Dependent
Care Credit. The Child and Dependent Care Credit is a credit for childcare expenses
that allow taxpayers to work or to seek work. Examples of childcare expenses that do
NOT qualify for this credit include:

 Tuition costs for children in kindergarten and above.

 Summer school or tutoring programs.
 The cost of sending a child to an overnight camp (but day camps generally do
qualify).
 The cost of transportation not provided by a care provider.
 A forfeited deposit to a daycare center (since it is not for care and therefore not a
work-related expense).
To learn more about the Child and Dependent Care Credit, see IRS Topic No. 602 Child
and Dependent Care Credit.

27. Question ID: 94849908 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Sabrina is taking care of her cousin's child, age 8, who was lawfully placed in her home
on February 1, by the foster care system after her cousin went to jail. Sabrina receives
foster care payments for the child. Which of the following is true about the Child Tax
Credit?

 A. Sabrina may not take the child tax credit because she receives government
assistance.wrong
 B. Sabrina is allowed to take the child tax credit for this child.correct
 C. Only the child's parent can claim the child tax credit.
 D. Sabrina may not take the child tax credit because her cousin's child fails the
relationship test.
 Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

The child is considered her Qualifying Child for the Child Tax Credit because she is the
child's foster parent. Because the relationship test is passed, Sabrina may claim the
Child Tax Credit.

29. Question ID: 94849838 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Frank files head of household. He has one 7-year-old son, named Paul, who is his
qualifying child. Frank lives and works full-time in the United States and makes
$188,000 in wages in 2024. What is the maximum amount of Child Tax Credit that
Frank can claim on his tax return?

 A. $0, his AGI is too high to claim the credit. wrong

 B. $2,000correct
 C. $2,500
 D. $1,000
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

Based on his AGI, Frank is eligible for a Child Tax Credit of $2,000 for his son Paul. To
learn more about the Child Tax Credit, see the Child Tax Credit FAQ.

30. Question ID: 98939101 (Topic: Child Tax Credit and Additional Child Tax
Credit)
What is the age requirement for a child to be eligible for the Child Tax Credit (CTC) or
Additional Child Tax Credit (ACTC)?

 A. The child must be under the age of 18 or under the age of 24 and a full-time student
at the start of the tax year.
 B. The child must be under the age of 17 at the end of the tax year.correct
 C. The child must be under the age of 19 at any point during the tax year.
 D. There is no age limit for the child if the child is disabled.wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Incorrect Answer Explanation for D:

 In order to qualify for the Child Tax Credit or Additional Child Tax Credit, at the end of
the tax year, the child must be under the applicable age limit (which is 17 in 2024).
There are no exceptions.

Correct Answer Explanation for B:

In order to qualify for the Child Tax Credit or Additional Child Tax Credit, at the end of
the tax year, the child must be under the applicable age limit (which is 17 in 2024).
There are no exceptions.

Show Other Explanations

32. Question ID: 94849925 (Topic: Child Tax Credit and Additional Child Tax
Credit)
In general, for a child to qualify for the Child Tax Credit, the child must have lived with
the taxpayer for MORE THAN HALF of the tax year. This is also called the "residency
test" for the Child Tax Credit. There are exceptions to the residency test, however.
Which of the following is NOT an exception to the residency test for the Child Tax
Credit?

 A. A child that is legally emancipated under state law and lives apart from his
parents.correct
 B. A child who died during the tax year.
 C. A child who was born during the tax year.wrong
 D. Temporary absences for school or medical care.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for A:

The Child Tax Credit includes a residency test. The child must generally have lived with
the taxpayer for more than half of the year in order to meet the residency test. There are
exceptions to this rule. A child who was born (or died) during the tax year is considered
to have lived with the taxpayer for the entire year. Temporary absences, such as for
school, vacation, business, medical care, military service, or detention in a juvenile
facility, also count as time "lived with the taxpayer". There also are exceptions for
kidnapped children and children of divorced or separated parents. However, if a child is
legally emancipated under state law, the child is treated as not living with either parent
for IRS purposes.

To learn more about the Child Tax Credit, see Child Tax Credit FAQ.

35. Question ID: 94850000 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Paige and Santo are married and file jointly. They have four dependents, listed below:
  Rosalie, who is Paige's mother and age 62.
 Oneta, who is Paige's grandmother. She is age 91 and disabled
 Romeo, who is Santo's brother, age 25 and a student
 Ronnie, Paige's nephew, who is 16. Ronnie has an ITIN, not an SSN
All the dependents live with Paige and Santos. None of the dependents have any
taxable income, although Oneta and Rosalie both receive SSI. All the dependents have
valid Social Security numbers, except for Ronnie, who has an ITIN. Based on this
information, what is the maximum Other Dependent Credit (ODC) Santo and Paige can
claim on their joint tax return?

 A. $1,000wrong
 B. $500
 C. $1,500
 D. $2,000correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 38% of students.

Correct Answer Explanation for D:

The maximum ODC credit is $500 for each dependent, so Paige and Santos would
qualify for $2,000 ($500 for each dependent, and they have 4 qualifying dependents).

None of their dependents would qualify for the Child Tax Credit (they are all above the
age limit for the CTC, except for Ronnie, but Ronnie doesn't have a valid SSN, he only
has an ITIN). The ODC can be claimed for:

 Dependents of any age, including those who are age 18 or older.

 Dependents who have Social Security numbers or individual taxpayer
identification numbers (ITINs).
 Dependent parents or other qualifying relatives supported by the taxpayer.
 Dependents living with the taxpayer who aren't related to the taxpayer.
The ODC credit begins to phase out for married couples filing a joint tax return at
$400,000 ($200,000 for all other filing statuses). See an overview of the Credit for Other
Dependents, or ODC.

36. Question ID: 94850013 (Topic: Adoption Credits)

How many years can unused adoption credits be carried over?

 A. 0 years (no carryover)wrong

 B. 10 years
 C. 1 year
 D. 5 yearscorrect
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

The adoption credit is not refundable, but any amount the taxpayer cannot claim on the
current year’s return can be carried over for up to five years.

39. Question ID: 94849955 (Topic: Adoption Credits)

To claim the adoption credit, the taxpayer must file which form along with their tax
return?

 A. Form 8826
 B. Form 8275wrong
 C. Form 8839correct
 D. Form 8308
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

To claim the adoption credit, the taxpayer must file Form 8839, Qualified Adoption
Expenses, along with their tax return.

40. Question ID: 94849818 (Topic: Adoption Credits)

The Adoption Credit is nonrefundable, but any unused adoption credit may be carried
forward for _____ year(s).

 A. Two.wrong
 B. You cannot carry forward the adoption credit.
 C. Five.correct
 D. One.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for C:

The allowable carryover for the adoption credit is five years for any unused credits. To
learn more about the Adoption Credit, see IRS Topic No. 607, Adoption Credit and
Adoption Assistance Programs.
 42. Question ID: 94849957 (Topic: Adoption Credits)
Which of the following expenses is NOT a qualifying expense for the adoption credit?

 A. Costs for adopting a foreign child.

 B. Costs for an unsuccessful adoption.wrong
 C. Costs for travel related to the adoption.
 D. Costs for adopting a step-child (the child of one’s spouse).correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for D:

Costs for adopting a step-child, or the child of one’s spouse, are not qualifying adoption
expenses. The costs of a surrogate parenting arrangement also are not deductible.

43. Question ID: 94849966 (Topic: Adoption Credits)

Bettie and Tony legally adopted a foster child with special needs on February 1, 2024.
The child is a U.S. citizen. Their total out-of-pocket adoption expenses totaled $4,300,
none of which were reimbursed. What is the maximum amount of her adoption credit?

 A. $16,550
 B. $4,300wrong
 C. $16,810correct
 D. $2,000
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

For adoptions finalized in 2024, there is a federal adoption tax credit of up to $16,810
per child. Bettie and Tony adopted a child with special needs, which means that they
can claim the full adoption credit, even though their actual expenses are much less. The
adoption credit is not refundable, however. So if they cannot use up the entire credit in
the current year, any excess of tax liability may be carried forward for up to five years.

45. Question ID: 94849825 (Topic: Education Credits)

Eudora is age 27 and a full-time student in her sophomore year of college. During the
year, Eudora paid $3,000 for tuition, $200 for required books, and $5,000 for room and
board at her university. She is a degree candidate. To assist with these costs, she was
awarded a $2,000 scholarship and a $4,000 student loan. She used the scholarship to
offset her tuition costs. She is not required to pay the student loan until she graduates.
What are her qualified education expenses for the year?
 A. $8,200
 B. $8,000
 C. $3,200wrong
 D. $1,200correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

For purposes of the education credit, Eudora must first subtract the tax-free scholarship
from her tuition and books. The $5,000 paid for room and board is not a qualifying
expense. Unlike the scholarship, the student loan is not considered tax-free educational
assistance, so it does not reduce the qualified expenses. Eudora is treated as having
paid $1,200 of qualified expenses ([$3,000 tuition + $200 books] – $2,000 scholarship).

46. Question ID: 98939098 (Topic: Education Credits)

Which of the following statements about the American Opportunity Tax Credit (AOTC) is
correct?

 A. The AOTC can be claimed regardless of the educational institution’s eligibility to

participate in a student aid program administered by the U.S. Department of Education.
 B. The AOTC can be claimed for any level of education.
 C. The AOTC can be claimed for the first four years of post-secondary education
only.correct
 D. The AOTC can be claimed without attending an eligible educational
institution.wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Incorrect Answer Explanation for D:

The AOTC can be claimed for the first four years of post-secondary education only. The
AOTC is for post-secondary education, which may include education at a college,
university, or technical school. The school must be eligible to participate in a student aid
program administered by the U.S. Department of Education.

Correct Answer Explanation for C:

The AOTC can be claimed for the first four years of post-secondary education only. The
AOTC is for post-secondary education, which may include education at a college,
university, or technical school. The school must be eligible to participate in a student aid
program administered by the U.S. Department of Education.
 Show Other Explanations

47. Question ID: 94815829 (Topic: Education Credits)

Oswald is 27 years old and files single. He earned $24,000 in wages during the year.
He paid $4,427 in tuition and fees to an automotive college for an associate's degree
program. This is his first year in college. He has a past felony drug conviction for
cocaine possession. What education credit (if any) is Oswald eligible for?

 A. American Opportunity Credit or the Lifetime Learning Credit

 B. He is not eligible for any education credits because of his felony
conviction.wrong
 C. Lifetime Learning Creditcorrect
 D. American Opportunity Credit
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for C:

Oswald meets the requirements to take the Lifetime Learning Credit. There are two
education credits available: the American Opportunity Tax Credit (AOTC) and the
Lifetime Learning Credit, but Oswald is not eligible for the American Opportunity Credit
because of his felony drug conviction.

48. Question ID: 94815850 (Topic: Education Credits)

Anias is 25 years old and single. She received Form 1098-T from the university that she
attends. The form shows her tuition was $8,500 and that she received a $1,500
scholarship. She also paid $250 in mandatory student health fees during the year. The
student health fees were not included on her tuition statement, but she had the receipt
for the payment. She had no other scholarships or nontaxable payments. Her maximum
qualifying expenses for figuring an education credit would be _____________.

 A. $7,250wrong
 B. $7,000correct
 C. $8,750
 D. $8,500
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

Her maximum qualifying expenses for the education credit would be $7,000 ($8,500 -
$1,500). The student health fees would not be included because it is not a qualifying
 education expense, even if required by the college. The following expenses are not
qualifying educational expenses:

 Room and board, insurance, medical expenses (including student health fees),
transportation costs, or other similar personal, living, or family expenses.
 Any course of instruction or other education involving sports, games, or hobbies,
unless the course is part of the student’s degree program or (for the lifetime
learning credit) helps the student to acquire or improve job skills.
49. Question ID: 94849878 (Topic: Education Credits)
Bernice is 25 and single. She enrolled in college for the fall semester. She meets all the
requirements to claim the American Opportunity Credit. During the year, Bernice pays
$5,000 in college tuition and $4,000 for room and board. Bernice received a $5,000 Pell
grant and took out a $2,750 student loan to pay her remaining expenses. She paid the
remaining $1,250 out of her own savings. She makes $15,000 in wages from a part-
time job. Bernice chooses to apply the Pell grant entirely to her tuition expenses. Based
on the information in this scenario, what is the amount of Bernice's American
Opportunity Credit?

 A. $2,500.
 B. $1,250.wrong
 C. $2,750.
 D. $0correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for D:

Her credit amount will be $0. If she chooses to apply the Pell grant to the qualified
education expenses, it will qualify as a tax-free scholarship. Bernice will not include any
part of the Pell grant in gross income, and it will be nontaxable. After reducing qualified
education expenses by the tax-free scholarship, Bernice will have $0 ($5,000 - $5,000)
of adjusted qualified education expenses available to figure her American Opportunity
Credit. Her credit will be $0.

50. Question ID: 98939099 (Topic: Education Credits)

What is the maximum credit amount of the Credit for Other Dependents (ODC)?

 A. $2,000
 B. $100
 C. $2,500wrong
 D. $500correct
Study Unit 13: Individual Tax Credits covers the information for this question.
 This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for C:

The Credit for Other Dependents, also called the Other Dependent Credit (ODC)
is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each
eligible dependent. This credit is nonrefundable.

Correct Answer Explanation for D:

The Credit for Other Dependents, also called the Other Dependent Credit (ODC)
is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each
eligible dependent. This credit is nonrefundable.

Show Other Explanations

52. Question ID: 94815851 (Topic: Education Credits)

Keely paid $4,000 for tuition and $5,000 for room and board at an eligible university.
She also paid $200 in mandatory student activity fees and $425 for required textbooks.
Which of these costs would not be allowable as a qualified education expense for the
American Opportunity Credit?

 A. $200 in student activity fees.

 B. $425 in required textbooks.
 C. $4,000 in tuition.wrong
 D. $5,000 in room and board.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

The amounts paid for room and board are not a qualified expense for the education
credits. The following expenses do not qualify:

 Room and board, insurance, medical expenses (including student health fees),
transportation costs, or other similar personal, living, or family expenses.
 Any course of instruction or other education involving sports, games, or hobbies,
unless the course is part of the student's degree program or (for the lifetime
learning credit) helps the student to acquire or improve job skills.
54. Question ID: 94849993 (Topic: Education Credits)
A Coverdell ESA can be used to pay qualified higher education expenses or qualified
elementary and secondary education expenses, but there are maximum contribution
limits. What is the maximum amount that can be contributed to a Coverdell ESA per
beneficiary in a single year?
 A. $7,000
 B. $6,000wrong
 C. $2,000correct
 D. $15,000
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

A Coverdell ESA can be used to pay either qualified higher education expenses or
qualified elementary and secondary education expenses. Income limits apply to
contributors, and the total contributions for the beneficiary of this account can't be more
than $2,000 in any year, no matter how many accounts have been established. An
"allowable beneficiary" of a Coverdell ESA is someone who is under age 18 or is a
special needs beneficiary. For more on this topic, see IRS Topic No. 310 Coverdell
Education Savings Accounts.

55. Question ID: 94849847 (Topic: Education Credits)

Aaron, age 61, is unmarried and has two qualifying children (Giselle and Lynette) who
are full-time college students. Aaron pays their tuition and other education expenses.
Giselle is 21 and a junior in college. Giselle had $5,000 of tuition expenses. Lynette is
23 and attends graduate school for her master’s degree. Lynette had $6,000 of tuition
expenses during the year. Assuming that Aaron meets all the other requirements for
claiming the credit, what is the maximum American Opportunity Tax Credit that he can
claim on his tax return?

 A. He can claim $2,500 as an American Opportunity Credit for Giselle, and another
$2,500 for Lynette.
 B. He can claim a total of $8,000 ($4,000 for each student) as an American
Opportunity Credit.wrong
 C. He can claim $4,000 as an American Opportunity Tax Credit for Giselle only.
 D. He can claim $2,500 as an American Opportunity Credit for Giselle only.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for D:

Aaron can claim $2,500 as an American Opportunity Credit for Giselle only. The
American Opportunity Credit is a maximum credit of up to $2,500 for the cost of
qualified tuition and related expenses paid during the taxable year for each eligible
student. Taxpayers receive a tax credit based on 100% of the first $2,000 of tuition,
fees, and course materials paid, plus 25% of the next $2,000 of qualified expenses paid.
This is a per-student limit. The expenses for Lynette do not qualify, because the
 American Opportunity Credit can be claimed only for expenses for the first four years of
post-secondary education. For Lynette’s expenses, Aaron may be able to claim the
Lifetime Learning Credit instead.

See Publication 970, Tax Benefits for Education, for information about education
credits.

58. Question ID: 94849828 (Topic: Education Credits)

The Lifetime Learning Credit is different from the American Opportunity Credit.
However, they do share some of the same requirements. Which of the following
requirements is true for both education credits?

 A. Expenses related to housing are allowed as qualified education expenses.

 B. Both education credits are available for only the first four years of post-
secondary education.wrong
 C. There is no limit to the number of years the credits can be claimed.
 D. To be eligible for either of the education credits, taxpayers may use any filing status
other than married filing separately.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

Taxpayers who use the filing status of married filing separately are not eligible to claim
either the American Opportunity or Lifetime Learning credits. To learn more about both
these credits, see the IRS detail page on Education Credits.

59. Question ID: 94849986 (Topic: Education Credits)

Ansel has two daughters in college. He is unmarried and files as head of household
(HOH), and claims both of his children as dependents. His AGI is $65,000. Both of
Ansel's children are full-time college students. Details regarding their education
expenses are as follows:

 Jenna, age 24, a graduate student working on her master’s degree, with $8,500
of qualifying higher education expenses.
 Marcie, age 19, a college freshman working on her undergraduate degree, with
$5,600 of qualifying higher education expenses.
Based on the facts above, which of the following statements is correct?

 A. Ansel cannot claim any credits because his AGI is too high.wrong
 B. Ansel can claim the Lifetime Learning Credit for Jenna and the American Opportunity
Credit for Marcie.correct
 C. Ansel can claim the American Opportunity Credit for both of his daughters.
 D. Ansel can claim the Lifetime Learning Credit for both of his daughters. Neither is
eligible for the American Opportunity Credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

Ansel can claim the Lifetime Learning Credit for Jenna and the American Opportunity
Credit for Marcie. The American Opportunity Credit is a better credit, but it only applies
to the first four years of undergraduate study, so Jenna, who is a graduate student,
does not qualify. Ansel may still recover a portion of Jenna's education expenses using
the Lifetime Learning Credit.

60. Question ID: 94849860 (Topic: Education Credits)

Carol and William are married on June 30. That same year, William enrolled in an
accredited college to further his career and subsequently received a Form 1098-T,
Tuition Statement. William had no income for the year and was considered a full-time
student. Carol was employed the entire year with wages of $59,000 and paid for all of
her husband's education expenses. Based on their circumstances, what is the correct
method to report any education credit that they might qualify for?

 A. William is ineligible to claim an education credit because his wife paid his education
expenses.
 B. Education credits can only be claimed if the tuition expenses are paid on behalf of a
qualifying child.
 C. They do not qualify for any education credits, because they weren't married at
the beginning of the year.wrong
 D. The taxpayers must file jointly in order to claim an education credit.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

William and Carol must file jointly in order to claim an education credit, because the wife
paid the education expenses for her spouse. (This question is based on an actual EA
exam question released by the IRS).

61. Question ID: 94849934 (Topic: Education Credits)

The American Opportunity Tax Credit has a refundable component. What is the
maximum amount of the American Opportunity Tax Credit, if the taxpayer does not have
a tax liability?

 A. $2,500 credit per tax return.

 B. $1,000 credit per eligible student.correct
 C. $2,500 credit per eligible student.wrong
 D. $4,000 credit per eligible student.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Correct Answer Explanation for B:

The American Opportunity Tax Credit is a maximum credit of up to $2,500 per eligible
student. However, the AOTC also has a refundable component. The refundable portion
of the AOTC is calculated as 40% of the value of the credit the taxpayer is eligible for,
based on qualifying education expenses. Therefore, if the taxpayer was eligible for
$2,500 of the AOTC, but had no tax liability, they could still receive $1,000 (40% of
$2,500) as a refund.

64. Question ID: 94849935 (Topic: Education Credits)

Liesel works full-time and takes one course a month at night school. She takes these
courses primarily to advance her career, and she is not a degree candidate. Which
education credit is she eligible for?

 A. The American Opportunity Tax Credit.

 B. The Lifetime Learning Credit.correct
 C. She can take either the American Opportunity Credit or the Lifetime Learning
Credit.wrong
 D. She cannot take any education credits, because she is not a degree candidate.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for B:

Liesel qualifies for the Lifetime Learning Credit but not the American Opportunity Credit,
because she is not a degree candidate. For more information and to see similar
examples, see Publication 970, Tax Benefits for Education.

66. Question ID: 94850008 (Topic: Education Credits)

Regarding qualified education expenses for education credits, which of the following is
NOT a qualifying expense for the AOTC or the Lifetime Learning Credit?

 A. Tuition at a qualifying adult vocational school.wrong

 B. On-campus room and board in a college dormitory.correct
 C. Required course books.
 D. Private college tuition.
Study Unit 13: Individual Tax Credits covers the information for this question.
 This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for B:

Only certain expenses qualify for education credits. Qualified expenses include:
amounts paid for tuition, fees and other related expenses for an eligible student that are
required for enrollment or attendance at an eligible educational institution. Even if you
pay the following expenses to enroll or attend the school, the following are NOT
qualified education expenses:

 Room and board (even on-campus).

 Insurance.
 Medical expenses (including student health fees).
 Transportation Similar personal, living or family expenses.
67. Question ID: 94849947 (Topic: Education Credits)
Rosita and Valentino are married and have two kids in college and one child attending
private high school. They claim all their children as dependents. Rosita does not work,
but she has rental income of $13,000 from a rental property that she owns. Valentino
earned $89,000 in wages. Their joint AGI is $102,000. These are their three children
and their respective tuition expenses:

 $7,000 for Francis, age 17, a full-time student at a private high school
 $10,500 for Angela, age 24, a full-time graduate student working towards her
Master's degree.
 $5,100 for Selena, age 18, a college freshman attending full-time
Based on the above scenario, what is the maximum amount in American Opportunity
Tax Credits (AOTC) Rosita and Valentino can claim on their joint tax return?

 A. $5,000wrong
 B. $7,500
 C. $0
 D. $2,500correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

Rosita and Valentino can only claim the AOTC for Selena ($2,500 maximum based on
her tuition expenses). The expenses for Francis do not qualify for the American
Opportunity Credit, because he is a high school student, not a college student. The
expenses for Angela do not qualify because she is working on her Master’s degree,
which means that she has already completed her first four years of post-secondary
 education. See Publication 970, Tax Benefits for Education, for information about the
AOTC.

68. Question ID: 94850009 (Topic: Education Credits)

To be eligible to claim the AOTC or the Lifetime Learning Credit, the student must:

 A. Be claimed as a dependent.
 B. Be a U.S. citizen.
 C. Be over the age of 18.wrong
 D. Attend an eligible educational institution.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for D:

To be eligible to claim the AOTC or the Lifetime Learning Credit, the student must be
attending an eligible educational institution. Eligible educational institutions include
colleges and universities and any post-secondary school that satisfies the requirements
to participate in the U.S. Department of Education financial aid program.

69. Question ID: 94849813 (Topic: Education Credits)

What is the maximum amount of the American Opportunity Tax Credit, and what is the
refundable portion of the credit?

 A. The credit is worth $2,500 per eligible student. Up to 40% of the credit (up to $1,000)
is refundable.correct
 B. The credit is a maximum of $2,000 per return.
 C. $2,500 per student. The entire amount is refundable.wrong
 D. The credit is worth up to $4,000 per eligible student. Up to 50% of the credit ($2,000)
is refundable.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

The AOTC is a tax credit of up to $2,500 of the cost of tuition, fees and course materials
paid during the taxable year. Also, up to 40% of the credit (up to $1,000) is refundable.
This means you can get a refund even if you owe no tax. Taxpayers will receive a tax
credit based on 100 percent of the first $2,000, plus 25 percent of the next $2,000, paid
during the taxable year for tuition, fees and course materials. See Publication 970, Tax
Benefits for Education, for information about the AOTC.

70. Question ID: 94849937 (Topic: Education Credits)

 Jonathan and Jennifer are married and have three kids in college. Their joint AGI is
$105,000. These are their three dependents and their respective college tuition
expenses:

 $5,000 for Cosima, age 21, a college sophomore working on her first bachelor’s
degree.
 $5,100 for Marico, age 19, a college freshman working on his first bachelor’s
degree.
 $9,000 for Kasha, age 23, a graduate student working on her first master’s
degree.
Based on the above scenario, what is the maximum amount in American Opportunity
Tax Credits (AOTC) Jonathan and Jennifer can claim on their joint tax return?

 A. $5,000correct
 B. $7,500wrong
 C. $0 (Their AGI is too high to claim the AOTC)
 D. $2,500
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for A:

Their joint AGI is within the threshold to take the full AOTC for the children who
qualify. In 2024, a taxpayer’s modified adjusted gross income (MAGI) must be $80,000
or less, or $160,000 or less, for a married couple filing jointly to receive the full AOTC.

However, the most Jonathan and Jennifer can claim is $5,000 in AOTC credits ($2,500
for Cosima and $2,500 for Marico). The expenses for Kasha do not qualify for the
American Opportunity Credit, because to be eligible for the American Opportunity
Credit, a student must not have completed the first four years of post-secondary
education as of the beginning of the taxable year. Since Kasha is working on her
Master’s degree, those expenses would not be eligible for the AOTC, but they would be
eligible for the Lifetime Learning Credit, if she otherwise qualifies. See Publication
970, Tax Benefits for Education, for information about the AOTC.

72. Question ID: 94849907 (Topic: Education Credits)

Skyler, 29, decides to go to college during the year. Which of the following will disqualify
him from taking the Lifetime Learning Credit?

 A. Skyler is not seeking a degree, and is only taking two courses to improve his job
skills.
 B. Skyler is attending school less than half-time.wrong
 C. Skyler is pursuing a graduate degree.
 D. Skyler is filing Married Filing Separately.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for D:

If Skyler is filing Married Filing Separately (MFS) then he cannot claim any education
credit, including the Lifetime Learning Credit. None of the other answers would bar him
from claiming the Lifetime Learning Credit. See Publication 970, Tax Benefits for
Education, for information about education credits.

74. Question ID: 94816008 (Topic: Education Credits)

Stavros is a Turkish citizen with a green card. Stavros lives and works in the United
States all year. His sister, Grenada, is 18 years of age and also a Turkish citizen.
Grenada lives in Turkey and goes to school full-time as a college freshman. Stavros
supports his sister financially and pays for her college tuition. Stavros provided more
than 50 percent of Grenada's total support. Can Stavros claim his sister as a dependent
and claim the American Opportunity Tax Credit (AOTC) for the tuition that he paid on
her behalf?

 A. Stavros can claim his sister as a dependent and claim the AOTC.
 B. Stavros can claim his sister as a dependent but cannot claim the AOTC.wrong
 C. Stavros can claim his sister as a dependent but cannot claim the AOTC. He can
claim the Lifetime Learning Credit instead.
 D. Stavros cannot claim his sister as a dependent.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for D:

Stavros cannot claim his sister as a dependent because she does not pass the "Citizen
or Resident Test". A taxpayer generally can't claim a person as a dependent unless that
person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or
Mexico. Since Grenada does not pass the Citizen or Resident Test, he cannot claim her
as a dependent.

1. Question ID: 95042145 (Topic: Other Itemized Deductions)

All of the following are deductible as business expenses on Schedule C except _____.

 A. Charitable gifts to a qualified organization.correct

 B. Expenses for business use of the taxpayer's home (home office expenses).
 C. Business-related travel.
 D. Interest paid on business loans.
 Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Charitable gifts to a qualified organization are not deductible on Schedule C. They

would be deductible on Schedule A if the taxpayer itemizes deductions.

2. Question ID: 94849578 (Topic: Other Itemized Deductions)

Royce is having money troubles and agrees to sell his home to Janie, his friend. Janie
agrees to pay all of the delinquent real estate taxes on the residence, totaling $2,000.
How must Janie treat the property tax payment of $2,000?

 A. The taxes can be prorated and deducted over the life of her loan.
 B. Janie can deduct the taxes as an itemized deduction on her Schedule A.
 C. Janie can deduct the taxes paid as an adjustment to income.
 D. Janie cannot deduct the taxes. She must add the taxes paid to her basis in the
property.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for D:

Janie can only deduct property taxes that are legally imposed on her. She cannot
deduct the delinquent property taxes because she was not the owner of the property
when the taxes were imposed. Property taxes paid in connection with a purchase may
be added to the buyer’s basis if the taxes are for the time period the property was
owned by the seller.

9. Question ID: 94849927 (Topic: Other Itemized Deductions)

Galilea is employed as a full-time saleswoman and travels occasionally on behalf of her
employer. Her employer does not have a reimbursement policy. Her adjusted gross
income in the current year is $80,000. She has the following miscellaneous expenses,
including business expenses for which she was not reimbursed:

 Meals with clients: $500.

 Home office expenses: $1,100.
 Personal tax return preparation: $200.
 Gambling losses: $9,000.
 Galilea had $2,000 of gambling winnings during the year. Based on the information
above, what is her allowable deduction for miscellaneous itemized deductions on her
Schedule A?

 A. $2,000correct
 B. $1,100
 C. $2,600
 D. $9,000
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for A:

Of Galilea's deductions, only gambling losses are deductible, and then, the deduction is
limited to the amount of her gambling winnings ($2,000). None of her work-related
expenses would be deductible.

Note: The Tax Cuts and Jobs Act suspended a large number of miscellaneous
deductions lumped together in a category called “miscellaneous itemized deductions”
that were deductible to the extent they exceeded 2% of a taxpayer's AGI. One of these
was the deduction for employee business expenses (for most employees, although
there are some narrow exceptions). Some miscellaneous itemized deductions are still
allowable, however, including the deduction for gambling losses (but only to the extent
of gambling winnings).

11. Question ID: 94850017 (Topic: Other Itemized Deductions)

Which of the following expenses is deductible for individual taxpayers on Form 1040?
(Choose the best answer)

 A. Rental and utility payments on a personal home.

 B. Payments for tuition at a private elementary school.
 C. Life insurance premiums paid by a self-employed taxpayer.
 D. Health insurance premiums paid by a self-employed taxpayer.correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for D:

Health insurance premiums paid by a self-employed taxpayer are deductible as an

adjustment to income on Form 1040. Since it is an adjustment to income, self-employed
 taxpayers can claim this deduction regardless if they choose to claim the standard
deduction or itemize their deductions.

13. Question ID: 94849978 (Topic: Other Itemized Deductions)

Which of the following expenses is no longer deductible as an itemized deduction on
Schedule A?

 A. Investment interest expense.

 B. Union dues.correct
 C. Gambling losses.
 D. Casualty and theft losses incurred in a federally declared disaster area.
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

Due to the Tax Cuts and Jobs Act, union dues are no longer deductible as a
miscellaneous itemized deduction. Certain other itemized deductions are still allowable,
including:

 Certain casualty and theft losses incurred in a federal disaster area.

 Gambling losses up to the amount of gambling winnings.
 Investment interest (limited to the amount of taxable investment income).
 Impairment related work expenses of a disabled employee.
22. Question ID: 94849906 (Topic: Child and Dependent Care Credit)
Judy and her husband, Nixon, have two children: Susie, aged 3, and Junior, aged 15.
Neither child is disabled. They file a joint tax return. Judy and Nixon both work. They
paid the following childcare expenses: $2,500 for Susie's daycare and $1,000 for
Junior's summer camp. They also paid a babysitter $40 so they could go out and see a
movie one night. What is the amount of their qualifying expenses for the Child and
Dependent Care Credit?

 A. $3,540
 B. $0
 C. $2,500correct
 D. $3,500
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

 The only qualifying expenses are the $2,500 that was paid for Susie's daycare. The
summer camp for a 15-year-old child is not a qualifying expense, and neither is the
amount they paid a babysitter so they could go see a movie.

28. Question ID: 94849866 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Which of the following statements is not true regarding the Child Tax Credit in 2024?

 A. The child tax credit may be limited depending on modified adjusted gross income.
 B. A qualifying child must be under age 18 at the end of the year.correct
 C. The child must be claimed as the taxpayer’s dependent.
 D. Qualifying children must have a valid Social Security Number.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

A qualifying child must be under the age of 17 (not 18) at the end of the year, in order to
be a qualifying child for the Child Tax Credit in 2024. All of the other statements about
the credit are correct.

31. Question ID: 94849975 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Yoshiro is 49 and has a dependent son who is 18 years old. The child is no longer a
student. Yoshiro is divorced and qualifies for head of household filing status. He earned
$36,000 in wages during the year. He also had investment income of $12,000. Based
only on this information, which credits may he be eligible for in 2024?

 A. Child and Dependent Care Credit

 B. The Child Tax Credit.
 C. The Other Dependent Credit.correct
 D. The Earned Income Credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for C:

Yoshiro would likely be eligible to claim the Other Dependent Credit or ODC, for his
dependent son. He cannot claim the Earned Income Credit, because his investment
income exceeds the allowable limit for 2024. And he wouldn't qualify for the Child Tax
Credit, either, because his child is over the age of 17. He would not qualify for the Child
and Dependent Care Credit because his son is not disabled and does not need daycare
 or meet the age test for that credit. See an overview of the Credit for Other Dependents,
or ODC.

33. Question ID: 94850006 (Topic: Child Tax Credit and Additional Child Tax
Credit)
In order for a taxpayer to claim the Child Tax Credit, the child must have an SSN that’s
valid for employment and issued before: _____________________.

 A. The due date of the return (NOT including extensions).

 B. At the time of the child's birth.
 C. The due date of the return (including extensions).correct
 D. By the end of the tax year.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

In order for a taxpayer to claim the Child Tax Credit, the child must have an SSN that’s
valid for employment and issued before the due date of the return (including
extensions).

34. Question ID: 94849976 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Simone and Xander are married and file jointly. Their joint AGI is $129,000 in 2024.
They have two dependent children, ages 18 and 19; both are full-time students. Simone
and Xander also claim Xander's disabled mother, Bernice, who is 72 years of age, as a
dependent parent. All of them lived in the United States all year and all have valid Social
Security numbers. Based on this information, what is the maximum Other Dependent
Credit (ODC) that Simone and Xander can claim on their joint tax return?

 A. $1,500correct
 B. $4,000
 C. $2,500
 D. $500
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for A:

 The maximum ODC credit is $500 for each dependent, so Simone and Xander would
potentially qualify for $1,500. None of their dependents would qualify for the Child Tax
Credit (they are all above the age limit for the CTC). The ODC can be claimed for:

 Dependents of any age, including those who are age 18 or older.

 Dependents who have Social Security numbers or individual taxpayer
identification numbers.
 Dependent parents or other qualifying relatives supported by the taxpayer.
 Dependents living with the taxpayer who aren't related to the taxpayer.
The ODC credit begins to phase out for married couples filing a joint tax return at
$400,000 ($200,000 for all other filing statuses). See an overview of the Credit for Other
Dependents, or ODC.

37. Question ID: 94849837 (Topic: Adoption Credits)

Brianna adopted a foreign child from China. The adoption became final on December 1.
The following events occurred during the year:

 Briana paid $14,900 of qualified adoption expenses.

 Her employer reimbursed her for $4,000 of those adoption expenses under a
cafeteria plan.
What is the proper treatment of these transactions on her tax return?

 A. Brianna can exclude the $4,000 reimbursement from her gross income. She
can claim an Adoption Credit of $10,900.correct
 B. Brianna can exclude $4,000 from her gross income. She can claim an Adoption
Credit of $14,900.
 C. Brianna must include $4,000 in her gross income. She can claim an Adoption Credit
of $14,900.
 D. Foreign adoptions are not eligible for the adoption credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for A:

Brianna can exclude the $4,000 employer reimbursement from her gross income. After
applying the reimbursement, she has qualifying adoption expenses of $10,900 ($14,900
of the actual adoption expenses she paid, minus the $4,000 reimbursement).

Note: If a taxpayer’s employer helped pay for the adoption through a qualified adoption
assistance program, the taxpayer may exclude that amount from tax, but the amount
reimbursed by the employer would reduce the amount of adoption expenses allowable
for the Adoption Credit. If not all of the credit can be used in the current tax year,
 taxpayers can carryover any unused credits for up to five years, or until they fully use
the credit, whichever comes first. To learn more about the Adoption Credit, see
IRS Topic No. 607, Adoption Credit and Adoption Assistance Programs.

38. Question ID: 94849954 (Topic: Adoption Credits)

For the purposes of the adoption credit, which of the following would NOT qualify as a
"special needs” child?

 A. A foster child who is a naturalized U.S. citizen, and is now available for adoption in
the U.S. foster care system as a “special needs” child.
 B. A foreign child who is a citizen of China and has a severe disability. The child
is available for adoption by a U.S. couple.correct
 C. A child that is a citizen of the United States, and the state has determined that the
child will not be adoptable without assistance provided to the adoptive family.
 D. All of the above would be considered “special needs” children for the purpose of the
adoption credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 40% of students.

Correct Answer Explanation for B:

A foreign child with a disability would not qualify for the special-needs adoption credit. If
a taxpayer adopts a U.S. child that a state has determined to have special needs, the
taxpayer is eligible for the maximum amount of credit in the year the adoption is final.
However, this does not apply to foreign adoptions.

41. Question ID: 94849819 (Topic: Adoption Credits)

Lyra and Tuan adopt a child this year through a U.S. adoption agency. Their child is
determined by the state to have special needs. The child is a U.S. citizen. Once the
adoption is complete, they determine that they have $4,000 in qualifying adoption
expenses. Regarding the adoption credit, which of the following is true?

 A. Lyra and Tuan are allowed to deduct $2,500 in adoption expenses on their tax return.
 B. Lyra and Tuan are allowed to take the full adoption credit, even though they
only have $4,000 in qualifying expenses, because the child is special
needs.correct
 C. Lyra and Tuan are not allowed to take the adoption credit because children adopted
from an adoption agency are not eligible for the credit.
 D. Lyra and Tuan are allowed to deduct $4,000 in adoption expenses on their tax return.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

 Correct Answer Explanation for B:

Lyra and Tuan are allowed to take the full adoption credit, even though they only have
$4,000 in qualifying expenses, because the child is special needs. In 2024, the federal
adoption tax credit is up to $16,810 per child. The full amount of the credit is allowed for
a special-needs child as long as the adoption is a domestic adoption of a U.S. special-
needs child (i.e., it cannot be a foreign adoption, although foreign adoptions are still
eligible for the regular Adoption Credit, a foreign adoption does not qualify for the
“special needs” adoption credit). To learn more about the Adoption Credit, see
IRS Topic No. 607, Adoption Credit and Adoption Assistance Programs.

44. Question ID: 94849877 (Topic: Education Credits)

All of the people listed below are college students working towards their first college
degree. All are degree candidates. Which of the following taxpayers cannot claim the
American Opportunity Tax Credit?

 A. Ricky, who is age 75 and widowed. He earns $32,000 from a part-time job.
 B. Hester, who is legally separated from her spouse and earns $53,000 in self-
employment income.
 C. Gary, who earns $30,000 in wages and is married filing separately.correct
 D. Judy, who has $22,000 in wages and $20,000 in interest income.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Only Gary would be automatically disqualified from claiming the credit, and that is
because of his filing status, which is married filing separately. A taxpayer can’t claim an
education credit if any of the following apply:

 Their filing status is married filing separately.

 They are claimed as a dependent on another person's tax return.
 The taxpayer didn't have a social security number (SSN) by the due date of the
return (including extensions).
 The taxpayer's MAGI exceeds the phaseout thresholds for the credit.
For more information and to see similar examples, see Publication 970, Tax Benefits for
Education.

51. Question ID: 95003637 (Topic: Education Credits)

Samson and Gracie are married and file jointly. Gracie paid $3,200 in qualified student
loan interest during the year. Samson paid $2,600 in qualified student loan interest
during the year. On their jointly filed return, what is the maximum student loan interest
deduction allowable?
 A. $0
 B. $5,800
 C. $2,500correct
 D. $5,000
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for C:

The most student loan interest a taxpayer can claim as a tax deduction is limited to
$2,500. The $2,500 deduction is not per person, but instead, it is capped per return.
See IRS Topic No. 456 Student Loan Interest Deduction.

53. Question ID: 94849879 (Topic: Education Credits)

Granville claimed the American Opportunity Tax Credit on his tax return four years ago,
but the credit was later disallowed due to negligence. In 2024, Granville enrolls in
college again, and believes that he is eligible for the credit. What form must Granville
attach to his tax return in order to claim the American Opportunity Credit after a prior
disallowance?

 A. Form 8862.correct
 B. Form 2848.
 C. Form 2106.
 D. Form 1098-T.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for A:

If a taxpayer's American Opportunity Credit was denied or reduced for any reason, other
than a simple math error or clerical error, the taxpayer must attach a completed Form
8862, Information To Claim Certain Refundable Credits After Disallowance, to their
individual return. For more information, see Publication 970, Tax Benefits for Education.

56. Question ID: 94849985 (Topic: Education Credits)

Turner is age 26 and a college sophomore working on his first bachelor's degree. He
files single and is not claimed as a dependent. He paid $2,500 on December 23, 2024,
for college tuition for the semester that begins January 15, 2025. He also obtained a
Pell Grant of $1,000 to help pay for required textbooks. His total textbook expenses
were $1,200. In which tax year can he claim the American Opportunity Tax Credit for his
tuition payment, and what is the amount of his “qualifying” educational expenses?
 A. He can take the credit in 2024. His qualifying expenses are $2,700.correct
 B. He can take the credit in 2024. His qualifying expenses are $3,600.
 C. He can take the credit in 2025. His qualifying expenses are $2,700.
 D. He can take the credit in 2025. His qualifying expenses are $2,500.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for A:

He can take the credit in 2024, the year he paid the expenses. His qualifying expenses
are $2,700 ($2,500 tuition + $200 textbooks, the amount the Pell Grant did not cover).
Taxpayers can claim payments that are prepaid for the academic period that begins in
the first three months of the next calendar year. Therefore, Turner can use the $2,500 in
tuition he paid in December to compute his AOTC credit. He can also claim $200 for the
cost of the textbooks, which is the amount he paid that exceeded his Pell Grant ($1,200
- $1,000 Pell Grant = $200).

57. Question ID: 94849974 (Topic: Education Credits)

With regards to the Lifetime Learning Credit, which of the following expenses would
NOT be considered a qualified education expense?

 A. Required student health fees.correct

 B. Required tuition and fees.
 C. Course-related equipment.
 D. Required textbooks.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

Student health fees are not qualified expenses (even if the fees are required for
attendance at the college or university). Health insurance of any kind is not a qualifying
educational expense for the purposes of either the AOTC or the Lifetime Learning
Credit. The rest of the costs listed are qualifying expenses for the purposes of the credit.

62. Question ID: 94849904 (Topic: Education Credits)

Kumari, 25, decides to go to college full-time to get a 4-year degree. This is her first
time attending college. She meets the requirements for the American Opportunity Tax
Credit or the Lifetime Learning Credit. Which of the following expenses qualifies as
qualified education expenses for the purposes of both education credits?

 A. Health insurance.
 B. College tuition.correct
 C. On-campus room and board.
 D. Required student health fees.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for B:

College tuition is a qualified education expense for both credits. Room and board,
student health fees (even if required by the college), or health insurance would not be
qualifying expenses. For more information and to see similar examples, see Publication
970, Tax Benefits for Education.

63. Question ID: 95400090 (Topic: Education Credits)

Dulce is age 30 and a graduate student. She is married but uses the Married Filing
Separately status. She and her husband keep all their finances separate, and she pays
all her own tuition costs. Her AGI is $40,000 on her separate return. In 2024, she pays
$5,000 in tuition and fees to a qualifying educational institution. Which education
credit/deduction can she claim on her separate tax return?

 A. The Lifetime Learning Credit.

 B. She is not eligible for an education credit.correct
 C. The American Opportunity Tax Credit.
 D. She can deduct her tuition as an adjustment to income.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for B:

She is not eligible for an education credit or deduction, because she is filing MFS.
Education credits, as well as the tuition and fees deduction, cannot be claimed by
married taxpayers who file as Married Filing Separately or by an individual who is a
dependent of another taxpayer.

65. Question ID: 94815856 (Topic: Education Credits)

Who is an eligible student for the AOTC (American Opportunity Tax Credit) in the
following list?

 A. Paulie, who is in his first year of college and enrolled half-time for one
academic period.correct
 B. Abram, who is a full-time student in his second year of college. Abram has a felony
drug conviction for possession of cocaine.
 C. Shelly, who has claimed the AOTC in the four prior years but doesn't have a
bachelor's degree yet.
 D. Timmy, who is taking courses just for fun and is not a degree candidate.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

Only Paulie would be eligible for the AOTC. Paulie is in his first year of college and
enrolled at least half-time for one academic period. The other students listed would not
qualify. Shelly does not qualify because she has already claimed the credit for 4 years.
Timmy would not qualify because he is not a degree candidate. And Abram would not
qualify because he has a felony drug conviction.

71. Question ID: 94849898 (Topic: Education Credits)

Sumati is 24 years old, and an incoming freshman at San Diego State University. The
university requires each incoming freshman to enroll with their own computer. Sumati
paid $500 for a laptop that he will use for school. Can Sumati deduct the cost of the
computer, or use the cost in order to claim a credit?

 A. Sumati can claim the cost of the computer on Schedule A, but only if she itemizes
deductions.
 B. The cost of a personal computer is a personal expense that is not deductible.
 C. Sumati may be able to claim an American Opportunity Credit for the cost of the
computer.correct
 D. Sumati can claim the cost of the computer as a business expense on Schedule C.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for C:

The cost of a personal computer is generally a personal expense that is not deductible.
However, if a computer is a necessary requirement for enrollment or attendance at an
educational institution, the IRS will allow the cost of the computer as a qualifying
expense for the American Opportunity Tax Credit.

73. Question ID: 94849875 (Topic: Education Credits)

In order for a taxpayer to claim the American Opportunity Credit, which of the following
pieces of information is required?

 A. The physical address of the college.

 B. The student must have a Form 1098-T.
 C. The student's major in college.
 D. The EIN of the educational institution or college to which the taxpayer's
qualified expenses were paid.correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 42% of students.

Correct Answer Explanation for D:

To claim the American Opportunity Credit, the taxpayer must have the EIN of the
institution to which the student's qualified educational expenses were paid. There are a
few exceptions in which educational institutions are not required to furnish Form 1098-T
to the student, so a Form 1098-T is not automatically required to claim the American
Opportunity Credit in every circumstance. A taxpayer may still claim one of these
education benefits if the student does not receive a Form 1098-T because the student's
educational institution is not required to send a Form 1098-T to the student under
existing rules (for example, if the student is a nonresident alien, has qualified education
expenses paid entirely with scholarships, has qualified education expenses paid under
a formal billing arrangement, or is enrolled in courses for which no credit is awarded).

Note: You can also claim an education credit if your school closed or ceased operations
and did not provide you a Form 1098-T.

75. Question ID: 94849876 (Topic: Education Credits)

Benny is 27 years old and a full-time college student in his junior year of college (3rd
year of his baccalaureate). He earns $22,000 in wages and is not claimed as a
dependent, and both his parents are deceased. Benny's grandmother, Leslie, paid
$10,000 of Benny's tuition this year, as a gift to him. For the purposes of the American
Opportunity Credit, qualified education expenses paid on his behalf are treated as paid
by whom?

 A. The educational institution.

 B. The government.
 C. The student, Benny.correct
 D. Leslie, the grandparent.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for C:

Qualified education expenses paid on behalf of the student by someone other than the
student (such as a relative) are treated as paid by the student. So in this scenario, the
amounts paid by his grandmother would be treated as paid by Benny, because they
were a gift to him. However, qualified education expenses paid by a student who is
claimed as a dependent on a taxpayer's tax return are treated as paid by the taxpayer.
So if Benny was a dependent that was still claimed by his parents, then the gifted
amounts would be treated as if they had been paid by his parents. For more information
and to see similar examples, see Publication 970, Tax Benefits for Education.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

2. Question ID: 7585019511 (Topic: Individual Energy Credits)

Which of the following is NOT a type of property that is eligible for the Residential Clean
Energy Credit?

 A. Gasoline powered generatorscorrect

 B. Solar water heaterswrong
 C. Wind turbines
 D. Battery storage technology
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Incorrect Answer Explanation for B:

Gasoline powered generators are NOT a type of qualifying property for the Residential
Clean Energy Credit. Eligible technologies include solar panels, wind turbines,
geothermal heat pumps, battery storage, solar water heaters, and fuel cells. The credit
is equal to 30% of the costs for new energy property (including certain labor and
installation costs).

Correct Answer Explanation for A:

Gasoline powered generators are NOT a type of qualifying property for the Residential
Clean Energy Credit. Eligible technologies include solar panels, wind turbines,
geothermal heat pumps, battery storage, solar water heaters, and fuel cells. The credit
is equal to 30% of the costs for new energy property (including certain labor and
installation costs).

Show Other Explanations

3. Question ID: 7585019510 (Topic: Individual Energy Credits)

Frank bought solar panels for his home this year.The panels were installed and
operational before the end of the year. What percentage of the costs for this qualifying
new energy property installed in 2024 can Frank claim under the Residential Clean
Energy Credit?

 A. A maximum of 20% of qualifying costs

 B. A maximum of 10% of qualifying costswrong
 C. A maximum of 50% of qualifying costs
 D. A maximum of 30% of qualifying costscorrect
Study Unit 13: Individual Tax Credits covers the information for this question.
 This question is answered correctly on the first attempt by 66% of students.

Incorrect Answer Explanation for B:

Taxpayers can claim 30% of the costs for qualifying new energy property, including
labor and installation costs, as part of the Residential Clean Energy Credit in 2024.

The Residential Clean Energy Credit is available for property installed on a taxpayer’s
home. Qualified improvements include: solar panels, solar water heaters, wind turbines,
geothermal heat pumps, fuel cells, and battery storage technology. The credit is equal
to 30% of the costs for new energy property (including certain labor and installation
costs).

Correct Answer Explanation for D:

Taxpayers can claim 30% of the costs for qualifying new energy property, including
labor and installation costs, as part of the Residential Clean Energy Credit in 2024.

The Residential Clean Energy Credit is available for property installed on a taxpayer’s
home. Qualified improvements include: solar panels, solar water heaters, wind turbines,
geothermal heat pumps, fuel cells, and battery storage technology. The credit is equal
to 30% of the costs for new energy property (including certain labor and installation
costs).

Show Other Explanations

4. Question ID: 7585019511 (Topic: Individual Energy Credits)

Which of the following energy-efficient improvements qualifies for the Residential Clean
Energy Credit in 2024?

 A. New tile roofing

 B. New energy-efficient vehiclewrong
 C. Energy-efficient windows
 D. Solar panelscorrect
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

The Residential Clean Energy Credit applies to qualified improvements such as solar
panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and
battery storage technology. Energy-efficient windows, roofing, and insulation are not
covered under this credit, but may qualify instead for the Energy Efficient Home
Improvement Credit.
 5. Question ID: 7585019513 (Topic: Individual Energy Credits)
Benny plans to purchase a brand new energy-efficient vehicle this year. What is one of
the key requirements for Benny to qualify for the New Clean Vehicle Tax Credit?

 A. The vehicle must cost less than $25,000.wrong

 B. Benny must claim the credit in the tax year he actually receives the vehicle.correct
 C. The vehicle must be purchased from a private party.
 D. The vehicle must be used primarily for business purposes in order to qualify.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Incorrect Answer Explanation for A:

The New Clean Vehicle Tax Credit offers up to $7,500 for purchasing a qualified new
electric vehicle. To qualify, the vehicle must meet specific criteria. The credit depends
on whether the vehicle meets the critical minerals requirement ($3,750), the battery
component requirement ($3,750), or both ($7,500).

The taxpayer must claim the credit in the tax year they actually receive the vehicle. Key
elements to claim this credit:

 The final assembly of the vehicle must occur in North America.

 The manufacturer’s suggested retail price cannot exceed $55,000, or $80,000 for
a pick-up truck, SUV, or van.
 The taxpayer’s modified adjusted gross income cannot exceed certain limits.
Correct Answer Explanation for B:

The New Clean Vehicle Tax Credit offers up to $7,500 for purchasing a qualified new
electric vehicle. To qualify, the vehicle must meet specific criteria. The credit depends
on whether the vehicle meets the critical minerals requirement ($3,750), the battery
component requirement ($3,750), or both ($7,500).

The taxpayer must claim the credit in the tax year they actually receive the vehicle. Key
elements to claim this credit:

 The final assembly of the vehicle must occur in North America.

 The manufacturer’s suggested retail price cannot exceed $55,000, or $80,000 for
a pick-up truck, SUV, or van.
 The taxpayer’s modified adjusted gross income cannot exceed certain limits.
Show Other Explanations


 






6. Question ID: 94849915 (Topic: Other Individual Tax Credits)

Leland is 23, single and had AGI of $22,000. He contributed $5,000 to an IRA. He is a
full-time student. Which of the following statements is correct about his eligibility for the
Retirement Savings Contributions Credit?

 A. Leland is eligible for a credit of up to $2,000.

 B. Leland’s AGI is too high to be eligible for the credit.wrong
 C. Leland cannot be eligible for the credit if he is a full-time student or is claimed as a
dependent on another person’s return.correct
 D. IRA contributions are not eligible contributions for purposes of the credit. It must be a
contribution to a 401(k) or other qualified plan.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

He cannot claim the credit. To be eligible for the Retirement Savings Contributions
Credit, a taxpayer must be at least 18 years old and must not be a full-time student or
be claimed as a dependent on another person’s return. To see more information about
this credit, see IRS Topic No. 610 Retirement Savings Contributions Credit.

8. Question ID: 94849892 (Topic: Other Individual Tax Credits)

Rhonda and Theo are married and do not have any dependents. Theo earns $10,000 in
wages during the year. Rhonda earned $31,000 in wages for the year. Theo contributed
$1,000 to his traditional IRA for 2024. Rhonda also contributed $1,000 to her traditional
IRA during the year. After deducting their IRA contributions, the adjusted gross income
shown on their joint return is $39,000. What is the maximum Retirement Savings
Contribution Credit that they may claim on their joint 2024 tax return?

 A. Rhonda and Theo may claim a 50% Retirement Savings Contribution credit of $1,000
(for their combined $2,000 IRA contributions) on their 2024 tax return.correct
 B. They are not eligible for the Retirement Savings Contribution credit, because
they already deducted their IRA contributions. wrong
 C. Rhonda and Theo may claim a 10% Retirement Savings Contribution credit of $200
(for their combined $2,000 IRA contributions) on their 2024 tax return.
 D. Rhonda and Theo may claim a 100% Retirement Savings Contribution credit of
$2,000 (for their combined $2,000 IRA contributions) on their 2024 tax return.
 Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

Rhonda and Theo may claim a 50% Retirement Savings Contribution credit of $1,000
(for their combined $2,000 IRA contributions) on their 2024 tax return. To see more
information about this credit, see IRS Topic No. 610 Retirement Savings Contributions
Credit.

2024 AGI Limits (Table) Source: https://www.irs.gov/retirement-plans/plan-participant-

employee/retirement-savings-contributions-savers-credit

2024 Saver's Credit

Credit Rate Married Filing Jointly Head of Household All Other Filers*
AGI not more than AGI not more than AGI not more than
50% of your contribution
$46,000 $34,500 $23,000
20% of your contribution $46,001- $50,000 $34,501 - $37,500 $23,001 - $25,000
10% of your contribution $50,001 - $76,500 $37,501 - $57,375 $25,001 - $38,250
0% of your contribution more than $76,500 more than $57,375 more than $38,250
*Single, married filing separately, or qualifying surviving spouse (QSS). (this question is
modified from the IRS' VITA tax training module)

9. Question ID: 94850165 (Topic: Other Individual Tax Credits)

Perry is a software engineer. He worked for two different employers during the year. He
earned $108,000 for the first employer and $73,500 for the other. Each employer
withheld FICA taxes on his earnings, so Perry had too much Social Security tax
withheld from his compensation. What should he do in order to receive the excess
amount withheld?

 A. Claim the excess amount withheld as an adjustment to income.

 B. Claim the excess amount withheld as a credit against his income tax. The amount is
refundable.correct
 C. File a refund request with the employer.wrong
 D. Deduct the excess amount as an itemized deduction on his Schedule A, Form 1040.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for B:

 Perry can claim the excess amount withheld as a credit against his income tax. The
amount is refundable. Employers are required to withhold Social Security tax from an
employee’s wages. Sometimes, if a taxpayer has more than one employer during the
year, his total compensation is over the Social Security base limit for the year, and too
much Social Security tax is withheld. Perry can claim the excess as a refundable credit
against his income tax on his Form 1040. This is also called the “Credit for Withholding
and Estimated Tax.” Overpayments of Social Security tax are discussed in IRS Tax
Topic 608, Excess Social Security and RRTA Tax Withheld.

11. Question ID: 94849872 (Topic: Other Individual Tax Credits)

All of these taxpayers work and contributed to their employers' 401(k) plan. Who
qualifies for the Retirement Savings Contributions Credit (Saver's Credit) based on their
adjusted gross income in 2024?

 A. Carl, who is single and has a modified AGI of $66,250

 B. Megan, who is head of household and has an AGI of $55,350
 C. Edwin, who is single and has an AGI of $42,000.wrong
 D. Sybil, who is married filing jointly with a nonworking spouse. They have an AGI of
$54,500correct
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for D:

Sybil qualifies for the Retirement Savings Contribution Credit (also called the "Saver's
Credit") because her AGI is under $76,500, which is the maximum AGI threshold in
2024 for taxpayers who are married filing jointly. Edwin, Carl, and Megan cannot qualify
because they have an AGI that exceeds the limits for their filing status. To see more
information about this credit, see IRS Topic No. 610 Retirement Savings Contributions
Credit.

2024 AGI Limits (Table) Source: https://www.irs.gov/retirement-plans/plan-participant-

employee/retirement-savings-contributions-savers-credit

2024 Saver's Credit

Credit Rate Married Filing Jointly Head of Household All Other Filers*
AGI not more than AGI not more than AGI not more than
50% of your contribution
$46,000 $34,500 $23,000
20% of your contribution $46,001- $50,000 $34,501 - $37,500 $23,001 - $25,000
 Credit Rate Married Filing Jointly Head of Household All Other Filers*
10% of your contribution $50,001 - $76,500 $37,501 - $57,375 $25,001 - $38,250
0% of your contribution more than $76,500 more than $57,375 more than $38,250
*Single, married filing separately, or qualifying surviving spouse (QSS). (this question is
modified from the IRS' VITA tax training module)

12. Question ID: 94850134 (Topic: Other Individual Tax Credits)

Megan is a doctor who worked at two different medical clinics during the year. She
overpaid her Social Security taxes because one clinic paid her $120,000 in wages and
the second clinic paid her $60,000 ($180,000 in wages total). What is the proper way for
her to request a refund of these overpaid amounts?

 A. She can claim the excess withholding as a credit in the payments section of Form
1040.correct
 B. She can claim the excess withholding as a deduction on Schedule A.
 C. She can claim the excess withholding as a credit on Schedule B.
 D. She can claim the excess withholding as an adjustment to income on Form
1040.wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for A:

Megan can claim the excess withholding as a credit in the payments section of Form
1040. Social Security taxes are withheld from the paychecks of all employees up to the
allowable maximums. Taxpayers with more than one employer might have had more
than the required amount of Social Security tax withheld from their wages for the year. If
this occurred, taxpayers can claim the excess withholding as a credit in the payments
section of Form 1040. Overpayments of Social Security tax are discussed in IRS Tax
Topic 608, Excess Social Security and RRTA Tax Withheld.

13. Question ID: 95419605 (Topic: Other Individual Tax Credits)

Mohammad is age 28 and files single. Which of the following actions would prevent him
from claiming the Retirement Savings Contribution Credit?

 A. His AGI is $32,000.

 B. He makes a $2,000 contribution to a Roth IRA.
 C. He is a full-time student. correct
 D. He makes a $3,000 contribution to a 401(k). wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

 Correct Answer Explanation for C:

Being a full-time student would prevent Mohammad from claiming the credit. The
Retirement Savings Contributions Credit (Saver’s Credit) is a credit for low-income and
moderate-income taxpayers who save for retirement. The retirement savings
contribution credit is worth up to $1,000 ($2,000 if married filing jointly). Taxpayers may
be eligible for the credit if they are:

 Age 18 or older,
 Not claimed as a dependent on another person’s return, and
 Not a full-time student.
See Form 8880, Credit for Qualified Retirement Savings Contributions, for more
information.

15. Question ID: 94849952 (Topic: Other Individual Tax Credits)

Which of the following is not a tax credit targeted for individual taxpayers?

 A. Adoption Credit
 B. Earned Income Tax Creditwrong
 C. Work Opportunity Tax Creditcorrect
 D. Child Tax Credit
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

The Work Opportunity Tax Credit is a business credit available through 2025 for
businesses that hire certain types of workers from targeted groups, such as disabled
veterans, ex-felons, and food stamp recipients. The other credits listed are for individual
taxpayers and not for businesses.

18. Question ID: 94849979 (Topic: The ACA and the Premium Tax Credit)
Todd is age 35 and works for a small business that does not offer health insurance, so
Todd purchased his health insurance through the Health Care Marketplace. What credit
might he be eligible for?

 A. The Premium Tax Credit correct

 B. Small Business Health Care Tax Creditwrong
 C. Health Coverage Tax Credit (HCTC)
 D. He does not qualify for a credit.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.
 This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for A:

Todd may qualify for the Premium Tax credit. The other credits would not be applicable
to Todd's situation. The Small Business Health Care Tax Credit is a credit for small
businesses that provide health insurance to their employees. The Health Coverage Tax
Credit (HCTC) was a federal tax credit that only applied to certain individuals at least 55
and up to 65 years of age which are receiving health benefits from PBGC (a
government insurer that covers defined benefit pension plans). Learn more about
the Premium Tax Credit.

19. Question ID: 94815864 (Topic: The ACA and the Premium Tax Credit)
Lucie is 32 years old and has health insurance through the Marketplace. She received
the Advanced Premium Tax Credit in order to help pay for her health insurance. What
Marketplace form does she need in order to reconcile her advance payments of the
Premium Tax Credit on her Form 1040?

 A. Lucie does not need to wait for any forms from the Marketplace.
 B. Form 1095-Cwrong
 C. Form 1095-B
 D. Form 1095-Acorrect
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for D:

Lucie will need the information on Form 1095-A to complete Form 8962 to reconcile any
advance payments of the premium tax credit. She needs to wait until she receives the
Form 1095-A in order to file a complete and accurate tax return.

If you receive a Form 1095-A, Health Insurance Marketplace Statement, showing that
advance payments of the premium tax credit were paid for coverage for you or your
family member, you must file an individual income tax return and submit a Form 8962 to
reconcile those advance payments, even if you would not otherwise be required to file a
tax return. Learn more about the Premium Tax Credit and the forms that are required to
reconcile the APTC on a taxpayer's individual return on this FAQ page: Questions and
Answers about Health Care Information Forms for Individuals (Forms 1095-A, 1095-B,
and 1095-C).

20. Question ID: 94850177 (Topic: The ACA and the Premium Tax Credit)
Viktor is age 36 and works full-time for a small car dealership. His employer does not
offer health insurance, so Viktor purchases his health insurance through the Health
Insurance Marketplace. What tax credit may he be eligible for?
 A. Advanced Healthcare Credit
 B. Individual Wellness Credit
 C. Universal Health Creditwrong
 D. Premium Tax Creditcorrect
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for D:

Taxpayers who purchase health insurance through a Health Insurance Marketplace for
themselves or others in their family may be eligible for the Premium Tax Credit. The
other credits listed do not exist. See IRS Topic No. 612 The Premium Tax Credit, for
more information.

21. Question ID: 94815964 (Topic: The ACA and the Premium Tax Credit)
Which of the following taxpayers would not be eligible for the Premium Tax Credit or the
Advance Premium Tax Credit?

 A. A taxpayer who is a full-time student.

 B. An individual who is not lawfully present in the United States.correct
 C. A taxpayer who is single with no dependents.
 D. Taxpayers who got divorced or legally separated during the tax year.wrong
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

A PTC is not allowed for the coverage of an individual who is not lawfully present in the
United States. All APTC paid for an individual not lawfully present who enrolls in a
qualified health plan must be repaid. All of the other choices listed could still potentially
be eligible for the credit.

23. Question ID: 94815961 (Topic: The ACA and the Premium Tax Credit)
Jonas purchased health insurance through the Marketplace. A week later, he gets a full-
time job, and his employer offers him health coverage. The coverage meets affordability
guidelines, but Jonas declines the coverage because he doesn't like the fact that he
would have to switch hospitals and drive much farther to see a doctor. He decides to
keep paying for his Marketplace policy instead. Is Jonas allowed to claim the Premium
Tax Credit?
 A. Jonas will be eligible for the Premium Tax Credit because he declined the
employer's coverage. wrong
 B. Jonas will not be eligible for the Premium Tax Credit for any month that he was
eligible for an employer-sponsored policy. correct
 C. Jonas will be eligible for a partial credit based on his AGI.
 D. Jonas can claim the Premium Tax Credit, because he has reasonable cause for
declining the employer's group policy.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

Jonas will not be eligible for the Premium Tax Credit for any month that he was eligible
for an employer-sponsored health insurance policy. This is true even if he declines the
employer's offer of health coverage. However, a taxpayer may still be eligible for a PTC
despite an offer of employer coverage if the employer’s coverage is unaffordable or fails
to meet a minimum value standard.

Learn more about the Premium Tax Credit.

24. Question ID: 94815881 (Topic: The ACA and the Premium Tax Credit)
The Premium Tax Credit (PTC) is a tax credit for taxpayers who enroll in:
_________________.

 A. College.
 B. A daycare for their children.wrong
 C. A qualified health plan offered through a Marketplace.correct
 D. An employer-sponsored retirement plan.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for C:

The Premium Tax Credit is a refundable tax credit designed to help eligible individuals
afford health insurance purchased through the Health Insurance Marketplace. Although
the individual healthcare penalty was repealed, most other ACA provisions are still
active. Learn more on the IRS website about the Premium Tax Credit.

26. Question ID: 94815967 (Topic: The ACA and the Premium Tax Credit)
Only health plans purchased from ___________ are eligible for the Premium Tax
Credit.
 A. The U.S. military.
 B. A group plan through an employer.wrong
 C. Cobra coverage.
 D. The Health Insurance Marketplace.correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for D:

Only health plans purchased from the Health Insurance Marketplace are eligible for the
Premium Tax Credit. Learn more about the Premium Tax Credit.

27. Question ID: 94815962 (Topic: The ACA and the Premium Tax Credit)
Giselle is single and has no dependents. When enrolling through the Marketplace
during open enrollment, she was not eligible for employer-sponsored coverage because
her employer was a very small business that did not offer health insurance. On August
1st, Giselle started a brand new job and became eligible for employer-sponsored
coverage exactly one month later (on September 1st). Giselle officially discontinued her
Marketplace coverage at the end of September. Can Giselle claim the Premium Tax
Credit?

 A. She cannot claim the PTC because she got an offer of employer coverage during the
year.
 B. She can claim the PTC for the months of January through September. wrong
 C. She can claim the PTC for the full year.
 D. She may be able to claim a PTC for the months of January through August.correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for D:

Giselle may be able to claim a PTC for the months of January through August. She may
also be able to get a PTC for September, but ONLY if APTC was being paid for her
Marketplace coverage, and she informed the Marketplace about her coverage, and the
Marketplace was unable to discontinue the APTC for September (this question was
modified from an example in Publication 4491).

30. Question ID: 95033714 (Topic: Net Investment Income Tax)

Roscoe and Arista are married and file jointly. Their MAGI is $562,000. They have net
investment income of $62,000 from dividends. They sell their main home that they have
owned and lived in for 20 years for $1.2 million and realize a gain of $645,000 on the
 sale. They also sell a vacation home for $575,000 and realize a gain of $130,000 on the
sale. What amount do Roscoe and Arista owe for the net investment income tax? (The
NIIT threshold for couples who file jointly is $250,000.)

 A. $31,806wrong
 B. $23,712
 C. $11,856correct
 D. $12,806
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 44% of students.

Correct Answer Explanation for C:

The net investment income tax is imposed on individuals, estates, and trusts. For
individuals, the 3.8% tax is imposed on the lesser of:

 The individual’s net investment income for the year, or

 Any excess of the individual’s modified adjusted gross income for the tax year
over certain thresholds.
Roscoe and Arista may use section 121 to exclude $500,000 of capital gain on the sale
of their primary home ($645,000 - $500,000 = $145,000 gain not excluded), but cannot
exclude any of the gain on the sale of their vacation home, so their net investment
income total is $337,000 ($62,000 + $145,000 + $130,000). Their MAGI over the
threshold amount of $250,000 is $312,000 ($562,000 - $250,000). Since this is less
than the net investment total, the answer is calculated as follows: $312,000 × 3.8% =
$11,856 net investment tax owed. To learn more about the Net Investment Income Tax,
see IRS Topic No. 559 Net Investment Income Tax.

31. Question ID: 95033713 (Topic: Net Investment Income Tax)

A couple who files jointly will be subject to the net investment income tax (NIIT) if they
have net investment income and also have modified adjusted gross income over the
following threshold:

 A. $300,000wrong
 B. $125,000
 C. $250,000correct
 D. $200,000
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

 Correct Answer Explanation for C:

For a couple who files jointly, the MAGI threshold is $250,000 ($125,000 MFS). The
threshold for head of household and single filers is $200,000. These numbers are not
indexed annually for inflation. The Net Investment Income Tax applies at a rate of 3.8%
to certain net investment income. The NIIT affects income tax returns of individuals,
estates and trusts. To learn more about the Net Investment Income Tax, see IRS Topic
No. 559 Net Investment Income Tax.

32. Question ID: 95092393 (Topic: Net Investment Income Tax)

Chad is 32 years old and unmarried. He does not have any dependents. He has wages
of $180,000 and $15,000 of dividends during the taxable year. Is he subject to the Net
Investment Income tax?

 A. Yes, he is subject to the NIIT, but only on his investment income.wrong

 B. No, he is not subject to the NIIT because his income is below the threshold.correct
 C. Yes, he is subject to the NIIT on all his taxable income.
 D. Yes, he is subject to the NIIT, but only on his wages.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

Chad's modified adjusted gross income is $195,000, ($180,000 wages + $15,000 in

dividends), which is less than the $200,000 statutory threshold for single filers. He is not
subject to the Net Investment Income Tax. To learn more about the Net Investment
Income Tax, see IRS Topic No. 559 Net Investment Income Tax.

33. Question ID: 95033701 (Topic: Net Investment Income Tax)

Which of the following are not subject to the net investment income tax (NIIT)?

 A. Estates of deceased taxpayers.

 B. Trusts.wrong
 C. U.S. residents (green-card holders) that live overseas.
 D. Nonresident aliens.correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for D:

 Nonresident aliens are not subject to the net investment income tax. A dual-resident
individual may be subject to the NIIT for the portion of the year during which he is a U.S.
resident, depending on the amount of his net investment income and MAGI. Estates
and trusts may be subject to the NIIT if they have undistributed net investment income
over certain thresholds.

34. Question ID: 94850151 (Topic: Net Investment Income Tax)

Katrina 60, and Bradley, 61, are married and file jointly. Neither are real estate
professionals, but they own a rental property that they actively manage themselves.
They had the following income during the year:

 Self-employment income: $162,000 for Katrina

 Wage income: $155,000 for Bradley
 Traditional IRA distribution: $30,000
 Capital gains from the sale of stock: $40,000
 Rental income from a residential rental: $12,000
 Dividends: $8,000
Their total Modified Adjusted Gross Income is $407,000. What amount do they owe, if
any, for the net investment income tax (NIIT)? The NIIT threshold for MFJ filers is
$250,000.

 A. $540wrong
 B. $5,966
 C. $2,280correct
 D. $0
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for C:

Their Net Investment Income is $60,000, the total of their capital gains, rental income,
and dividend income. Their MAGI exceeds the threshold for MFJ filers by $157,000
($407,000 - $250,000 threshold). Since $60,000 is less than $157,000, the net
investment income tax would be calculated as follows: ($60,000 × 3.8% = $2,280). For
individuals, a 3.8% tax is imposed on the lesser of:

 The individual’s net investment income for the year, or

 Any excess of the individual’s modified adjusted gross income for the tax year
over the following threshold amounts:
 $250,000 for MFJ or QSS
 $125,000 for MFS
  $200,000 for all other filing statuses
Net investment income does not include “earned” income, such as wages or self-
employment earnings. Retirement income is also not included in net investment income,
so the retirement plan distribution would not be included in the calculation. For more
information, see IRS Topic No. 559 Net Investment Income Tax.

35. Question ID: 94850150 (Topic: Net Investment Income Tax)

Which of the following statements is correct about qualified retirement plans and the net
investment income tax?

 A. Distributions from qualified retirement plans are not investment income, but they are
included in gross income for purposes of comparison to the applicable threshold for the
net investment income tax.correct
 B. Net investment income includes distributions from qualified plans, but not
from any type of IRA.wrong
 C. Net investment income includes distributions from 401(k) plans and traditional or
Roth IRAs.
 D. Net investment income includes distributions from traditional or Roth IRAs, but not
from 401(k) plans.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

For purposes of the net investment income tax, "net investment income" does NOT
include distributions from a qualified retirement plan, such as a 401(k), or from
traditional or Roth IRAs. However, these distributions are taken into account when
determining the taxpayer’s modified adjusted gross income for purposes of comparison
to the applicable threshold for the tax. Retirement income is never treated as investment
income for tax purposes. For more information, see IRS Topic No. 559 Net Investment
Income Tax.

37. Question ID: 94850061 (Topic: Additional Medicare Tax)

Fleur and Abram are married and file jointly. They had the following items of income
during the current year:

 Abram's wages: $178,000

 Fleur's self-employment income: $143,000
 Capital gains: $7,000
 Dividends: $5,000
 Abram's employer did not withhold the additional Medicare tax from his earnings. What
amount, if any, do Fleur and Abram owe for the additional Medicare tax (the threshold is
$250,000 in 2024 for MFJ filers):

 A. $2,889wrong
 B. $2,997
 C. $0
 D. $639correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for D:

Abram's wages did not exceed $200,000, which is why his employer did not withhold
the additional Medicare tax from his earnings. However, when combined with Fleur's
self-employment income, the couple’s earned income exceeds the $250,000 threshold
for joint filers. They are liable to pay the 0.9% additional Medicare tax on $71,000
($321,000 combined income minus $250,000 MFJ filing threshold.) Their additional
Medicare tax is $639 ($71,000 × .009). Fleur and Abram must file Form 8959, Additional
Medicare Tax. Note: Abram can adjust his W-4 to increase the amount withheld from his
wages, but he cannot request additional withholding specifically for the additional
Medicare tax.

To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

39. Question ID: 94850064 (Topic: Additional Medicare Tax)

Stanley and Mira are married and file jointly. Stanley earned $195,000 in salary and
commissions, and Mira earned $80,000 in self-employment income. What is the amount
of additional Medicare Tax they will owe?

 A. $0
 B. $875wrong
 C. $2,625
 D. $225correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for D:

 Stanley and Mira will owe the additional Medicare Tax on the amount by which their
combined earned income exceeds the threshold amount for their filing status, which is
MFJ.

Additional Medicare Tax Thresholds

Filing Status Earned income above:

Married Filing Jointly $250,000
Single, HOH, QSS $200,000
Married Filing Separately $125,000
Based on the thresholds above, Stanley and Mira would pay the Additional Medicare
Tax on the amount by which their combined earned income exceeds the $250,000
threshold for their filing status, which is $25,000 ([195,000 +$80,000]- $250,000
threshold = $25,000). Their additional Medicare Tax would be 0.9% x $25,000 = $225.
To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

41. Question ID: 94850058 (Topic: Additional Medicare Tax)

Billy is married, but files "married filing separate" (MFS) from his spouse. He earns
$120,000 in wages and an additional $80,000 in self-employment income. He does not
have any other type of income for the year. How much additional Medicare Tax will Billy
be required to pay in 2024?

 A. $11,475
 B. $675correct
 C. $0
 D. $2,625wrong
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for B:

Billy would be required to pay $675 in additional Medicare Tax. The additional Medicare
tax of 0.9% applies to wages, compensation, and self-employment income above
specified threshold amounts. Since Billy is filing MFS, his threshold is only $125,000.

Additional Medicare Tax Thresholds

Filing Status Earned income above:

 Filing Status Earned income above:
Married Filing Jointly $250,000
Single, HOH, QSS $200,000
Married Filing Separately $125,000
Based on the thresholds above, Billy would pay the Additional Medicare Tax on the
amount by which his earned income exceeds the $125,000 threshold for his filing
status, which is $75,000 ([120,000 +$80,000]- $125,000 threshold = $75,000). His
Additional Medicare Tax would be 0.9% x $75,000 = $675. To learn more about the
additional Medicare Tax, see Topic No. 560 Additional Medicare Tax.

43. Question ID: 94850087 (Topic: Additional Medicare Tax)

Roxanne is single and does not have any dependents. She earns $350,000 in wages
for the year. She had no other income during the year. How much of her income will be
subject to the additional Medicare tax?

 A. $120,000
 B. $150,000correct
 C. $0wrong
 D. $24,000
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

The additional 0.9% Medicare tax will be calculated on her earnings above $200,000.
This means that $150,000 of her earnings will be subject to additional Medicare tax
($350,000 wages - $200,000 threshold amount). She will pay $1,350 in additional
Medicare tax on her tax return ($150,000 x 0.9% = $1,350). When a person is an
employee, the additional Medicare tax is withheld from wages automatically by the
employer. When a person is self-employed, they must calculate and pay the additional
Medicare tax along with their tax return. The threshold amounts for the additional
Medicare tax are:

 Married filing jointly: $250,000.

 Married filing separately: $125,000.
 Single, HOH, QSS: $200,000.
To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.
 45. Question ID: 94850062 (Topic: Additional Medicare Tax)
Which of the following taxpayers will have the additional Medicare Tax withheld
automatically from their wages?

 A. Bradley, who is unmarried and files single. He earns $210,000 in wages during the
year. correct
 B. Ian, who is widowed with one dependent. He files as a Qualifying Surviving Spouse.
He earned $140,000 in wages and had $70,000 in capital gains from the sale of stock.
 C. Dornetta, who is married and files jointly with her husband. She earned
$195,000 in wages and also had $12,000 in passive rental income. wrong
 D. Teddy, who is unmarried and files Head of Household. He earns $125,000 in salary
during the year.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for A:

Bradley is the only one who will have the additional Medicare Tax automatically withheld
from his wages. Bradley earns $210,000 in wages during the year. This is a "tricky"
question, because for withholding purposes, the employer is forced to withhold the
(0.9%) additional Medicare Tax from any employee who earns more than $200,000 a
year, regardless of the employee's actual filing status. The additional Medicare Tax only
applies to wages, railroad retirement (RRTA) compensation, self-employment income,
and other types of "earned" income. None of the other taxpayers listed has earned
income above $200,000, so no additional Medicare Tax would be withheld by their
employers.

Note: If the employee is married, and his spouse’s combined earnings are less than the
$250,000 MFJ threshold, they can apply the overpayment against any other type of tax
that may be owed on their individual income tax return when they file. To learn more
about the additional Medicare Tax, see Topic No. 560 Additional Medicare Tax.

46. Question ID: 95394477 (Topic: Additional Medicare Tax)

Which of the following types of income is never subject to the Additional Medicare tax?

 A. Distributions from qualified retirement plans.correct

 B. Salary earned by a statutory employee.
 C. Self-employment income.
 D. Wages.wrong
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

 Correct Answer Explanation for A:

The additional Medicare tax of 0.9% applies to wages, compensation, tips, and self-
employment income above specified threshold amounts. Distributions from qualified
retirement plans are exempt from the Additional Medicare Tax, because they are
treated as pension income. Employer contributions to a qualified plan are also exempt.
To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

1. Question ID: 7585019512 (Topic: Individual Energy Credits)

Under the New Clean Vehicle Tax Credit, what is the maximum credit amount that a
taxpayer may claim for purchasing a brand new, qualified energy-efficient vehicle?

 A. $18,000
 B. $7,500correct
 C. $5,000
 D. $3,200
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

The maximum credit amount in 2024 is $7,500. The credit depends on whether the
vehicle meets the critical minerals requirement ($3,750), the battery component
requirement ($3,750), or both ($7,500).

The taxpayer claims the credit in the tax year they receive the vehicle. Key elements to
claim this credit:

 The final assembly of the vehicle must occur in North America.

 The manufacturer’s suggested retail price cannot exceed $55,000, or $80,000 for
a pick-up truck, SUV, or van.
 The taxpayer’s modified adjusted gross income cannot exceed certain limits.
Show Other Explanations








 



7. Question ID: 94849967 (Topic: Other Individual Tax Credits)

Donna, age 29, is unmarried and earns $26,000 in wages during the year. She
contributes $1,000 to her traditional IRA. She plans to fully deduct her IRA contribution.
Based only on this information, what type of credit can she claim?

 A. Retirement Savings Contribution Creditcorrect

 B. She cannot claim a credit, because she is already deducting her IRA contribution.
 C. Residential Energy Credit
 D. Excess Social Security and RRTA tax withheld
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

She can deduct her IRA contribution and also take the Retirement Savings
Contributions Credit (also called the "Saver's Credit") at the same time. This credit gives
a special tax credit that allows lower-income taxpayers a credit when they save for
retirement. To see more information about this credit, see IRS Topic No. 610
Retirement Savings Contributions Credit.

2024 AGI Limits (Table) Source: https://www.irs.gov/retirement-plans/plan-participant-

employee/retirement-savings-contributions-savers-credit

2024 Saver's Credit

Credit Rate MFJ Head of Household All Other Filers*

AGI not more than AGI not more than AGI not more than
50% of your contribution
$46,000 $34,500 $23,000
20% of your contribution $46,001- $50,000 $34,501 - $37,500 $23,001 - $25,000
10% of your contribution $50,001 - $76,500 $37,501 - $57,375 $25,001 - $38,250
0% of your contribution more than $76,500 more than $57,375 more than $38,250
*Single, married filing separately, or qualifying surviving spouse (QSS). (this question is
modified from the IRS' VITA tax training module)

10. Question ID: 94815971 (Topic: Other Individual Tax Credits)

Which of the following credits might carryover from a prior tax year?
 A. Retirement Savings Contribution Credit
 B. Earned Income Credit
 C. Adoption Credit correct
 D. Lifetime Learning Credit
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for C:

Of all the credits listed, only the Adoption Credit allows a carryover from a prior year.
The adoption credit is nonrefundable, however, taxpayers can carry any remaining
unused credit for up to five years, or until they fully use the credit, whichever comes
first. To learn more about the Adoption Credit, see IRS Topic No. 607, Adoption Credit
and Adoption Assistance Programs.

14. Question ID: 95419650 (Topic: Other Individual Tax Credits)

Which of the following taxpayers would be eligible for the Retirement Savings
Contribution credit?

 A. Paul, age 23, who is claimed as a dependent by his parents. He is not a student, but
earns $3,400 in wages and contributes $1,500 to a traditional IRA.
 B. Jackie, age 31, who is a full-time student in graduate school. She earns $31,000 in
wages and contributed $3,000 to her 401(k).
 C. Annie, age 22, who files single and earns $22,000 in wages. She contributes
$2,000 to her Roth IRA.correct
 D. Tony, age 17, who earns $23,000 in wages and contributes $1,900 to a traditional
IRA.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

Annie, age 22, who files single and earns $22,000 in wages and contributes $2,000 to
her Roth IRA, is the only one who would qualify for the credit.

Being a full-time student would prevent Jackie from claiming the credit. Tony cannot
claim the credit because he is not at least 18 years of age. Paul cannot claim the credit
because he is claimed as a dependent by his parents.

The Retirement Savings Contributions Credit (Saver’s Credit) is a credit for low-income
and moderate-income taxpayers who save for retirement. The retirement savings
 contribution credit is worth up to $1,000 ($2,000 if married filing jointly). Taxpayers may
be eligible for the credit if they are:

 Age 18 or older,
 Not claimed as a dependent on another person’s return, and
 Not a full-time student.
See Form 8880, Credit for Qualified Retirement Savings Contributions, for more
information.

16. Question ID: 94849945 (Topic: Other Individual Tax Credits)

Which of the following is a nonrefundable tax credit?

 A. The Retirement Savings Contributions Credit.correct

 B. Credit for Excess Social Security and RRTA Tax Withheld
 C. The Premium Tax Credit.
 D. The Earned Income Tax Credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for A:

The Retirement Savings Contributions Credit (also called the "Saver's Credit") is a
nonrefundable tax credit. All of the other credits listed are refundable credits that can
produce a refund even if the taxpayer has no tax liability. To see more information about
this credit, see IRS Topic No. 610 Retirement Savings Contributions Credit.

17. Question ID: 94849944 (Topic: Other Individual Tax Credits)

Taxpayers may be eligible for the Retirement Savings Contributions Credit if they make
eligible contributions to which types of retirement plans?

 A. Only to an employer-sponsored plan.

 B. An employer-sponsored retirement plan, Roth IRA, or an individual retirement
arrangement (Traditional IRA), not including rollover contributions.correct
 C. Only a traditional IRA or an employer-sponsored retirement plan.
 D. A Roth IRA or a Traditional IRA, including rollover contributions.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for B:

 The Saver’s Credit (also called the Retirement Savings Contribution Credit) can be
taken for a taxpayer's contributions to: a traditional or Roth IRA; a 401(k), SIMPLE IRA,
SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and voluntary after-tax
employee contributions to a qualified retirement plan as well as 403(b) plans. However,
rollover contributions are NOT eligible for the Saver’s Credit. To see more information
about this credit, see IRS Topic No. 610 Retirement Savings Contributions Credit.

22. Question ID: 94849943 (Topic: The ACA and the Premium Tax Credit)
The Premium Tax Credit is what type of tax credit?

 A. Refundable credit.correct
 B. Nonrefundable credit.
 C. Estimated credit.
 D. Retroactive credit.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

The Premium Tax Credit is a refundable tax credit. The premium tax credit – also known
as PTC – is a refundable credit that helps eligible individuals and families cover the
premiums for their health insurance purchased through the Health Insurance
Marketplace. To get this credit, you must meet certain requirements and file a tax return
with Form 8962, Premium Tax Credit. For more information, see the official IRS detail
page on the Premium Tax Credit.

25. Question ID: 94815963 (Topic: The ACA and the Premium Tax Credit)
For individuals requesting the Advance Premium Tax Credit, the Marketplace
determines whether the employer coverage is "affordable" by comparing
______________________.

 A. The employee’s cost of the Marketplace coverage to average Cobra premiums.

 B. The employee’s cost of the employer coverage for self-only coverage to
household income.correct
 C. The employee’s cost of the employer coverage for Cobra coverage to the household
AGI.
 D. The employee’s cost of the employer coverage for self-only coverage to the
employee's AGI.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 32% of students.

 Correct Answer Explanation for B:

In general, for individuals requesting the APTC, the Marketplace determines whether
the employer coverage is "affordable" by comparing the employee’s cost of the
employer coverage for self-only coverage to household income. (See Publication 4491
for examples).

28. Question ID: 94815832 (Topic: The ACA and the Premium Tax Credit)
The Premium Tax Credit helps eligible individuals and families afford health insurance.
Which of the following scenarios would make a person ineligible for the Premium Tax
Credit or the Advanced Premium Tax Credit?

 A. The taxpayer is self-employed and files as Head of Household.

 B. The taxpayer is a U.S. Resident Alien with a green card.
 C. The taxpayer purchased their coverage outside the Healthcare
Marketplace.correct
 D. The taxpayer files Married Filing Separately and is the victim of domestic abuse.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for C:

Taxpayers are not eligible for the Premium Tax Credit for insurance coverage
purchased outside the Marketplace. None of the other scenarios would disqualify a
taxpayer from claiming the Premium Tax Credit. Generally, individuals who are legally
married are required to file joint income tax returns to claim the premium
tax credit (PTC), however, if you are a victim of domestic abuse or spousal
abandonment, you can file a return as Married Filing Separately and still claim the
Premium Tax Credit. Taxpayers must file a tax return to claim the Premium Tax Credit,
whether or not they have a filing requirement. See the instructions to Form 8962,
Premium Tax Credit (PTC), for information about the Premium Tax Credit.

29. Question ID: 94850138 (Topic: Net Investment Income Tax)

Which of the following taxpayers would NOT be subject to the net investment income
tax (the NIIT)?

 A. An estate of a deceased U.S. citizen.

 B. An irrevocable trust.
 C. A nonresident alien.correct
 D. An individual taxpayer with investment income.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.
 This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Nonresident aliens are not subject to the net investment income tax. The NIIT applies at
a rate of 3.8% to certain net investment income of individuals, estates and trusts that
have income above the statutory threshold amounts. For more information, see IRS
Topic No. 559 Net Investment Income Tax.

36. Question ID: 94850140 (Topic: Net Investment Income Tax)

Which of the following types of income is considered “investment Income” for the
purposes of figuring the Net Investment Income Tax (NIIT)?

 A. Social Security Benefits.

 B. Taxable alimony.
 C. Rental and royalty income.correct
 D. Tax-exempt interest income.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Net investment income includes rental and royalty income. In general, investment
income includes: interest, dividends, capital gains, rental and royalty income, non-
qualified annuities and income from other passive activities. Net Investment income
does NOT include: wages, unemployment compensation, income from a (non-passive)
business, Social Security Benefits, taxable alimony, tax-exempt interest, self-
employment income, Alaska Permanent Fund Dividends, and distributions from certain
Qualified Plans. For more information, see IRS Topic No. 559 Net Investment Income
Tax.

38. Question ID: 95394455 (Topic: Additional Medicare Tax)

Of the taxpayers listed, which one is the most likely to pay the Additional Medicare tax?

 A. Aster who is single and earns $190,000 in wages and $26,000 in interest income.
 B. Geraldine, who files MFS and earns $120,000 in self-employment income.
 C. Thaddeus, who is married and earns $220,000 in wages. (His wife does not work).
 D. Logan, who is single and earns $200,000 in wages from one employer, and an
additional $33,000 in wages from a second job.correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.
 This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Logan will likely owe Additional Medicare Tax. Employers must begin withholding the
additional Medicare tax once an employee’s wages exceed $200,000, but in Logan's
case, he worked two jobs, but his combined wages exceed the threshold for his filing
status ($200,000 in wages + $33,000 in wages from a second job) = $233,000 in
wages.

Note: Higher-income taxpayers must pay an additional Medicare tax. The additional tax
rate is 0.9% of employee income, and applies to "earned income" like wages and self-
employment income. Once earnings reach $200,000 in a calendar year, ($250,000 for
MFJ and $125,000 for MFS) the Additional Medicare Tax will apply.

To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

40. Question ID: 94850063 (Topic: Additional Medicare Tax)

Hamza is single. His AGI was $306,000 during the current year, resulting from the
following items of income:

 Self-employment income: $210,000

 Rental income: $80,000
 Net capital gains: $9,000
 Dividends: $7,000
Which of the following statements is correct?

 A. Hamza will owe both the net investment income tax and the additional
Medicare tax.correct
 B. Hamza will owe the additional Medicare tax, but not the net investment income tax.
 C. Hamza will owe the net investment income tax, but not the additional Medicare tax.
 D. Hamza will not owe the net investment income tax or the additional Medicare tax.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for A:

Hamza will owe both Affordable Care Act taxes: The 0.9% additional Medicare tax and
the 3.8% net investment income tax because his income exceeds the applicable
threshold for both of these taxes. For single filers, the additional Medicare tax applies to
 earned income above $200,000 and the net investment income tax is imposed on the
lesser of:

 The individual’s net investment income, or

 The excess of the individual’s modified adjusted gross income over $200,000.
To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax. To learn more about the Net Investment Income Tax, see IRS Topic No.
559 Net Investment Income Tax.

42. Question ID: 94850164 (Topic: Additional Medicare Tax)

Karlton and Ranna are married and file jointly. Karlton earned a salary of $152,000 and
Ranna earned $124,000 in wages. Their employers did not withhold amounts for the
additional Medicare tax. The earned income threshold for this tax for couples filing
jointly is $250,000. What amount will Karlton and Ranna owe, (if any), for the additional
Medicare tax on their income tax return?

 A. $0
 B. $9,880
 C. $234correct
 D. $2,484
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Karlton and Ranna will owe $234 of additional Medicare tax on their return. Their
combined earned income of $276,000 is $26,000 more than the $250,000 additional
Medicare tax threshold for MFJ filers, so they will owe $234 ($26,000 × .9%). See
IRS Tax Topic No. 560 Additional Medicare Tax, for more information.

44. Question ID: 94850135 (Topic: Additional Medicare Tax)

The Additional Medicare Tax does not apply to which of the following types of income?

 A. Regular wages.
 B. Self-employment income.
 C. Railroad Retirement Tax Act compensation.
 D. Interest income.correct
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

The Additional Medicare Tax applies to wages, railroad retirement (RRTA)

compensation, and self-employment income over certain thresholds. Employers are
generally responsible for withholding the tax on wages and RRTA compensation in
certain circumstances. Investment income (such as interest and dividends) is not
subject to the Additional Medicare Tax. See IRS Tax Topic No. 560 Additional Medicare
Tax, for more information.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

4. Question ID: 94849727 (Topic: Foreign Account and Asset Reporting)

Which of the following scenarios would likely trigger mandatory filing of Form 3520?

 A. A taxpayer who receives a $30,000 gift from a family member. wrong

 B. A taxpayer who sells $100,000 of cryptocurrency.
 C. A taxpayer who invests directly in a foreign corporation and becomes a 10%
shareholder.
 D. A taxpayer who receives a $200,000 inheritance from a foreign estate. correct
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for D:

A taxpayer who receives a $200,000 inheritance from a foreign estate would be

required to file Form 3520. In general, a Form 3520, Annual Return to Report
Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is required to be
filed when a U.S. person receives a foreign gift or inheritance. The filing requirements
depend on the value of the inheritance of the gift, and whether the gift was given by a
foreign individual, entity, or trust. In the case of a foreign gift or inheritance, the reporting
requirement is triggered when the value of the transfer or gift exceeds $100,000 U.S.
dollars.

6. Question ID: 958501693 (Topic: Foreign Account and Asset Reporting)

Which of the following is generally NOT considered a “United States person” for FBAR
filing purposes?

 A. A U.S. corporation that primarily does business overseas.wrong

 B. A U.S. citizen that has lived overseas their entire life.
 C. U.S. resident with a green card that has been living overseas for over one year.
 D. A nonresident alien that must file Form 1040-NR.correct
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Incorrect Answer Explanation for A:

Generally, nonresident aliens are not considered "United States persons" and they are
not obligated to file FBARs.
 Note: Exceptions to this rule may occur if the nonresident chooses to be treated as a
U.S. resident for tax purposes or elects to file a joint tax return with a U.S. citizen or
U.S. resident.

Correct Answer Explanation for D:

Generally, nonresident aliens are not considered "United States persons" and they are
not obligated to file FBARs.

Note: Exceptions to this rule may occur if the nonresident chooses to be treated as a
U.S. resident for tax purposes or elects to file a joint tax return with a U.S. citizen or
U.S. resident.

Show Other Explanations

8. Question ID: 958501691 (Topic: Foreign Account and Asset Reporting)

What is the primary purpose of the FBAR (Report of Foreign Bank and Financial
Accounts)?

 A. To inform the Financial Crimes Enforcement Network (FinCEN) about foreign

financial accounts.correct
 B. To report the existence of foreign financial accounts to the IRS.
wrong
 C. To apply for a foreign tax credit on a U.S. tax return.

 D. To calculate the U.S. income tax owed on foreign income.

Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Incorrect Answer Explanation for B:

The primary purpose of filing an FBAR is for U.S. taxpayers to inform the Financial
Crimes Enforcement Network (FinCEN) about foreign financial accounts. A taxpayer
who holds a foreign financial account may have a reporting obligation even when the
account produces no taxable income, and even if the person does not have an
individual income tax filing requirement.

Correct Answer Explanation for A:

The primary purpose of filing an FBAR is for U.S. taxpayers to inform the Financial
Crimes Enforcement Network (FinCEN) about foreign financial accounts. A taxpayer
who holds a foreign financial account may have a reporting obligation even when the
account produces no taxable income, and even if the person does not have an
individual income tax filing requirement.
 Show Other Explanations

9. Question ID: 94850257 (Topic: International Information Reporting)

Which of the following foreign assets must be reported on Form 8938, but not the
FBAR?

 A. Foreign mutual funds.

 B. Foreign partnership interests.correct
 C. Bank accounts held at a foreign financial institution.wrong
 D. Foreign-issued life insurance or annuity with cash value.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

Foreign partnership interests are not reported on the FBAR. Foreign partnership
interests are reported on Form 8938. All of the other choices would be reported on the
FBAR as well as the Form 8938 (so both forms would potentially be required for all of
the other assets listed). You should be familiar with the distinctions between FBAR and
Form 8938 requirements for the exam (it is on the test specifications). To see a
table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS
detail page.

10. Question ID: 94850268 (Topic: International Information Reporting)

Angel is a U.S. citizen who lives and works in New York. His mother, Diana, is a
Canadian citizen who lives in Ontario, Canada. Diana is elderly and Angel tries to help
her manage her financial affairs. To facilitate this, Angel became a signatory on Diana's
Canadian bank account. Angel does not have a financial interest in the bank account
(all of the money in the account is his mother's). He is only a signatory. At the end of the
year, Diana's account had $50,000 in it. What filing requirement might this trigger?

 A. An FBAR for Diana.wrong

 B. Angel will have to file an FBAR as well as Form 8938.
 C. An FBAR for Angel.correct
 D. No reporting is required if he does not have a financial interest in the account.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 34% of students.

Correct Answer Explanation for C:

Angel will have to file an FBAR, but not a Form 8938. Angel has signature authority, but
no financial interest in the account, therefore, a Form 8938 is not required. To see a
 table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS
detail page.

11. Question ID: 94850273 (Topic: International Information Reporting)

Lorne and Donatella are married and live in the U.S. all year long. They jointly co-own a
foreign investment account valued at $60,000. This is a "specified foreign financial
asset". They file separate income tax returns (MFS). Lorne earned $95,000 in wages for
the year. Donatella had $34,000 in royalty income. They both have a filing requirement,
so both will file individual separate returns. Is either spouse required to file Form 8938,
Statement of Foreign Financial Assets?

 A. Yes, they are both required to file Form 8938. wrong

 B. They are both required to file Form 8938, unless they file jointly.
 C. Neither spouse is required to file Form 8938. correct
 D. Only Lorne is required to file Form 8938.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 26% of students.

Correct Answer Explanation for C:

Neither spouse has to file Form 8938. Each owns one-half of the value of the asset
($30,000 each). This amount must be used to determine the total value of specified
foreign financial assets that each owns. They both reside in the United States, so
neither spouse meets the reporting threshold of more than $50,000 on the last day of
the tax year or more than $75,000 at any time during the tax year. (Example from the
Form 8938 Instructions). Note that a different reporting threshold exists for taxpayers
who live abroad. To see a table comparison of FBAR and Form 8938
requirements, reference the dedicated IRS detail page.

12. Question ID: 94850272 (Topic: International Information Reporting)

Under FATCA (the Foreign Account Tax Compliance Act), certain U.S. taxpayers
holding financial assets OUTSIDE the United States must report those assets to the IRS
using which form?

 A. Form 1040NRwrong
 B. Form 3520
 C. Form 8938correct
 D. Form 1041
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for C:

 Under FATCA, certain U.S. taxpayers holding financial assets outside the United States
must report those assets to the IRS on Form 8938, Statement of Specified Foreign
Financial Assets. Other foreign assets may have to be reported on the FBAR. There are
serious penalties for not reporting these financial assets. To see a comparison of FBAR
and Form 8938 requirements, reference the dedicated IRS detail page.

13. Question ID: 94850297 (Topic: International Information Reporting)

Jaime is a U.S. green card holder and a citizen of Bolivia. Jaime lives and works in the
United States. Jaime has a power of attorney on her elderly parents’ accounts in Bolivia,
but she has never exercised the power of attorney. Her parent's Bolivian bank account
has the equivalent of $10,000 US dollars in it. She does not own or have signature
authority over any other foreign financial accounts. When is Jaime required to file an
FBAR?

 A. Only if she exercises her power of attorney.wrong

 B. She is required to file an FBAR for any year the account reaches $10,000
USD.correct
 C. Only if she accesses the funds at any time during the year.
 D. Never, as long as she can prove that the bank account is not hers.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for B:

Jaime must file an FBAR any year the account reaches or exceeds $10,000. She is
required to file an FBAR if the power of attorney gives her signature authority over the
financial accounts. Whether or not the authority is ever exercised is irrelevant to the
FBAR filing requirement.

14. Question ID: 94850244 (Topic: International Information Reporting)

Collette is an unmarried U.S. citizen who lives and works in the U.S. She owns a
vacation condo in Mexico and visits the condo frequently, and sometimes will stay for
several months. She does not live or work in Mexico, but in order to facilitate her trips
abroad, she opened several bank accounts in Mexico. At the end of the year, she had
the following funds held in three separate Mexican bank accounts:

 Santander Bank Mexico: $8,000

 Citibanamex: $19,000
 Scotiabank Mexico: $35,000
All amounts above are converted to U.S. dollars. What are Collette’s federal tax filing
requirements for these funds?

 A. She must file an FBAR.wrong

 B. She must file both an FBAR and Form 8938.correct
 C. None. Funds held in Mexican bank accounts are not taxable by the U.S. government.
 D. She must file Form 8938.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for B:

Collette will need to file both an FBAR and Form 8938.

Note: The filing threshold for the FBAR is $10,000 in any foreign bank account(s). The
filing threshold for Form 8938 is $50,000 for U.S. Citizens who do NOT have a foreign
tax home. Since Collette lives in the U.S. and her tax home is also in the U.S. then she
must file both forms based on the amounts she has deposited in the foreign banks. The
filing threshold is higher for those who live and work abroad. You should be familiar with
the distinctions between FBAR and Form 8938 requirements for the exam (it is on the
EA exam test specifications). To see a table comparison of FBAR and Form 8938
requirements, reference the dedicated IRS detail page.

15. Question ID: 94850200 (Topic: International Information Reporting)

George is an expat living overseas. He has over $10,000 in a foreign bank account and
is therefore required to file an FBAR. Where should he file his FBAR return?

 A. He should file the FBAR with the Financial Crimes Enforcement Network
(FinCEN).correct
 B. He should file the FBAR with his nearest U.S. embassy in the country where he
resides.wrong
 C. He should file the FBAR with Treasury Inspector General for Tax Administration
(TIGTA).
 D. He should file the FBAR with the IRS.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for A:

George must file his FBAR directly with the office of Financial Crimes Enforcement
Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS.
FinCen Form 114 and Instructions can be found through FinCen’s BSA E-Filing System.

16. Question ID: 94850269 (Topic: International Information Reporting)

For FBAR reporting purposes, which of the following is NOT considered a "foreign"
financial account?

 A. A foreign insurance trust where the beneficiary is a minor child.

 B. An account maintained with the branch of a foreign bank physically located in the
U.S.correct
 C. A foreign annuity policy.wrong
 D. A foreign life insurance policy that has a cash surrender value.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

An account maintained with the branch of a foreign bank physically located in the U.S.
would not be considered a foreign financial account. The other options listed would be
considered "foreign financial accounts" for FBAR reporting purposes. To see more
information about FBAR filing requirements, see the IRS FBAR detail page.

17. Question ID: 94850243 (Topic: International Information Reporting)

Geraldine lives and works overseas in Spain. She has various foreign financial assets.
Which of the following assets could trigger a filing requirement for an FBAR as well as a
Form 8938?

 A. Bank accounts held at a foreign financial institution.correct

 B. Foreign currency held directly.wrong
 C. Domestic (U.S) mutual funds that invest in foreign stock.
 D. Foreign real estate held directly.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for A:

Bank accounts held at a foreign financial institution may trigger an FBAR filing, as well
as a Form 8938. The other assets listed would not need to be reported on either an
FBAR or a Form 8938. You should be familiar with the distinctions between FBAR and
Form 8938 requirements for the exam (it is on the EA exam test specifications). To see
a table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS
detail page.

18. Question ID: 94850242 (Topic: International Information Reporting)

Which of the following foreign financial interests is not required to be reported on
Schedule B, and will not trigger possible FBAR reporting?

 A. Ownership of a foreign annuity policy with a cash value.

 B. Direct ownership of a foreign mutual fund.wrong
 C. Being the beneficiary of a foreign term life insurance policy with no cash
value.correct
 D. Signature authority over a bank account in a foreign country.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

A taxpayer is not required to report if they are the beneficiary of a foreign term life
insurance policy with no cash value. A taxpayer is required to file Schedule B if any of
the following applies:

 You had over $1,500 of taxable interest or ordinary dividends.

 You received interest from a seller-financed mortgage and the buyer used the
property as a personal residence.
 You have accrued interest from a bond. You are reporting original issue discount
(OID) of less than the amount shown on Form 1099-OID.
 You are reporting interest income of less than the amount shown on a Form 1099
due to amortizable bond premium.
 You are claiming the exclusion of interest from series EE or I U.S. savings bonds
issued after 1989.
 You received interest or ordinary dividends as a nominee.
 You had a financial interest in, or signature authority over, a financial account in
a foreign country or you received a distribution from, or were a grantor of, or
transferor to, a foreign trust.
19. Question ID: 94850240 (Topic: International Information Reporting)
What is the filing requirement for an FBAR (Foreign Bank Account Report) for 2024?

 A. $100,000, in aggregate, held in foreign bank account, but excluding other

financial accounts.wrong
 B. $25,000 in any single foreign bank account, but excluding other financial accounts.
 C. An amount exceeding $10,000 in any single foreign financial account.
 D. An amount that exceeds $10,000, in aggregate, held in any foreign financial
accounts.correct
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for D:

A United States person, including a citizen, resident, corporation, partnership, limited

liability company, trust and estate, must file an FBAR to report a financial interest in or
signature or other authority over at least one financial account located outside the
United States if the aggregate value of those foreign financial accounts exceeded
 $10,000 at any time during the calendar year reported. Taxpayers must file the FBAR
electronically through the Financial Crimes Enforcement Network’s BSA E-Filing
System. The FBAR is not filed with a taxpayer's federal tax return. To see more
information about FBAR filing requirements, see the IRS FBAR detail page.

20. Question ID: 94850256 (Topic: International Information Reporting)

Zoran is not married and does not live abroad. He is a U.S. citizen and has two foreign
bank accounts in Serbia, where members of his family live. He visits Serbia at least
once a year, but never stays longer than a few weeks. The total value of his specified
foreign financial assets is $49,000 and has never exceeded this amount during the year.
He earns $40,000 in wages during the year, so he has a filing requirement. What forms
is he required to file in addition to his tax return?

 A. No foreign reporting forms are required to be filed. wrong

 B. The FBAR onlycorrect
 C. Form 8938 only
 D. The FBAR and Form 8938
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for B:

Zoran is required to file the FBAR, but not the Form 8938, because Zoran's foreign
financial assets do not exceed $50,000. U.S. taxpayers that live in the United States do
not have to file a Form 8938 if the value of their foreign financial assets does not exceed
$50,000 on the last day of the tax year (or more than $75,000 at any time during the tax
year).

To compare the filing requirements between the FBAR and Form 8938, reference the
dedicated table on the IRS website.

21. Question ID: 94850281 (Topic: International Information Reporting)

Namira is a U.S. Citizen. Her father, Ishaan, is a citizen of India who owns a 75%
interest in an Indian corporation. During the year, Ishaan dies, and his 75% ownership
stake of the foreign corporation passes directly to Namira. In addition to her regular
income tax reporting requirements, which special form is Namira required to file to
report her newly-acquired ownership in this foreign corporation?

 A. Form 1040NR.wrong
 B. FBAR.
 C. Form 5471.correct
 D. Form 8938.
Study Unit 17: Foreign Financial Reporting covers the information for this question.
 This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

Namira will likely have to file a Form 5471 to report her ownership in the foreign
corporation. U.S. citizens who are officers, directors, or shareholders in certain foreign
corporations are responsible for filing Form 5471, Information Return of U.S. Persons
With Respect to Certain Foreign Corporations. The categories of U.S. persons
potentially liable for filing Form 5471 include: U.S. citizen and resident alien individuals,
U.S. domestic corporations, U.S. domestic partnerships, and U.S. domestic trusts.
Penalties for non-filing of this form are extremely severe. Form 5471 should be filed as
an attachment to the taxpayer’s regular federal income tax return, and filed by the due
date (including extensions) for that return. See the IRS information page for Form
5471 for more information.

22. Question ID: 94850280 (Topic: International Information Reporting)

What is the official due date for the FBAR?

 A. April 15correct
 B. December 31wrong
 C. October 15
 D. April 1
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

The FBAR is an annual report, officially due April 15. A taxpayer is allowed an automatic
extension to October 15. A taxpayer does not need to request an extension to file the
FBAR.

26. Question ID: 94850251 (Topic: International Information Reporting)

With regards to the filing requirements for the Form 8938, Statement of Specified
Foreign Financial Assets, the reporting threshold depends upon several different
factors. Which of the following is NOT a factor when determining whether a taxpayer is
required to file a Form 8938?

 A. The taxpayer's age (over 65 or not)correct

 B. Whether the taxpayer will file a separate return or a joint return. wrong
 C. Whether the taxpayer lives in the United States or outside the United States.
 D. The taxpayer's marital status.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for A:

A taxpayer's age has no bearing on the filing requirement for the Form 8938. With
regards to the filing requirements for the Form 8938, Statement of Specified Foreign
Financial Assets, the applicable reporting threshold depends upon several different
factors: whether the taxpayer is married, and if they are married, whether the couple will
file a joint federal income tax return, and where the taxpayer lives (either inside or
outside the United States).

To see a table detailing the Form 8938 requirements, reference this dedicated IRS
detail page.

27. Question ID: 94850307 (Topic: International Information Reporting)

Tony is an unmarried U.S. citizen who lives overseas in Serbia. He has lived in Serbia
for several years and has a bank account in the country. Tony earns $50,000 in wages
per year working as a consultant in the country. Tony's foreign bank account has
$325,000 USD in deposits. What are his filing requirements with regards to this
account?

 A. Tony must file an FBAR and the Form 3520

 B. Tony must file an FBAR and the Form 8938correct
 C. Tony must file Form 3520 and the Form 8938wrong
 D. Tony must file an FBAR
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

Tony must file an FBAR and the Form 8938 to report the value of the foreign bank
account. Form 8938, Statement of Specified Foreign Financial Assets, is filed with the
IRS. The FBAR (FinCEN Form 114) is not filed with the IRS; instead, it is filed with the
Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the
Treasury, separate from the IRS. You can see a Comparison of Form 8938 and FBAR
Requirements here.

28. Question ID: 94850277 (Topic: International Information Reporting)

Lenny and Kristy, both age 65, are U.S. citizens but lived abroad for the entire tax year
in Greece. They have not returned to the US in five years. They will file a joint income
tax return. The total value of their combined specified foreign financial assets is
$150,000, which is all cash in their Greek bank account. The account balance has never
exceeded $150,000. What foreign reporting requirements do they have?

 A. The FBAR only.correct

 B. They do not have any reporting requirements.
 C. They must file Form 8938, but they do not have to file an FBAR. wrong
 D. They must file Form 8938 and the FBAR.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 41% of students.

Correct Answer Explanation for A:

They only have to file the FBAR. Lenny and Kristy do not have to file Form 8938. Since
they live overseas all year, their reporting threshold for foreign financial assets is higher
than taxpayers who reside in the United States. The reporting threshold for married
taxpayers that live overseas is (1) more than $400,000 on the last day of the tax year or
(2) more than $600,000 at any time during the tax year. Since their foreign account
holds only $150,000, they do not need to file a Form 8938. (Question based on an
example in the Instructions for Form 8938).

29. Question ID: 94850302 (Topic: International Information Reporting)

A nonresident alien is an alien who has not passed either the green card test or
_________________________.

 A. Deferred Action for Childhood Arrivals (DACA) test

 B. Tax treaty test
 C. Substantial presence testcorrect
 D. Refugee testwrong
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for C:

A nonresident alien is an alien who has not passed either the (1) green card test or the
(2) substantial presence test. An "alien" is any individual who is not a U.S. citizen or
U.S. national.

32. Question ID: 94850247 (Topic: International Information Reporting)

Draven is single and a U.S. citizen who had $60,000 deposited in an Italian bank
account at the end of the year. He planned to purchase a vacation home in Italy, but the
sale was never completed. No interest was earned on the foreign bank account. Draven
earned $92,000 in wages during the year and is required to file a U.S. tax return.
Draven currently lives and works in the U.S., although he travels overseas quite
frequently. What are his reporting requirements for the Italian bank account?

 A. None, since the bank account did not earn any interest.wrong
 B. He must file an FBAR as well as a Form 8938. correct
 C. He must file an FBAR to report the value of the account.
 D. He must file Form 8938 to report the value of the account.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

Draven has two reporting requirements. He must file an FBAR as well as a Form 8938.
Draven has a U.S. tax home and holds foreign financial assets with an aggregate value
that exceeds $50,000 ($100,000 MFJ) on the last day of the tax year, so he is required
to file a Form 8938. There is also an FBAR reporting mandate for taxpayers with foreign
accounts of more than $10,000. These are considered separate filings. You should be
familiar with the distinctions between FBAR and Form 8938 requirements for the exam
(it is on the EA exam test specifications). To see a table comparison of FBAR and Form
8938 requirements, reference the dedicated IRS detail page.

33. Question ID: 94850246 (Topic: International Information Reporting)

Steven lives and works in Canada. He is a U.S. citizen and a legal resident of Canada.
Which of the following assets may trigger an FBAR filing requirement?

 A. Valuable artwork and collectibles that he has in his home, valued at

$150,000. wrong
 B. His home in Canada, which he owns outright and has a fair market value of
$500,000.
 C. $30,000 in Canadian currency that he has in a wall safe in his home.
 D. $10,000 in a Canadian bank account. correct
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for D:

The $10,000 in the Canadian bank account is the only asset that will trigger the FBAR
filing requirement. Foreign real estate and foreign currency held directly do not need to
be reported on the FBAR. Personal property held directly, such as art, antiques, jewelry,
cars and other collectibles, also do not need to be reported on the FBAR.

Taxpayers must file the FBAR electronically through the Financial Crimes Enforcement
Network’s BSA E-Filing System. The FBAR is not filed with a taxpayer's federal tax
return. To see more information about FBAR filing requirements, see the IRS FBAR
detail page.

34. Question ID: 94850301 (Topic: International Information Reporting)

 What is the Form 1040-NR used for?

 A. Form 1040-NR is used by American citizens living overseas to report their worldwide
income.
 B. Form 1040-NR is used by resident aliens to report their US-source
income.wrong
 C. Form 1040-NR is used by non-resident aliens to report their US-source
income.correct
 D. Form 1040-NR is used by green card holders to report their foreign income.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for C:

Form 1040-NR is used by non-resident aliens to report only their US-source income.
Form 1040-NR is used by nonresident aliens who are engaged in a trade or business in
the United States or otherwise earned income from U.S. sources.

35. Question ID: 94850300 (Topic: International Information Reporting)

Anook is a citizen of Malaysia and a nonresident alien engaged in a trade or business in
the United States. What form should he use to report his US-source income?

 A. FBARwrong
 B. Form 1040-NRcorrect
 C. Form 1040-SR
 D. Form 1040
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 95% of students.

Correct Answer Explanation for B:

Form 1040-NR is used by nonresident aliens who are engaged in a trade or business in
the United States or otherwise earned income from U.S. sources. Nonresidents typically
must only report their US sourced income.

36. Question ID: 94850103 (Topic: Gift Taxes)

Wendy's father, Timothy, has been in poor health for some time. Both are U.S. citizens.
During the year, Timothy transfers the title of his main home to Wendy. The Fair Market
Value of the home was $230,000 at the time of the transfer. Does this transaction need
to be reported? (Choose the best answer)

 A. Wendy is required to report this transaction to the IRS using a gift tax return
(Form 709).wrong
 B. Timothy is required to report this transaction to the IRS using an estate tax return
(Form 706).
 C. Timothy is required to report this transaction to the IRS using a gift tax return (Form
709).correct
 D. Wendy is required to report this transfer as "other income" on her Form 1040.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Timothy is required to report this transaction to the IRS using a gift tax return (Form
709). Gift tax reporting obligations are the responsibility of the donee (the giver of the
gift), not the recipient. Generally, the transfer of any property or interest in property for
less than adequate and full consideration is a gift. Any amount above the gift limit must
be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax
Return.

37. Question ID: 95421217 (Topic: Gift Taxes)

Amos is a tax return preparer. His client, Jolene, told him that she had made several
gifts during 2024 and asked if she should file a gift tax return, and if so, how much tax
she would owe. Jolene has never given a taxable gift before. Jolene’s gift transactions
were as follows:

 Paid her parents’ medical bills, $14,000 for her father and $18,000 for her mother
 Bought a sports car for her grandson, cost was $32,000
 Gave $19,000 in cash to her church
 Prepared her last will leaving her vacation cabin, valued at $75,000, to her sister
 Sent a wedding gift of $11,000 to her niece
What is Amos’ best answer to Jolene's questions?

 A. No return is due because all the gifts are excluded.wrong

 B. Must file a gift tax return but no tax will be owed because of the unified credit.correct
 C. Must file a gift tax return but no tax will be owed because of the standard deduction.
 D. Must file a gift tax return and will owe gift tax on $32,000.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 40% of students.

Correct Answer Explanation for B:

 Jolene must file a gift tax return for the gift of the vehicle ($32,000), which is the only gift
that has a reporting requirement. But no tax will be owed because of the unified credit.
(This question is based on a prior-year EA exam question).

The annual gift exclusion amount is $18,000 in 2024. Only the gift of the car is a
reportable gift, because it is over this limit. The direct payment for medical expenses,
the charitable donation, and the other gifts are not taxable or reportable. The $75,000
cabin is not a gift, it is merely a bequest in Jolene's will. Generally, the following gifts are
not taxable or reportable gifts (i.e., a Form 709 does not have to be filed for these gifts).

 Gifts that are not more than the annual exclusion for the calendar year (in 2024,
this is $18,000 per person).
 Tuition or medical expenses paid on behalf of another person (the educational
and medical exclusions).
 Gifts to a spouse.
 Gifts to a charity or nonprofit group.
 Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s)
made. For additional information about reportable gifts, review Form 709 and its
instructions.

38. Question ID: 94850253 (Topic: Gift Taxes)

On January 20, 2024, Hiram sells his son, Devin, a house below market value. Devin
only pays $10,000 for the house. The fair market value of the house is $90,000. What is
the treatment of this transaction?

 A. Hiram has made a gift to his son of $90,000. A gift tax return is required.
 B. Hiram has made a gift to his son of $80,000. A gift tax return is required.correct
 C. Devin must report income of $80,000.wrong
 D. No gain or loss is recognized by either party until they dispose of the property.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

Hiram has made a gift to his son of $80,000 ($90,000 - $10,000 = $80,000). Hiram is
required to file a gift tax return (Form 709), because the gift exceeds the $18,000 gift
threshold for 2024.

The following gifts are NOT taxable or reportable:

 Gifts that do not exceed the annual exclusion.

  Tuition or medical expenses paid directly to the institution for someone else.
 Unlimited gifts to a spouse, (as long as the spouse is a U.S. citizen).
 Gifts to a political organization for its own use.
 Gifts to a qualifying charity.
 A parent's support for a minor child. This may include support required as part of
a legal obligation, such as by a divorce decree.
For more information, see the instructions for Form 709, United States Gift Return.

39. Question ID: 94850225 (Topic: Gift Taxes)

Margot, age 59, transferred her vacation home to her son, Noah. The house's fair
market value on the date of the transfer was $125,000. Noah did not pay his mother
anything for the home. He moved in and began living in it. What reporting requirement is
triggered by this gift?

 A. Neither Margot or Noah is required to report this gift.

 B. Noah is required to report this transaction on his income tax return. The value
of the home ($125,000) is taxable income to Noah. wrong
 C. Margot is required to report this transaction to the IRS on Form 1099-MISC. Noah
must report the gift as taxable.
 D. Margot is required to report this transaction to the IRS on Form 709. This is a
reportable gift.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for D:

Margot is required to report this transaction to the IRS on Form 709. Generally, the
transfer of any property or interest in property for less than adequate and full
consideration is a gift. "As the "donee" of the gift, Noah does not have any reporting
requirements, and the gift is not taxable to him. Gifts are never taxable to the receiver of
the gift, and any reporting that has to be done is always done by the donor of the gift.

40. Question ID: 94850252 (Topic: Gift Taxes)

Sophia and Ralph are married and file jointly. Sophia gives her cousin, Elijah, $24,000
in cash as a Christmas present in 2024. Sophia elects to split the gift with her husband,
Ralph. What is their filing requirement for this split gift?

 A. The entire gift is subject to tax. A gift tax return is required.wrong

 B. The entire gift is tax free. A gift tax return is not required.
 C. The entire gift is tax free. However, a gift tax return is required.correct
 D. A portion of the gift is tax free. A gift tax return is required.
 Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for C:

Ralph is treated as if he gave Elijah half the amount ($24,000 / 2 = $12,000). Assuming
Sophia and Ralph make no other gifts during the year, the entire $24,000 gift is tax-free,
but a gift tax return is required. In 2024, the gift tax exemption is $18,000 per individual
gift, meaning that a couple using gift-splitting could gift up to $36,000 to any individual
before being taxed on the amount. The following gifts are NOT taxable or reportable:

 Gifts that do not exceed the annual exclusion.

 Tuition or medical expenses paid directly to the institution for someone else.
 Unlimited gifts to a spouse, (as long as the spouse is a U.S. citizen).
 Gifts to a political organization for its own use.
 Gifts to a qualifying charity.
 A parent's support for a minor child. This may include support required as part of
a legal obligation, such as by a divorce decree.
For more information, see the instructions for Form 709, United States Gift Return.

41. Question ID: 94850265 (Topic: Gift Taxes)

Tomas is a U.S. citizen. He gives many gifts to family members as well as his wife
during the year. Which of the following gifts must be reported on Form 709, United
States Gift Tax Return?

 A. A gift of a used car to his cousin valued at $13,500.wrong

 B. A gift of tuition for his niece, totaling $36,000 and paid directly to a private University.
 C. A gift of a future interest to his mother. correct
 D. A gift of cash to his nephew totaling $16,000.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

A gift of a future interest cannot be excluded under the annual exclusion.

Future interest gifts are taxable and must be reported to the IRS on Form 709, the
United States Gift Tax Return. The following gifts are not taxable or reportable gifts:

 Gifts that are not more than the annual exclusion for the calendar year (this
threshold is $18,000 in 2024).
  Tuition or medical expenses paid for someone (the educational and medical
exclusions).
 Gifts to your spouse who is a U.S. citizen.
 Gifts to a political organization for its use.
 Gifts to a qualified charity
43. Question ID: 94850239 (Topic: Gift Taxes)
Draco gives his daughter, Camille, 20 shares of stock in ABC Corporation. At the time of
the gift, the FMV of the shares is $900. Draco had an adjusted basis in the stock of
$500 at the time of the gift. Camille sells the stock two months later for $975. What is
Camille's basis in the stock, for the determination of gain?

 A. $0
 B. $975wrong
 C. $500correct
 D. $900
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for C:

Camille's basis in the stock is $500. For purposes of determining gain, the taxpayer will
generally take a "transferred basis" when they receive property as a gift. This means
that Camille's basis in the property is the same as her father's basis in the property. This
is the general rule, but there are exceptions. For example, a different rule applies if the
taxpayer eventually sells the gifted property at a LOSS. If the FMV of the property at the
time of the gift was LESS than the donor's adjusted basis, the basis for loss on its sale
is its FMV at the time of the gift, plus or minus any required adjustments to basis during
the period the original owner (the donor) held the property. In other words, for purposes
of determining losses, the taxpayer must use the lesser of the donor's adjusted basis or
the FMV at the time of the gift as their basis.

44. Question ID: 94850264 (Topic: Gift Taxes)

Eric's grandfather tried to gift Eric a large plot of land that contains an abandoned
house. Eric's grandfather has already filed a gift tax return. Eric refuses the gift because
he does not want any of the legal liability associated with the property. With regards to
gift tax requirements, what is the procedure if a donee refuses to accept a gift?

 A. The property will be treated as if it had never been transferred to Eric.correct

 B. The gift tax return must be revoked.wrong
 C. The gift tax must be paid and the property is considered to still be owned by Eric's
grandfather.
 D. The gift tax must be paid and the property is considered transferred to Eric.
 Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 38% of students.

Correct Answer Explanation for A:

Eric's refusal is called a disclaimer. A donee's refusal to accept a gift is called a

disclaimer or a "renunciation". If a person makes a qualified disclaimer of any interest in
property, the property will be treated as if it had never been transferred to that person.
Eric does not have any requirement to accept the gift. However, to be a qualified
disclaimer, a refusal to accept an interest in property must be in writing. See the
Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax
Return, for more information about how a person can "disclaim" a gift.

45. Question ID: 94850194 (Topic: Gift Taxes)

What is the Unified Tax Credit, as it relates to estate and gift taxes?

 A. The unified tax credit is a credit that allowed an unlimited marital transfer after death
to a surviving spouse.
 B. The unified tax credit allows a credit to nonresident alien spouses whose U.S.
spouse has died.
 C. The unified tax credit is a credit against the passive income of an estate or
trust.wrong
 D. The unified tax credit gives a set dollar amount that an individual can gift during their
lifetime before any estate or gift taxes apply.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

The unified tax credit gives a set dollar amount that an individual can gift during their
lifetime before any estate or gift taxes apply. In other words, the Unified Tax Credit
combines an exemption for the federal gift tax and the federal estate tax.

The federal estate tax exemption for 2024 is $13,610,000. A married couple has a
combined exemption for 2024 of $27,220,000. For additional information, refer to the
IRS page on Estate Taxes and the Instructions for Form 706.

46. Question ID: 94850263 (Topic: Gift Taxes)

Gift taxes do not apply to which of the following transfers?

 A. A gift to a close family member.

 B. A gift to a nonresident alien spouse.
 C. Transfers of property from one person to another when the recipient doesn't
pay fair market value for the property.wrong
 D. A transfer to a political organization for the use of the organization.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

The gift tax does not apply to a transfer to a political organization for the use of the
organization. For additional information about reportable gifts, review Form 709 and its
instructions.

47. Question ID: 94850237 (Topic: Gift Taxes)

The generation-skipping transfer tax (GST) may be imposed on which persons?

 A. A child.
 B. A grandchild.correct
 C. A parent. wrong
 D. The surviving spouse of the deceased.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

The generation-skipping transfer tax (GST) is imposed separately and in addition to the
estate and gift taxes. The GST may apply to gifts during a taxpayer’s lifetime or
transfers occurring after his death, called bequests, made to “skip persons”. A “skip
person” is a person who belongs to a generation that is two or more generations below
the generation of the donor. The most common scenario is when a grandparent
transfers property to a grandchild. The generation-skipping transfer tax is reported on
Form 709.

Note: The GST is imposed on asset transfers that avoid estate or gift tax and skip one
or more generations. If the transfer is made to an unrelated person, it may apply if the
person is more than 37½ years younger than the transferor.

48. Question ID: 94850278 (Topic: Gift Taxes)

Which of the following transfers could potentially be subject to the gift tax?

 A. A gift of tax-exempt bonds to an individual.correct

 B. Transfers to charitable organizations.
 C. Payments that qualify for the educational exclusion.wrong
 D. Gifts to political organizations.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for A:

Bonds that are exempt from federal income taxes are not exempt from federal gift taxes.
Generally, the federal gift tax applies to any transfer by gift of real or personal property,
whether tangible or intangible, that you made directly or indirectly, in trust, or by any
other means. Some transfers are not subject to the gift tax, regardless of the dollar
amounts. These are:

 Transfers to political organizations,

 Transfers to certain exempt organizations,
 Payments that qualify for the educational exclusion, and
 Payments that qualify for the medical exclusion.
For additional information about reportable gifts, review Form 709 and its instructions.

49. Question ID: 94850235 (Topic: Gift Taxes)

Gerald is wealthy and likes to help his favorite grandson, Paul. Which of the following
payments made in 2024 on Paul's behalf might be subject to the generation-skipping tax
(GST)?

 A. Payment of Paul's student loans directly to the lender.correct

 B. Payment of Paul's college tuition made directly to a university.
 C. A cash gift of $16,000 made directly to Paul.
 D. Payment of Paul's medical expenses made directly to a hospital.wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for A:

The generation-skipping tax (GST) can be incurred when grandparents directly transfer
money or give property to their grandchildren. Any payments for tuition or medical
expenses on behalf of a "skip person" (i.e., a grandchild) that are made directly to an
educational or medical institution are exempt from gift tax and GST, and also do not
need to be reported on a gift tax return. Payment of a grandchild's student loan,
 however, would not qualify. The cash gift would not be subject to the GST because it is
under the annual gift limit and does not need to be reported at all.

The annual gift exclusion is $18,000 (in 2024). Gifts under this threshold do not have to
be reported. Generally, the following gifts are not taxable or reportable gifts (i.e., a Form
709 does not have to be filed for these gifts).

 Gifts that are not more than the annual exclusion for the calendar year (in 2024,
this is $18,000 per person).
 Tuition or medical expenses paid on behalf of another person (the educational
and medical exclusions).
 Gifts to a spouse.
 Gifts to a charity or nonprofit group.
 Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible as long as the taxpayer has
the correct substantiation records. For additional information about reportable gifts,
review Form 709 and its instructions.

50. Question ID: 94850250 (Topic: Gift Taxes)

Walter is married and has always filed jointly with his wife in the past. In 2024, he made
the following cash gifts to:

 His friend, Rick: $15,000.

 His first cousin, Paisley: $20,000.
 His wife, Tammy, who is a U.S. citizen: $50,000.
 A political organization (the Libertarian Party): $25,000.
 A qualified charitable organization: $35,000.
At the end of the year, Walter’s wife gets angry and moves out. She decides that she
does not want to split gifts or file jointly with Walter. Based on the information above,
what is the gross amount of gifts that Walter must include on his Form 709, United
States Gift Return?

 A. $35,000wrong
 B. $20,000correct
 C. $85,000
 D. $80,000
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for B:

 Walters’s $20,000 gift to his cousin, Paisley, is the only gift that he must report on Form
709, United States Gift Return. In 2024, the gift tax exemption is $18,000 per individual
gift, meaning that a couple using gift-splitting could gift up to $36,000 to any individual
before being taxed on the amount. However, Walter’s spouse refused to split any gifts
with him, so the $20,000 gift to Paisley becomes a reportable and taxable gift. The
following gifts are NOT taxable or reportable:

 Gifts that do not exceed the annual exclusion.

 Tuition or medical expenses paid directly to the institution for someone else.
 Unlimited gifts to a spouse, (as long as the spouse is a U.S. citizen).
 Gifts to a political organization for its own use.
 Gifts to a qualifying charity.
 A parent's support for a minor child. This may include support required as part of
a legal obligation, such as by a divorce decree.
51. Question ID: 97714648 (Topic: Gift Taxes)
Marylou received a valuable set of gold coins as an inheritance from her father, who
died on February 6, 2024. Her father’s adjusted basis in the coins was $9,750. The
coins’ fair market value on the date of her father’s death was $76,200. The executor of
the estate elects the alternate valuation date for valuing the gross estate. Six months
later, on August 6, 2024, the coins’ fair market value had dropped to $73,100. Marylou
finally received the coins on December 1, 2024, when its fair market value was $73,500.
She sold the coins a week later for $73,450. What is Marylou’s basis in the inherited
coins, in order to determine her taxable gain on the sale?

 A. $73,450
 B. $76,200
 C. $9,750
 D. $73,100correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

Since the alternate valuation date was elected by the executor, Marylou’s basis is the
fair market value on the alternate valuation date, or $73,100. This is the basis that she
must use in order to calculate her gain or loss on the sale of the coins. The basis of
property received from a decedent is generally the fair market value of the property on
the date of the decedent’s death. However, an executor has the option of choosing an
alternate valuation date, which is six months after the date of death for valuing the gross
estate.
 52. Question ID: 94850262 (Topic: Gift Taxes)
Gifts to a taxpayer's spouse are eligible for what type of deduction?

 A. The estate tax deduction.

 B. The survivor deduction.
 C. The commonlaw deduction.
 D. The marital deduction.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

Gifts to a spouse are eligible for the marital deduction. The marital deduction allows a
person to give assets to his or her spouse with reduced or no tax imposed upon the
transfer. The marital deduction is especially important with regards to estate planning.
The marital deduction is covered in detail in Publication 559, Survivors, Executors and
Administrators.

53. Question ID: 94850261 (Topic: Gift Taxes)

In general, who is responsible for paying the gift tax?

 A. The donee.
 B. The donor.correct
 C. The estate.
 D. The executor.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for B:

The donor (the person who gives the gift) is generally responsible for paying any gift
tax. For additional information about the reporting requirements for gifts, review Form
709 and its instructions.

1. Question ID: 94849730 (Topic: Foreign Account and Asset Reporting)

Gabriella received the following income during the year:

 $29,000 in Wages,
 $45 in Muni bond interest
 $3,000 in Child support,
  $4,000 in Workers' compensation from a work-related injury
 $150,000 foreign inheritance from her deceased grandfather's estate in France.
Which of these sources of income are taxable to Gabriella?

 A. Only her wages are taxable income. correct

 B. All of the income is taxable.
 C. All of the income is taxable except the child support.
 D. All of the income is taxable except the child support and the inheritance.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for A:

In this scenario, only Gabriella's wages would be taxable. She received: wages, muni
bond interest, child support, workers' compensation, and an inheritance from her
deceased grandfather's estate. The wages are taxable. Muni bond interest (also called
municipal bond interest, or interest from exempt bonds) must be reported on her tax
return, but it is not taxable. Child support and worker's compensation is also not taxable,
and inheritances are not taxable to the recipient. Although some foreign inheritances do
have a reporting requirement, this is an informational return only (foreign inheritances
are reported on Form 3520).

2. Question ID: 94816004 (Topic: Foreign Account and Asset Reporting)

With regards to FBAR reporting, which of the following taxpayers would NOT be
required to file an FBAR?

 A. A nonresident alien who lives in Germany and has investments in U.S.

Treasury stocks. correct
 B. U.S. citizen beneficiary of a Foreign Trust.
 C. A U.S. Resident Alien with signature authority over a financial account located
outside the United States.
 D. A U.S. Citizen with a “foreign financial account".
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Based on the IRS' FBAR guidelines, nonresident aliens are not required to file an
FBAR. A U.S. person (which includes: U.S. citizens, resident aliens, trusts, estates, and
domestic entities that have an interest in foreign financial accounts and meet the
reporting threshold are required to file an FBAR). Nonresident aliens are generally not
 subject to FBAR and FATCA, and only must report and pay taxes on U.S. taxable
income (by filing Form 1040NR).

3. Question ID: 98939092 (Topic: Foreign Account and Asset Reporting)

For the purposes of filing Form 8938, Statement of Specified Foreign Financial Assets,
which of the following is NOT a "specified foreign financial asset?"

 A. Foreign real estate held directlycorrect

 B. An interest in a foreign retirement plan, pension, or deferred compensation plan
 C. A partnership interest in a foreign partnership.
 D. Brokerage accounts held with a foreign financial institution.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for A:

Specified foreign financial assets are required to be reported (over certain thresholds)
even if no income has been received with respect to that asset. Specified foreign
financial assets include:

 Savings, deposit, checking and brokerage accounts held with a foreign financial
institution,
 Stock or securities issued by a foreign corporation,
 A note, bond or debenture issued by a foreign person,
 A swap or similar agreement with a foreign counter-party,
 An option or other derivative instrument that is entered into with a foreign
counter-party or issuer, A partnership interest in a foreign partnership,
 An interest in a foreign retirement plan, pension, or deferred compensation plan,
 An interest in a foreign estate,
 Any interest in a foreign-issued insurance contract or annuity with a cash-
surrender value,
 Any financial account maintained by a foreign financial institution,
 Reportable assets held by a disregarded entity.
The IRS has indicated that the following assets are NOT considered specified foreign
financial assets and therefore do not have to be reported on Form 8938:

 Foreign real estate (e.g., personal residence, land, etc.), unless the real estate is
held through a foreign entity, such as a corporation, partnership, trust or estate.
 Foreign currency held directly (i.e., not held in a bank),
  Directly held shares of a U.S. mutual fund that owns foreign stocks and
securities,
 Financial account maintained by a U.S. financial institution that holds foreign
stock and securities (e.g., U.S. mutual fund accounts; IRAs (traditional or Roth),
401(k) retirement plans, qualified U.S. retirement plans; and brokerage accounts
maintained by U.S. financial institutions.
 Payments or the rights to receive the foreign equivalent of Social Security.
Form 8938 is used for reporting specified foreign financial assets if the total value of all
of a taxpayer's specified foreign financial assets exceed the reporting threshold.

5. Question ID: 958501695 (Topic: Foreign Account and Asset Reporting)

Which of the following statements regarding FBARs is CORRECT?

 A. The FBAR must be filed electronically and is only available online through the
FinCEN website.correct
 B. The FBAR must be filed on electronically and is only available online through the IRS
Direct File system.
 C. The FBAR is considered part of the taxpayer’s individual tax return and may be
submitted online with the Form 1040.
 D. The FBAR is only required for U.S. citizens.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

The FBAR must be filed electronically and is only available online through
the FinCEN (Financial Crimes Enforcement Network) website. All of the other answer
choices are false.

Show Other Explanations

7. Question ID: 958501692 (Topic: Foreign Account and Asset Reporting)

Who may be required to file an FBAR?

 A. Any U.S. person with a financial interest in or signature authority over foreign
financial accounts exceeding $10,000 at any time during the calendar year.
correct
 B. Nonresident aliens with foreign financial accounts that a filing requirement on Form
1040-NR.
 C. Only U.S. residents and nonresidents with foreign financial accounts.

 D. Only U.S. citizens and U.S. residents with foreign earned income.
 Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Any U.S. person with a financial interest in or signature authority over foreign financial
accounts exceeding $10,000 at any time during the calendar year would be required to
file an FBAR.

Show Other Explanations

23. Question ID: 94850296 (Topic: International Information Reporting)

Harvey is a U.S. citizen living overseas in Austria. Harvey owns several foreign financial
accounts. All of the following accounts have balances exceeding $10,000 USD. Which
of the following accounts is Harvey required to report on his annual FBAR (FinCEN
Form 114)?

 A. A foreign financial account held in an individual retirement account (IRA) that Harvey
is a beneficiary of.
 B. A foreign bank account that Harvey does not own, but has signature authority
over. correct
 C. A bank account maintained on a United States military banking facility in a foreign
nation.
 D. A foreign financial account that is owned by a governmental entity.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

A United States person must file an FBAR if that person has a financial interest in
or signature authority over any financial account(s) outside of the United States and the
aggregate maximum value of the account(s) exceeds $10,000 at any time during the
calendar year. Generally, an account at a financial institution located outside the United
States is a foreign financial account. Whether the account produced taxable income has
no effect on whether the account is a “foreign financial account” for FBAR purposes.
But, you don’t need to report foreign financial accounts that are:

 Correspondent/Nostro accounts,
 Owned by a governmental entity,
 Owned by an international financial institution,
 Maintained on a United States military banking facility,
 Held in an individual retirement account (IRA) you own or are beneficiary of,
  Held in a retirement plan of which you’re a participant or beneficiary, or
 Part of a trust of which you’re a beneficiary, if a U.S. person (the trustee of the
trust files an FBAR reporting these accounts).
To see more information about FBAR filing requirements, see the IRS FBAR detail
page.

24. Question ID: 94850254 (Topic: International Information Reporting)

If you own or have authority over a foreign financial account, then you may be required
to: ________________.

 A. File a foreign tax return.

 B. File an FBAR with the IRS.
 C. File an FBAR with the FinCEN. correct
 D. Notify the U.S. Treasury Department.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for C:

If you own or have authority over a foreign financial account, including a bank account,
brokerage account, mutual fund or other type of financial account, then you may be
required to file an FBAR with the FinCen. The FBAR must be filed electronically through
the Financial Crimes Enforcement Network’s BSA E-Filing System. A taxpayer does
not file the FBAR with their federal tax return.

25. Question ID: 94850210 (Topic: International Information Reporting)

Who is required to file an FBAR?

 A. A taxpayer with foreign financial accounts whose aggregate value exceeded

$100,000 at any time during the year.
 B. A taxpayer with foreign financial accounts whose aggregate value exceeded
$10,000 at any time during the year.correct
 C. A taxpayer with foreign financial accounts whose aggregate value exceeded $50,000
at any time during the year.
 D. Any taxpayer with foreign assets, regardless of the amount.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

FBAR is also called the FinCEN Form 114, Report of Foreign Bank and Financial
Accounts (FBAR), which is filed online with the Treasury Department’s Financial Crimes
 Enforcement Network (FinCEN).
U.S. citizens, residents, entities, and estates are required to file an FBAR if they:

 Had a financial interest in or signature authority over at least one financial

account located outside of the United States;
 and the aggregate value of all foreign financial accounts exceeded $10,000 at
any time during the calendar year.
This requirement applies to bank accounts, brokerage accounts, mutual funds, trusts,
and other types of foreign financial accounts. Taxpayers may be required to file the
report even if their accounts produce no taxable income. FinCen Form 114 and
Instructions can be found through FinCen’s BSA E-Filing System.

30. Question ID: 98939136 (Topic: International Information Reporting)

What is the purpose of Form 5471?

 A. For U.S. persons to report large gifts to foreign charities.

 B. For U.S. persons to report direct ownership of foreign real estate.
 C. For U.S. persons to report ownership of foreign bank accounts.
 D. For U.S. persons to report direct ownership in a foreign corporation.correct
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for D:

U.S. citizens and U.S. residents who are officers or shareholders in certain foreign
corporations must file Form 5471, Information Return of U.S. Persons With Respect to
Certain Foreign Corporations, as part of their annual tax return. In general, any US
person who has at least 10% direct ownership of a foreign corporation is generally
required to file Form 5471.

31. Question ID: 94850274 (Topic: International Information Reporting)

Which of the following assets is NOT a "specified foreign financial asset" that is subject
to FATCA reporting requirements?

 A. Foreign social security.correct

 B. A capital or profits interest in a foreign partnership.
 C. Financial accounts maintained by a foreign banking institution.
 D. Stock issued by a foreign corporation, not held in a domestic financial account.
Study Unit 17: Foreign Financial Reporting covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

 Foreign social security is not a specified foreign financial asset. An interest in a social
security, social insurance, (or other similar program) of a foreign government is not a
specified foreign financial asset. (See the Form 8938 Instructions for more examples).

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States
must report those assets to the IRS on Form 8938, Statement of Specified Foreign
Financial Assets. Other foreign assets may have to be reported on the FBAR. There are
serious penalties for not reporting these financial assets. Learn more about FATCA
compliance on the dedicated IRS page for the Foreign Account Tax Compliance Act.

42. Question ID: 94850221 (Topic: Gift Taxes)

David, age 51, is wealthy and likes to give many gifts to family and friends. He is
unmarried and gives the following gifts in 2024. Which of these gifts must be reported
on Form 709?

 $40,000 in college tuition paid for his adult nephew, Joseph. The payment was
made directly to the college
 $22,000 donation to the SPCA, a qualified charitable organization
 $17,000 in cash to his 10-year-old grandson, Purvis
 $18,000 gift to the Red Cross, a 501(c)3 organization
 $19,000 gift to the Republican Party, a political organization
 $32,000 payment directly to a hospital to pay for his mother's cataract surgery
 $19,000 vacation cruise given to his girlfriend, Mary

 A. The $19,000 vacation cruise given to his girlfriend, Mary, must be

reported.correct
 B. The $17,000 in cash to his 10-year-old grandson, Purvis, and the $19,000 vacation
cruise for Mary must be reported.
 C. Only the $17,000 in cash to his 10-year-old grandson, Purvis, must be reported.
 D. The $19,000 vacation cruise for Mary, and the $19,000 gift to his local Chamber of
Commerce must be reported.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for A:

The $19,000 vacation cruise given to his girlfriend, Mary, must be reported on Form
709. None of the other gifts have a reporting requirement. The annual gift exclusion of
$18,000 (in 2024) applies to gifts to each donee. Gifts under this threshold do not have
to be reported. Generally, the following gifts are not taxable or reportable gifts (i.e., a
Form 709 does not have to be filed for these gifts).
  Gifts that are not more than the annual exclusion for the calendar year (in 2024,
this is $18,000 per person).
 Tuition or medical expenses paid on behalf of another person (the educational
and medical exclusions).
 Gifts to a spouse.
 Gifts to a charity or nonprofit group.
 Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible as long as the taxpayer has
the correct substantiation records. For additional information about reportable gifts,
review Form 709 and its instructions.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94850204 (Topic: The Estate Tax)

For tax year 2024, the requirement to file a return for a bankruptcy estate applies only if
gross income is at least ______.

 A. $600wrong
 B. $14,600correct
 C. $100
 D. $4,400
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 28% of students.

Correct Answer Explanation for B:

For tax year 2024, the requirement to file a return for a bankruptcy estate applies only if
gross income is at least $14,600. This amount is equal to the standard deduction for
married individuals filing a separate return and is generally adjusted annually.
Bankruptcy estates file Form 1041 (not Form 1040). For more information about the
filing requirements of a bankruptcy estate, see IRS Publication 908, Bankruptcy Tax
Guide.

2. Question ID: 94850205 (Topic: The Estate Tax)

All of the following are estates of a decedent. Which estate would be required to file
Form 1041?

 A. An estate with $200 of interest income and a beneficiary who is a nonresident

alien.correct
 B. An estate with $500 of rental income and a beneficiary who is a U.S. resident
alien.wrong
 C. An estate with $100 of tax-exempt muni bond income.
 D. An estate with dividend income of $50.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for A:

An estate with a beneficiary who is a nonresident alien is always required to file a tax
return (Form 1041), regardless of the amount of income the estate earned during the
 year. For more information about the filing requirements that apply to estates, see
Publication 559, Survivors, Executors and Administrators.

3. Question ID: 94850230 (Topic: The Estate Tax)

Sheree’s uncle, Jim, died on March 9, 2024. Sheree was the sole beneficiary of Jim's
life insurance policy. The face amount of the policy was $150,000. Instead of taking a
lump-sum payout, Sheree chose to receive the payments in 120 monthly installments of
$2,000 each. Which of the following statements is correct?

 A. The taxable amount per year is $15,000.wrong

 B. The taxable amount per year is $25,000.
 C. The taxable amount per year is $9,000.correct
 D. None of the payments is taxable.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for C:

Life insurance payments generally are not taxable to the recipient. However, if a
taxpayer chooses to receive life insurance proceeds in an annuity rather than as a lump
sum, part of the installment generally includes taxable interest income. To determine the
excluded part of a life insurance payment, the amount held by the insurance company
(generally, the total lump sum payable at the death of the insured person) is divided by
the number of installments to be paid. The taxpayer would include any amount over this
excluded portion as taxable interest income. In Sheree’s case, the excluded part of
each installment is $1,250 ($150,000 ÷ 120), or $15,000 for an entire year. The rest of
each payment, $750 a month or $9,000 per year, is taxable interest income to Sheree.

4. Question ID: 94850208 (Topic: The Estate Tax)

Kristina and Louis are married and file their 2024 tax return jointly on February 15,
2025. Two weeks after filing their tax return, Kristina dies suddenly. In Kristina’s final
will, she has chosen her older sister, Tiffany, as her executor. Tiffany doesn't like Louis,
so she wants to amend her late sister’s 2024 tax return to married filing separately, so
she can obtain a refund that was allocatable to her deceased sister. Which of the
following statements is correct?

 A. Tiffany cannot amend her sister’s return to MFS after a joint return has been
filed.wrong
 B. Tiffany may amend her sister’s return to MFS up to a year after the filing
deadline.correct
 C. Tiffany cannot amend her sister’s return to MFS after the original due date of the
original return.
 D. Tiffany cannot amend her sister’s return to MFS after the extended due date of the
original return.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for B:

Generally, after the due date of the original return, a taxpayer cannot change from MFJ
to MFS. However, a special rule applies to tax returns filed by an executor. As the
estate’s executor, Tiffany can choose to amend her deceased sister’s return to MFS up
to a year after the filing deadline. For more information, see Publication 559, Survivors,
Executors and Administrators.

5. Question ID: 94850206 (Topic: The Estate Tax)

Angela's husband, Rolando, died during the year. His estate was worth $4 million, so an
estate tax return does not need to be filed. Angela is the executor of her late husband's
estate, and she has been advised by her financial advisor that she should elect
portability. What must she do?

 A. She must file the deceased taxpayer's final individual return (Form 1040), and
elect portability on Schedule 1. wrong
 B. She must file an estate income tax return (Form 1041) and elect portability.
 C. She must file an estate tax return (Form 706) and the return must be filed
timely.correct
 D. She must file a gift tax return (Form 709) and the return must be filed timely.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for C:

Angela must timely file a Form 706 in order to elect portability. The due date of the
estate tax return is nine months after the decedent's date of death, however, the
estate's representative may request an extension of time to file the return for up to six
months. The DSUE is an election, and can only be taken if an estate tax return is filed.
This is regardless of the estate's value. For more information, see Publication 559,
Survivors, Executors and Administrators.

6. Question ID: 94850255 (Topic: The Estate Tax)

Lionel has a revocable living trust. The trust holds his investments, like stock and
mutual funds. Which form should Lionel use to report the income of the trust?
 A. Form 1065.wrong
 B. Form 1041.
 C. Form 706.
 D. Form 1040.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 18% of students.

Correct Answer Explanation for D:

Lionel should report the trust income on his personal return, Form 1040. The income
earned by a revocable living trust is typically reported on Form 1040, not on a separate
trust tax return, because it is treated as a disregarded entity for tax purposes. These
trusts are mainly used to avoid probate.

7. Question ID: 94850287 (Topic: The Estate Tax)

Gerald is age 68 and wealthy. He wants to take care of his severely disabled grandson,
Peyton, who is 21 years old and still claimed as a dependent by his parents. With the
help of a trusted attorney, Gerald sets up a qualified disability trust (QDT) for Peyton,
and transfers assets into the trust during the year. Gerald then names the attorney as
the trustee. Who is required to file and sign the trust's tax return?

 A. Gerald, the grantor of the trust.

 B. Peyton's parents should sign the return, because Peyton is disabled and
cannot sign for himself.wrong
 C. Peyton, the adult beneficiary of the trust.
 D. The attorney.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for D:

The attorney must sign the trust's tax return. The attorney is the named fiduciary (also
called the "trustee") and must sign Form 1041. Qualified disability trusts have a filing
requirement. The trust will be responsible for filing a tax return, Form 1041, under its
own Employer Identification Number (EIN), and the fiduciary of the trust is required to
file and sign the return. See the Form 1041 Instructions for more information.

8. Question ID: 94850249 (Topic: The Estate Tax)

Amarante died on February 9, 2024. He left an estate valued at $11.2 million. In his last
will and testament, Amarante bequeaths the entirety of his estate to the Green Party, a
political organization. He had not previously used any of his basic exclusion amount to
 avoid paying gift taxes. Does an estate tax return need to be filed for Amarante's
estate?

 A. Only a gift tax return would be required.

 B. No estate tax is owed and an estate return does not need to be filed.correct
 C. Yes, an estate tax return is required.wrong
 D. An estate tax return and a gift tax return are required for the gift, because a political
party is not a qualified charity.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 53% of students.

Correct Answer Explanation for B:

No estate tax is owed and an estate return does not need to be filed.

Amarante had not previously used any of his basic exclusion amount to avoid paying
gift taxes, so the entire exclusion amount is available to his estate. As the annual
exclusion amount exceeds the estate’s value ($13,610,000 in 2024), no estate tax is
owed and an estate tax return does not need to be filed. A gift tax return also does not
need to be filed, because gifts to political organizations are not tax-deductible, but they
do not have a reporting requirement, so no reporting would have to be done for the
estate's gift to any political organization. The estate tax and the filing requirement for an
estate tax return generally only applies to estates valued over $13,610,000 in 2024. For
more information about the tax rates that apply to estates, see Publication 559,
Survivors, Executors and Administrators.

12. Question ID: 94851217 (Topic: The Estate Tax)

Anika's mother died without a will. Anika hires an attorney and is later appointed the
administrator of her late mother's estate by the courts. Anika will file the estate's tax
returns as well as her mother's final returns. Which form should Anika use to notify the
IRS of her fiduciary relationship with the estate?

 A. Form 2848.
 B. Durable Power of Attorney.wrong
 C. Form 8821.
 D. Form 56.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for D:

 Anika should file Form 56. If a taxpayer is appointed to act in a fiduciary capacity for an
estate, the taxpayer must file a written notice with the IRS stating this. Form 56, Notice
Concerning Fiduciary Relationship, is used for this purpose. This form notifies the IRS
that the fiduciary is assuming the powers, rights, duties, and privileges of the decedent.
The notice remains in effect until the fiduciary notifies the IRS (by filing another Form
56) that the fiduciary relationship with the estate has terminated.

13. Question ID: 94850219 (Topic: The Estate Tax)

Ernesto, age 52, died on July 1, 2024. He was married when he died, and his surviving
spouse, Camila, is the executor of his estate. At the time of his death, he had the
following assets:

 U.S. savings bonds in his name: $50,000.

 Brokerage account held jointly with his spouse: $130,000.
 Checking account solely in his name: $60,000.
 Traditional IRA account: $290,000.
 Automobile solely in his name: $20,000.
 Sailboat owned jointly with his spouse: $80,000.
 Life insurance proceeds payable to his beneficiaries: $500,000.
 Fine art painting owned jointly with his spouse: $300,000.
He had $75,000 of unpaid medical expenses at the time of death. He did not live in a
community property state. What is the value of Ernesto's gross estate?

 A. $1,175,000correct
 B. $1,355,000wrong
 C. $825,000
 D. $420,000
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 48% of students.

Correct Answer Explanation for A:

The calculation of the gross estate includes all of Ernesto's assets he owned outright at
the date of his death, including the life insurance proceeds payable to his beneficiaries.
However, only half of the amounts of the assets he owned jointly with his wife would be
included in the calculation. Therefore, the answer is figured as follows:

$50,000 savings bond +

$65,000 ($130,000/2) joint brokerage account +
$60,000 checking account +
$290,000 IRA +
 $20,000 automobile +
$40,000 ($80,000/2) sailboat held jointly +
$500,000 life insurance proceeds +
$150,000 ($300,000/2) fine art painting held jointly

His gross estate= $1,175,000.

Debts not paid before the decedent's death, including medical expenses subsequently
paid on his behalf, are liabilities that can be deducted from the gross estate on the
estate tax return, but the expenses would not be used to calculate the "gross estate".
The expenses would be deducted from the gross estate to calculate the "taxable
estate." In this scenario, there is no "taxable" estate, because the taxpayer's assets do
not exceed the 2024 estate exclusion amount of $13,610,000.

For more information about taxable estates, see Publication 559, Survivors, Executors
and Administrators.

14. Question ID: 94850202 (Topic: The Estate Tax)

When does a decedent's estate come into existence?

 A. When an individual is permanently disabled.

 B. When an individual renounces their citizenship. wrong
 C. When an individual is born.
 D. At the time of death of an individual.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for D:

A decedent's estate comes into existence at the time of death. An estate is a taxable
entity separate from the decedent. It exists until the final distribution of its assets to the
heirs and other beneficiaries. For more information, see Publication 559, Survivors,
Executors and Administrators.

18. Question ID: 94850198 (Topic: The Estate Tax)

The Rather Family Trust has a fiscal year-end of June 30. What is the due date for the
trust's Form 1041?

 A. April 15.
 B. December 15.wrong
 C. May 15.
 D. October 15.correct
 Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

Estates or trusts must file Form 1041 by the fifteenth day of the fourth month after the
close of the trust's or estate's tax year. For a calendar-year trust or estate, the due date
is April 15. If the tax year for a trust ends on June 30, the filing deadline is October 15
(the 15th day of the 4th month after its fiscal year-end). For more information, see
Publication 559, Survivors, Executors and Administrators.

20. Question ID: 94850213 (Topic: The Estate Tax)

Suzanne was unmarried when she died on May 1, 2024. In her will, Suzanne named
her trusted attorney, Travis, as the executor of her estate. Suzanne left her adult son,
Mike, a commercial rental property in her will. She had purchased the property for
$300,000 over 10 years ago, and had taken $90,000 of depreciation deductions. The
fair market value of the building on the date of Suzanne's death was $400,000. Six
months after Suzanne’s death, when the FMV was $420,000, the property was re-titled
into Mike’s name by the estate’s executor. No alternate valuation was elected by the
executor, and no Form 706 was filed. What is Mike’s basis in the building?

 A. $420,000
 B. $300,000wrong
 C. $210,000
 D. $400,000correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for D:

The basis of inherited property is generally the FMV of the property on the date of the
decedent's death, regardless of what the deceased person paid for the property. A
special rule allows the personal representative of the estate to elect a different valuation
date of six months after the date of death. In this case, because there was no alternate
valuation elected, Mike’s basis remains $400,000, the FMV on the date of Suzanne’s
death. For more information about the basis of inherited property, see Publication 559,
Survivors, Executors and Administrators.

21. Question ID: 94850229 (Topic: The Estate Tax)

Hernando was the sole beneficiary of his mother’s life insurance policy. His mother died
on March 12, 2024. Hernando received the following payouts from the life insurance
company on June 1, 2024:
  $45,000 death benefit from his mother’s life insurance policy.
 $120 of interest income on the life insurance proceeds.
What is the proper treatment of these payments?

 A. The $45,000 life insurance proceeds and $120 in interest are both taxable as
ordinary income.
 B. The $45,000 and $120 are both taxable, but only as long-term capital
gains. wrong
 C. Only the $120 of interest is taxable.correct
 D. None of these payments are taxable to Hernando. Life insurance proceeds are
always tax-free to the beneficiary.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for C:

Life insurance proceeds are generally not taxable to the recipient. However, interest
earned on a life insurance proceeds is taxable, regardless of whether it is earned on a
life insurance policy. Hernando must report the interest income in the year he receives
it.

22. Question ID: 94850211 (Topic: The Estate Tax)

Marco inherited a home from his grandmother, Rose, who died on February 2, 2024.
Marco is not the executor of his grandmother's estate, and the executor did not elect the
alternate valuation date. His grandmother purchased the home over thirty years ago for
$39,000. A month before she passed away, Rose paid $11,000 to build a new deck on
the home. The home's Fair Market Value on the date of his grandmother's death was
$378,000. Marco sells the home seven months later for $389,500. For the purposes of
determining his gain on the sale, what is his basis in the home?

 A. $50,000
 B. $39,000
 C. $389,500wrong
 D. $378,000correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

 A taxpayer's basis in a home that is inherited is generally the fair market value of the
home on the date of the decedent's death or on the alternative valuation date if the
personal representative for the estate chooses to use alternative valuation. Since the
decedent's executor did not choose the alternate valuation date for the estate, the
home's basis would be the FMV on the date of death ($378,000).

For more information about the basis of inherited property, see Publication 559,
Survivors, Executors and Administrators.

24. Question ID: 94850226 (Topic: The Estate Tax)

The maximum estate tax rate is ______ in 2024.

 A. 35%wrong
 B. 45%
 C. 18%
 D. 40%correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

The maximum estate tax rate is 40% in 2024. In 2024, the federal estate tax ranges
from rates of 18% to 40%, with 40% being the highest tax rate. The estate tax generally
only applies to estates valued over $13,610,000 in 2024. For more information about
the tax rates that apply to estates, see Publication 559, Survivors, Executors and
Administrators.

25. Question ID: 94850260 (Topic: The Estate Tax)

If an estate's beneficiary sells inherited property that is a capital asset, the gain or loss
is considered __________, regardless of how long the beneficiary held the property.

 A. Nontaxablewrong
 B. Excludable
 C. Long-termcorrect
 D. Short-term
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

 If an estate's beneficiary sells inherited property that is a capital asset, the gain or loss
is always considered LONG-TERM, regardless of how long the beneficiary held the
property.

27. Question ID: 94850224 (Topic: The Estate Tax)

Dorothy’s husband, Casen, died on March 8, 2024. Casen’s assets totaled $3 million
dollars on the date of his death, so no estate tax return is required. Dorothy and Casen
are both U.S. citizens. What does Dorothy need to do to claim the deceased spousal
unused exclusion (DSUE)?

 A. File a DSUE election on Casen’s final income tax return.

 B. Nothing. The DSUE is automatic for all surviving spouses.wrong
 C. She must file a timely and complete Form 706 for Casen’s estate.correct
 D. She must file a DSUE election on her individual Form 1040.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for C:

The only action required to elect portability of the deceased spousal unused exclusion
(DSUE) is to file a timely and complete Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return. If an estate tax return is not filed, then the
DSUE is not automatic.

28. Question ID: 94850258 (Topic: The Estate Tax)

What is NOT an official duty of an executor with regards to a taxable estate?

 A. Obtain an employer identification number (EIN) for the estate.

 B. Pay the tax determined up to the date of discharge from duties.wrong
 C. An executor must pay any and all debts that exceed the value of the estate.correct
 D. File all tax returns, including income, estate, and gift tax returns, when due.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

The primary duties of a personal representative are to collect all the decedent's assets,
pay his or her creditors, and distribute the remaining assets to the heirs or other
beneficiaries. The personal representative also must perform the following duties:

 Apply for an employer identification number (EIN) for the estate.

  File all tax returns, including income, estate, and gift tax returns, when due.
 Pay the tax determined up to the date of discharge from duties.
An executor is NOT responsible for paying the decedent's tax out of pocket if there is no
money in the estate. In other words, an executor is not responsible for paying debts that
exceed the value of the estate. This includes tax debts. For more information, see
Publication 559, Survivors, Executors and Administrators.

29. Question ID: 94850207 (Topic: The Estate Tax)

Gloria is the sole beneficiary of her deceased sister’s estate. The estate is required to
distribute all of its income currently. Which of the following statements is true?

 A. Gloria must report her share of the distributable net income of the estate only if the
estate has a filing requirement.
 B. Gloria does not have to report any income from the estate, because
inheritances are not taxable.wrong
 C. Gloria must only report distributable net income of the estate if she actually receives
it.
 D. Gloria must report her share of the distributable net income of the estate whether she
actually receives it or not.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 27% of students.

Correct Answer Explanation for D:

Gloria must report her share of the distributable net income of the estate whether she
actually receives it or not. For more information about estates and trusts, see the detail
page on the IRS website.

30. Question ID: 94850222 (Topic: The Estate Tax)

Jason, age 71, died on June 26, 2024. Jason's final will and testament required all his
assets to be transferred to his only daughter, Regina. Jason's assets were as follows:

 Main home: Adjusted basis $855,000; FMV $998,000.

 Stock: Adjusted basis $400,000; FMV $955,000.
 Savings (bank account): Adjusted basis $75,000; FMV $75,000.
 Dividends on stock above (dividends were declared and received June-30):
Adjusted basis $1,000; FMV $1,000.
 Health insurance reimbursement (received June-28): Adjusted basis $8,000;
FMV $8,000.
The executor of Jason's estate, Regina, did not elect the alternate valuation date. What
is the amount of Jason's gross estate, for purposes of an estate tax return, Form 706?
 A. $2,029,000wrong
 B. $1,330,000
 C. $2,036,000correct
 D. $1,339,000
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 43% of students.

Correct Answer Explanation for C:

The gross estate includes the fair market value of all property in which the decedent had
an interest at the time of death. Since the dividends were declared after Jason died,
their value is not included in Jason's gross estate. Health insurance reimbursements
due to the individual at the date of death are considered property in which the decedent
had an interest, whether or not they were actually received. The answer is calculated as
follows: $998,000 + $955,000 + $8,000 + $75,000 = $2,036,000. For more
information, see Publication 559, Survivors, Executors and Administrators.

31. Question ID: 94850288 (Topic: The Estate Tax)

What income tax form is required to report the taxable income of an individual
bankruptcy estate?

 A. Form 1041.correct
 B. Form 709.
 C. Form 706.
 D. Form 1040.wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

A bankruptcy estate with a filing requirement must file Form 1041 by the 15th day of the
4th month following the close of the tax year (usually, this date is April 15, for calendar-
year bankruptcy estates). A bankruptcy estate that is created when an individual debtor
files a bankruptcy petition under either chapter 7 or 11 of title 11 of the U.S. Code. A
bankruptcy estate is treated as a separate taxable entity. For more information,
see Publication 908, Bankruptcy Tax Guide.

32. Question ID: 94850271 (Topic: The Estate Tax)

The unlimited estate tax marital deduction is only available if the surviving spouse is a
_____________.
 A. U.S. citizen or legal resident alien (green card holder).
 B. U.S. citizen only.correct
 C. U.S. citizen, U.S. resident, or citizen or resident of Canada or Mexico.
 D. U.S. citizen or U.S. resident, regardless of immigration status.wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for B:

The unlimited estate tax marital deduction is only available if the surviving spouse is a
U.S. citizen. The unlimited marital deduction allows an individual to transfer an
unrestricted amount of assets to his or her spouse at any time, including at the death of
the transferor, free from tax. This unlimited transfer is only available if the surviving
spouse is a U.S. citizen.

33. Question ID: 94850220 (Topic: The Estate Tax)

Judy dies on August 3, 2024. Her son, Marcus is named the executor. Judy owned $22
million in assets when she died, so her estate has a filing requirement. As the executor,
Marcus would like to elect the alternate valuation date for his late mother's estate. For
estate tax purposes, what is the alternate valuation date for Judy's estate?

 A. March 15, 2025wrong

 B. February 3, 2025correct
 C. January 31, 2025
 D. August 3, 2025
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

At the election of the estate’s executor, a taxpayer’s gross estate may be valued either
on the date of death or on the alternate valuation date, which is six months after the
date of death. Since the taxpayer died on August 3, the alternate valuation date for the
taxpayer's estate would be February 3, 2025 (exactly 6 months later). For more
information about the alternate valuation date, see Publication 559, Survivors,
Executors and Administrators.

34. Question ID: 94850286 (Topic: The Estate Tax)

The Saville Disability Trust is a qualified disability trust that has an annual filing
requirement. The trust has a fiscal year-end of June 30. When is the trust's income tax
return (Form 1041) due?
 A. September 15.wrong
 B. May 15.
 C. November 15.
 D. October 15.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Fiscal-year estates and trusts must file Form 1041 by the 15th day of the 4th month
following the close of the entity's tax year. In this example, the trust has a tax year that
ends on June 30, so the trustee must file Form 1041 by October 15.

35. Question ID: 94850203 (Topic: The Estate Tax)

Harold is the sole beneficiary of his mother's estate, and the beneficiary of her life
insurance policy. Instead of getting a lump-sum payout, he chooses to receive the life
insurance in the form of an annuity. The face value of the policy is $100,000. He
chooses to receive the life insurance proceeds in 10 annual installments of $11,000.
What is the amount of income that Harold must report as taxable income?

 A. All of the proceeds are taxable as passive income.wrong

 B. $0, life insurance is not taxable to the beneficiary.
 C. Harold can exclude from income $10,000 ($100,000 / 10) as a return of principal.
The balance of the installment ($1,000) is taxable to him as interest income.correct
 D. All of the proceeds are taxable to Harold as ordinary income.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for C:

Although life insurance proceeds are not taxable to the beneficiary, interest earned on a
life insurance annuity would be taxable. Each year, he can exclude from income
$10,000 ($100,000 / 10) as a return of principal. The balance of the installment, $1,000,
is taxable as interest income.

36. Question ID: 94850201 (Topic: The Estate Tax)

For tax year 2024, a qualified disability trust (QDT) can claim an exemption of up to
________.

 A. $5,050correct
 B. $600wrong
 C. $0, there are no exemptions for trusts.
 D. $100
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for A:

For tax year 2024, a qualified disability trust (also called a "special needs trust") can
claim an exemption of up to $5,050 (this is the same amount as the "gross income limit"
for qualifying relatives, or the "deemed exemption" amount). A qualified disability trust
must be established for the sole benefit of a person under age 65 who meets the Social
Security Administration's definition of "disabled." See the instructions for Form 1041,
U.S. Income Tax Return for Estates and Trusts for more information about trusts.

37. Question ID: 94850299 (Topic: The Estate Tax)

Johnathan died on January 20, 2024. His sole heir is his adult daughter, Judith. She is
the executor of her late father's estate. The estate has a filing requirement, because her
late father's assets totaled $28 million when he died. Based on this information, what is
the due date for filing Form 706?

 A. August 20, 2024

 B. July 15, 2024wrong
 C. April 15, 2025
 D. October 20, 2024correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

If a decedent's date of death is January 20, the due date to file Form 706 is October 20
(9 months later).The due date of the estate tax return is nine months after the
decedent's date of death, however, the estate's representative may request an
extension of time to file the return for up to six months. An automatic six month
extension of time to file the return is available to all estates, including those filing solely
to elect portability.

38. Question ID: 94850216 (Topic: The Estate Tax)

All of the following can be deducted from the gross estate to determine the taxable
estate except:

 A. Debts owed at the time of death.

 B. Executor’s fee.
 C. Funeral expenses paid out of the estate.wrong
 D. Property taxes accrued after the decedent’s death.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for D:

Once the gross estate has been calculated, certain deductions (and in special
circumstances, reductions to value) are allowed to determine the taxable estate.
Deductions may include:

 Funeral expenses paid out of the estate.

 Estate administrative expenses (if not deducted on Form 1041).
 Debts owed at the time of death.
 The marital deduction (generally, the value of property that passes from the
estate to a surviving spouse).
 The charitable deduction (generally, the value of property that passes from the
estate to qualifying charities).
 The state death tax deduction (generally, any inheritance or estate taxes paid to
any state).
Only property taxes accrued under state law prior to the decedent’s death can be
deducted from the gross estate. In addition, the following items are not deductible from
the gross estate:

 Federal estate taxes paid.

 Alimony paid after the taxpayer’s death (these payments are treated as
distributions to a beneficiary).
For more information, see Publication 559, Survivors, Executors and Administrators.

39. Question ID: 94850282 (Topic: The Estate Tax)

Francis was named the executor of her brother's estate in his will. Francis initially
accepted the appointment, but then changes her mind six months later and wishes to
step down. She had already requested an EIN for the estate. How should Francis notify
the IRS of the termination of her fiduciary relationship?

 A. Form 56 should be filed.correct

 B. Form 2848 must be filed.
 C. A letter should be submitted to the IRS.wrong
 D. A formal revocation should be submitted to the IRS.
 Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for A:

Francis should file Form 56 to notify the IRS of the termination of her fiduciary
relationship. Form 56 is used to notify the IRS of the creation or termination of a
fiduciary relationship. Form 56 cannot be used to update the last known address of the
trust, estate, or entity for whom the fiduciary is acting.

Note: The executor is typically named in a decedent's will. The executor is granted
authority through the courts (probate is used to validate the will). Being an
executor is a voluntary role and the nominated executor may refuse by submitting a
renunciation to court.

40. Question ID: 94850214 (Topic: The Estate Tax)

Darren received 25 shares of stock as an inheritance from his aunt, Marian, who died
on January 23, 2024. Marian's adjusted basis in the stock was $8,500 when she died,
as reflected by her brokerage statements. The stock’s fair market value on the date of
his aunt’s death was $26,500. Marian was very wealthy and an estate tax return will be
filed by the executor. The executor of the estate elects the alternate valuation date for
valuing Marian's gross estate. On July 23, 2024, the stock’s fair market value was
$24,750. The estate’s executor transferred the stock into Darren’s brokerage account
on November 5, 2024, when its fair market value was $27,200. Darren sells all the stock
on December 1, 2024, for $27,400. Based on this information, what is Darren’s basis in
the inherited stock, for determining his gain or loss on the sale?

 A. $27,400
 B. $26,500wrong
 C. $24,750correct
 D. $27,200
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for C:

Since the executor filed an estate tax return and selected an alternate valuation date for
Marian's estate, the stock’s basis is the fair market value on that date (July 23), so
Darren’s basis in the inherited stock is $24,750. That is the basis that he would use to
determine his gain or loss on the sale.
 The basis of property received from a decedent is generally the fair market value of the
property on the date of the decedent’s death. However, an executor has the option of
choosing an alternate valuation date of six months after the date of death for valuing the
gross estate. For more information, see Publication 559, Survivors, Executors and
Administrators.

41. Question ID: 94850248 (Topic: The Estate Tax)

Marisol died on February 20, 2025. She earned $96,000 of wages in 2024 and $23,000
in 2025 (from January 1- February 20, before her death). At the time of her death, she
had not yet filed her 2024 income tax return. Marisol's adult son, Lorenzo, is named as
the executor of his mother's estate. What is the deadline for Lorenzo to file his
deceased mother's 2024 tax return (Form 1040)?

 A. February 20, 2026

 B. October 20, 2025
 C. April 15, 2025correct
 D. April 1, 2025wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for C:

The normal filing deadline applies for deceased taxpayers. So her return would be due
on April 15, 2025. Lorenzo, her executor, would be responsible for filing and signing the
return. In this case, the personal representative would be responsible for filing TWO tax
returns, the 2024 return, as well as the 2025 return, because Marisol had a filing
requirement for both years and died before she could file either one. The 2025 return
will be her final return (the final return would be the year of death, and it would have the
same filing deadline as any 1040 tax return).

43. Question ID: 94850295 (Topic: The Estate Tax)

Jenni and Markus are married. Markus dies on October 1, 2024. Jenni did not remarry
before the end of the year, and will file a joint return with her late husband. How should
she sign the return, since her husband is deceased?

 A. Jenni should sign the return and also sign her husband's signature as best she can.
 B. Jenni should sign her signature line and leave her spouse's signature area
blank. wrong
 C. Jenni should sign the return and write in the signature area "Filing as surviving
spouse." correct
 D. Jenni cannot file a joint return with a deceased spouse.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.
 This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

When a surviving spouse is filing a joint return (and there is no other appointed
representative for the deceased spouse), the surviving spouse should sign the return
and write in the signature area "Filing as surviving spouse." A surviving spouse can file
joint returns for the taxable year in which the death occurred and, if the death occurred
before filing the return, for the taxable year immediately before the year of death. For
more information, IRS Tax Topic No. 356, Decedents.

44. Question ID: 94850212 (Topic: The Estate Tax)

Gail's mother Ruth, died last year, and Gail is her mother's sole heir. Ruth was not
married when she died. When Gail files her deceased mother's return, there is a small
refund. How can Gail obtain her deceased mother's refund? What is the procedure for
claiming a refund for a deceased taxpayer?

 A. Gail can receive her late mother's refund by filing Form 56 and declaring herself as
her mother's executor.
 B. Taxpayers must file an estate tax return in order to receive a refund from a
deceased taxpayer.wrong
 C. Gail should just receive the refund check and forge her mother's signature on the
back.
 D. Gail may request her deceased mother’s refund by filing her late mother’s final return
and attach Form 1310.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for D:

Gail must file her mother's final return (Form 1040) and attach Form 1310, Statement of
Person Claiming a Refund Due a Deceased Taxpayer. This form is not always required,
however. If a surviving spouse is filing a joint return, or a court-appointed or court-
certified personal representative is filing an original return for the decedent, the Form
1310 is not required. However, in the scenario presented in the question, the Form 1310
should be filed, since Gail is neither a surviving spouse nor a court-appointed
representative.

45. Question ID: 95092381 (Topic: The Estate Tax)

Camilla Jones dies on March 30, 2024. Her assets exceed $20 million, so an estate tax
return must be filed to report the value of her estate. The executor is her brother, Tony.
He is advised by an attorney to choose the alternate valuation date for Camilla's estate.
What is the alternate valuation date?
 A. November 30, 2024
 B. December 30, 2024wrong
 C. September 30, 2024correct
 D. February 28, 2025
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for C:

The alternate valuation date is six months from the date of death. Camilla died on
March 30, so the alternate valuation date for her estate is September 30.

For estate tax purposes, assets are generally valued on the estate tax return as of the
decedent’s date of death. However, if the executor elects to use alternate valuation, the
assets are generally valued as of six months after date of death. Alternate valuation
cannot be applied to only a part of the property, it must be applied to all the assets of
the estate. In addition,

 The use of the alternate valuation date must reduce the gross estate value.
 The use of the alternate valuation date must reduce the total net estate taxes due
after application of all allowable statutory deductions.
For more information about the alternate valuation date, see Publication 559, Survivors,
Executors and Administrators.

46. Question ID: 94850195 (Topic: The Estate Tax)

Felicia owns 200 shares of Ford stock, which she purchased two years ago for $50 per
share. On November 1, Felicia dies. On the date of her death, the stock's market price
is $65 per share. An estate tax return was not filed, and the alternate valuation date was
not selected. Her son, Rudy, is the sole beneficiary of her estate, and he inherits all the
stock. What is Rudy's basis in the 200 shares?

 A. $13,000correct
 B. $12,000
 C. $10,000wrong
 D. $50
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

 Rudy's basis is $13,000 (200 shares x $65), which is the FMV of the stock on the date
of his mother's death. Generally, estate assets are valued at the date of death. For more
information about the basis of inherited property, see Publication 559, Survivors,
Executors and Administrators.

47. Question ID: 94850227 (Topic: The Estate Tax)

The Harwell Family Trust has a filing requirement. The trustee would like to request an
extension of time to file the trust's income tax return, Form 1041. How should this be
done?

 A. The trustee must file Form 7004 to apply for a 6-month extension of time to file.
 B. The trustee must file Form 7004 to apply for a 5½-month extension of time to
file.correct
 C. The trustee must file Form 4868 to apply for a 6-month extension of time to file.
 D. The trustee must file Form 4868 to apply for a 9-month extension of time to
file.wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 35% of students.

Correct Answer Explanation for B:

The trustee must file Form 7004, Application for Automatic Extension of Time to File
Certain Business Income Tax, Information, and Other Returns, to apply for an automatic
5½-month extension of time to file. For more information on trust filing requirements,
see the Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.

48. Question ID: 94850293 (Topic: The Estate Tax)

Karen's mother, Flora, died on January 1, 2024. Karen is the beneficiary of her mother's
life insurance policy. The face amount of the policy is $200,000, and as beneficiary,
Karen chooses to receive annual installments of $12,000. The insurer's settlement
option guarantees Karen this amount for 20 years based on a guaranteed rate of
interest. What is the excludable part of each annual installment, and what is the amount
that is taxable to Karen as interest?

 A. The excludable part of each annual installment is $11,000 and $1,000 is taxable
interest income.
 B. The excludable part of each annual installment is $10,000 and $2,000 is taxable
interest income.correct
 C. The excludable part of each annual installment is $2,000 and $10,000 is taxable
interest income.
 D. None of the proceeds are taxable to Karen. wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.
 This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for B:

The face amount of the policy is $200,000, and the annual installments are $12,000.
Karen chose a 20-year settlement option, therefore, the excludable part of each
guaranteed installment is $10,000 ($200,000 ÷ 20 years). The balance of each
guaranteed installment, $2,000, is taxable as interest income to Karen. This question is
based directly on an example in Publication 559, Survivors, Executors and
Administrators.

49. Question ID: 94850291 (Topic: The Estate Tax)

Mabel died during the year. Her estate was valued at $49 million, so an estate tax return
must be filed. Which of the following expenses may be claimed as a deduction on Form
706, United States Estate Tax Return?

 A. Late filing penalties.

 B. Property taxes that accrued after the date of Mabel's death.
 C. Attorney's fees for work on behalf of the estate.correct
 D. Federal estate taxes paid. wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

Fees that have been paid to attorneys for work on behalf of the estate (or amounts that
can reasonably be expected to be paid) may be claimed as a deduction against the
value of the estate on Form 706. Federal estate taxes and penalties for late filing are
never deductible. The deduction for property taxes is limited to the taxes accrued before
the date of the decedent's death (not after).

For more information, see Publication 559, Survivors, Executors and Administrators.

50. Question ID: 94850223 (Topic: The Estate Tax)

Barney died on May 2, 2024. He owned $18 million in assets when he died, so his
estate has a filing requirement. Which of the following items listed is not deductible from
his gross estate on Form 706?

 A. Funeral expenses
 B. Federal taxes owed by the estatecorrect
 C. Debts that the decedent owed at the time of death
 D. Medical expenses incurred before his deathwrong
 Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for B:

Federal estate tax is not deductible from the gross estate. The other items listed are
allowable deductions from the gross estate. The decedent’s unpaid medical expenses
represent liabilities that can be deducted from the gross estate. Alternatively, if the
expenses are paid by the estate during the one-year period beginning with the day after
death, the personal representative can elect to treat all or part of the expenses as paid
by the decedent at the time they were incurred, and elect to deduct them on the
decedent’s final tax return (1040).

For more information about the filing requirements that apply to estates, see Publication
559, Survivors, Executors and Administrators.

51. Question ID: 94849623 (Topic: The Estate Tax)

Cecil earns $35,000 in wages and does not own a business. During the year, his
wealthy aunt, Henrietta dies. Cecil is named in Henrietta's will as one of the
beneficiaries of her estate. Henrietta owned a restaurant as well as several rental
properties at the time of her death. The attorney managing the estate sends Cecil a
check for $9,000 as well as a Schedule K-1 from the estate later in the year. Where
should Cecil report this income?

 A. Cecil should use the information on the Schedule K-1 and report the income on
Schedule C of his Form 1040.
 B. Cecil should use the information on the Schedule K-1 and report the income on
Schedule E of his Form 1040. correct
 C. The Schedule K-1 is informational only, Cecil will not owe any tax since any income
earned by the estate will be tax-free to the beneficiaries.
 D. Cecil should use the information on the Schedule K-1 and report the income on
Schedule D of his Form 1040.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for B:

Cecil should use the information on the Schedule K-1 and report the income on
Schedule E of his Form 1040. Schedule K-1 (Form 1041) is used to report a
beneficiary's share of an estate, including income, credits, deductions and profits. Since
 Cecil is one of the beneficiaries of the estate, he will continue to receive a Schedule K-1
until all the assets of his aunt's estate are distributed to her heirs.

To learn more about this topic, see the IRS page for the Schedule K-1 (Form 1041),
Beneficiary's Share of Income, Deductions, Credits, etc.

52. Question ID: 94850270 (Topic: The Estate Tax)

Tamila and Ramil are brother and sister. On September 1, Ramil dies, and Tamila is his
sole beneficiary. Ramil had a $220,000 life insurance policy, which is paid out to Tamila
as a lump sum on December 31. The payout also included $112 of interest. How should
this payment be treated by Tamila for tax purposes?

 A. The life insurance proceeds are not taxable to Tamila, but the amounts must be
reported as "exempt interest" on her return.
 B. The life insurance proceeds and the interest are taxable to Tamila, and must be
reported as "other income" on her return.
 C. The life insurance proceeds are not taxable to Tamila, but the interest is
taxable.correct
 D. The life insurance proceeds are taxable to Ramil's estate, and must be reported as
taxable on the estate's income tax return (Form 1041).
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

The life insurance proceeds do not have to be included in Tamila's gross income, and
She does not have to report the amounts on her tax return. However, the interest is
taxable. Generally, life insurance proceeds received as a beneficiary due to the death of
the insured person, aren't includable in gross income and the beneficiary doesn't have
to report them. However, any interest from a life insurance policy that is later received
by the beneficiary is taxable and must be reported.

53. Question ID: 94850285 (Topic: The Estate Tax)

The Harley Irrevocable Trust has an annual filing requirement. The trust reports income
and loss on a calendar year. When is the trust's Form 1041 due?

 A. June 30
 B. May 15
 C. April 15correct
 D. March 15
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.
 This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for C:

For calendar-year estates and trusts, Form 1041 and Schedule(s) K-1 are due by April
15. For fiscal year estates and trusts, the trust must file Form 1041 by the 15th day of
the 4th month following the close of the tax year. This means that a calendar year trust
would have the same due date as an individual (April 15).

54. Question ID: 94850236 (Topic: The Estate Tax)

Individual taxpayers sometimes file for bankruptcy. At the commencement of a
bankruptcy case, a "bankruptcy estate" is created. Which form must a bankruptcy estate
use to report income and losses?

 A. Form 1041.correct
 B. Form 706.
 C. Form 709.
 D. Form 1040.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for A:

A bankruptcy estate uses Form 1041 to report income and loss. A court-appointed
trustee is responsible for filing the bankruptcy estate's tax returns. The debtor (the
taxpayer who filed for bankruptcy) remains responsible for filing his or her own
individual returns on Form 1040 and paying any income taxes that do not belong to the
bankruptcy estate. For more information about the filing requirements of a bankruptcy
estate, see IRS Publication 908, Bankruptcy Tax Guide.

55. Question ID: 94850283 (Topic: The Estate Tax)

Franklin is the executor of his late mother's estate. An estate tax return must be filed,
because his mother's estate was valued at $16 million at the time of her death. His
mother died on February 13, 2024. When is the Form 706 due for the estate?

 A. February 13, 2024

 B. December 13, 2024
 C. August 13, 2024
 D. November 13, 2024correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.
 This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for D:

If a decedent's date of death is February 13, the due date to file Form 706 is November
13 (9 months later).The due date of the estate tax return is nine months after the
decedent's date of death, however, the estate's representative may request an
extension of time to file the return for up to six months. An automatic six-month
extension of time to file the return is available to all estates, including those filing solely
to elect portability.

For more information about estate tax return due dates, see Publication 559, Survivors,
Executors and Administrators.

56. Question ID: 94850266 (Topic: The Estate Tax)

The fair market value of property at the time of death is usually its value for estate tax
purposes. However, the executor may elect to value the decedent’s estate using the
alternative valuation method. What is the alternate valuation date for an estate?

 A. The value of the estate nine months after the decedent’s death is substituted for the
value at the date of death.
 B. The value of the estate six months after the decedent’s death is substituted for the
value at the date of death.correct
 C. The value of the estate twelve months after the decedent’s death is substituted for
the value at the date of death.
 D. The value of the estate six months before the decedent’s death is substituted for the
value at the date of death.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

For estate tax purposes, assets are generally valued on the estate tax return as of the
decedent’s date of death. However, if the executor elects to use alternate valuation, the
assets are generally valued as of six months after date of death. Alternate valuation
cannot be applied to only a part of the property, it must be applied to all the assets of
the estate. In addition,

 The use of the alternate valuation date must reduce the gross estate value.
 The use of the alternate valuation date must reduce the total net estate taxes due
after application of all allowable statutory deductions.
For more information about the alternate valuation date, see Publication 559, Survivors,
Executors and Administrators.
 57. Question ID: 94850298 (Topic: The Estate Tax)
Timothy's father died on August 25, 2024. Timothy is his sole heir. His father did not
have a will and the court did not appoint a personal representative for his estate. His
father is entitled to a $300 refund for his 2024 return. To get his father's tax refund, what
must Timothy do?

 A. Timothy must contact the IRS and have the refund deposited into his account.
 B. Timothy must complete and attach Form 1310 to his father’s final return.correct
 C. Timothy must claim his father as a dependent.
 D. Timothy cannot obtain his father's refund without proper court documents.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Question was not answered

58. Question ID: 94850279 (Topic: The Estate Tax)

The Smith Family Trust is an irrevocable trust that operates on a fiscal year-end of July
30. The trust has a filing requirement. When is the trust's tax return due (Form 1041)?

 A. October 15
 B. April 15
 C. November 15correct
 D. August 15
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Question was not answered

59. Question ID: 94850294 (Topic: The Estate Tax)

How does the personal representative of a decedent's estate choose the estate's
accounting period?

 A. The personal representative chooses the estate's accounting period upon filing the
Form 706.
 B. The personal representative chooses the estate's accounting period upon filing the
Form 709.
 C. The personal representative chooses the estate's accounting period upon filing the
decedent's final Form 1040.
 D. The personal representative chooses the estate's accounting period upon filing the
first Form 1041.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 43% of students.

Question was not answered

60. Question ID: 94850292 (Topic: The Estate Tax)

Andrea is a CPA and a 25% partner in the Greenway Accounting, LLP, which is an
accounting firm taxed as a partnership. There are 3 other partners in the firm. On April
1, 2024, Andrea dies. What effect does her death have on the partnership?

 A. The partnership's tax year must close.

 B. The death of a partner closes the partnership's tax year for all the partners.
 C. The partnership must dissolve and a new partnership must be formed.
 D. The death of a partner closes the partnership's tax year for that partner. correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Question was not answered

9. Question ID: 95421216 (Topic: The Estate Tax)

Jack Glenn died three years ago, and his estate has been going through its period of
administration. The Glenn Estate has a net operating loss for the year. The final estate
income tax return will be filed in 2024. Which of the following statements is true?

 A. The loss can be claimed by the executor.

 B. The loss may be passed to the beneficiaries, because it is a termination
year.correct
 C. The loss may not be passed to the beneficiaries.
 D. The loss may be carried forward, even if the estate terminates.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for B:

Estates filing Form 1041 may have net operating losses. In the case of an estate, any
net operating loss carryover remaining when the estate is terminated is allowed to the
 beneficiaries who succeed to the estate’s property. Losses are only permitted to be
passed to the beneficiaries in the year of termination. For more information, see the
Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.

10. Question ID: 94851283 (Topic: The Estate Tax)

Analise is the fiduciary of the Rockway Charitable Trust. She is not an enrolled agent,
CPA or attorney. What form should Analise file with the IRS in order to report her
fiduciary relationship to the trust?

 A. Analise must file Form 2848 to report her fiduciary relationship to the trust.
 B. Analise must file Form 56 to report her fiduciary relationship to the
trust. correct
 C. Analise must file Form 8821 to report her fiduciary relationship to the trust.
 D. No form is necessary.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

Analise must file Form 56, Notice Concerning Fiduciary Relationship, to report her
fiduciary relationship to the trust. Form 56 should be filed by a fiduciary to notify the IRS
of the creation (or termination) of a fiduciary relationship. If a taxpayer is acting as
fiduciary for an individual, a decedent's estate, or a trust, the fiduciary should
file Form 56, Notice Concerning Fiduciary Relationship.

11. Question ID: 94851202 (Topic: The Estate Tax)

Janell dies suddenly during the year. Her son, Kyle, is eventually named the executor of
his mother's estate by the courts. Which form is used by Kyle to notify the IRS of this
official fiduciary relationship?

 A. Form 2848.
 B. Form 56.correct
 C. Form 706.
 D. Form 1041.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for B:

 Form 56, Notice Concerning Fiduciary Relationship, is used to notify the IRS of the
creation or termination of a fiduciary relationship. For example, if you are acting as
fiduciary for an individual, a decedent's estate, or a trust, you may file Form 56. The
main difference between an IRS Form 56 and a Power of Attorney (Form 2848) is that
when one is a fiduciary, one can make decisions as if they were the taxpayer. Form 56
is used most often after a taxpayer has deceased, although it is also used for trusts,
cases of legal incompetence (such as when a person has Alzheimer's disease or some
other debilitating illness) and other types of fiduciary relationships.

15. Question ID: 94850217 (Topic: The Estate Tax)

Iwan has been named as the executor of his late mother’s estate. Iwan will receive
$3,000 for the duty. Iwan is not a professional executor and has never served as an
executor before. As his enrolled agent, what do you advise him about the tax
implications for receiving this payment?

 A. It is taxable to Iwan and must be included in his gross income on Form 1040.
The executor fees are "other income" and not subject to self-employment
tax.correct
 B. It must be reported on his tax return but it is excluded from income.
 C. It must be included in gross income, and Iwan will be required to pay self-
employment tax on the amount received.
 D. It is not taxable and not reportable, because the executor fees are treated as an
inheritance.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for A:

An executor must include payments received as “other income” on Form 1040.

However, Iwan does not have to pay self-employment tax on the executor fees that he
receives because he is not a professional executor and he is not "in the business" of
managing decedents’ estates. For more information about the tax treatment of executor
fees, see Publication 559, Survivors, Executors and Administrators.

16. Question ID: 94850234 (Topic: The Estate Tax)

Benedict dies on January 31. His executor must file a final income tax return for the
year of death. Which of the following is true?

 A. A deceased taxpayer is forced to itemize deductions, since they were not alive for the
entire year.
 B. The full amount of the standard deduction is allowed on the taxpayer's final
Form 1040, regardless of the fact that the taxpayer was only alive for one month
of the taxable year.correct
 C. The standard deduction must be pro-rated on the taxpayer's final Form 1040 for the
amount of time that the taxpayer was alive.
 D. Neither the standard deduction or itemized deductions are allowed on a deceased
taxpayer's final return.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for B:

The full amount of the standard deduction is allowed on the taxpayer's final Form 1040,
regardless of the fact that the taxpayer was only alive for one month of the taxable year.
If a taxpayer does not itemize deductions on the final return, the full amount of the
standard deduction is allowed regardless of the date of death. For more
information, see Publication 559, Survivors, Executors and Administrators.

17. Question ID: 94850215 (Topic: The Estate Tax)

Which credit is allowed to compute a deceased taxpayer’s net estate tax on Form 706?

 A. Credit for funeral expenses.

 B. Credit for state administrative expenses.
 C. Credit for foreign death taxes.correct
 D. Credit for charitable contributions.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 21% of students.

Correct Answer Explanation for C:

The amount of estate tax due is reduced by certain allowable credits, which includes the
credit for foreign death taxes. The other items listed (debts owed by the estate, the
marital deduction, funeral and administrative expenses paid by the estate, charitable
contributions, and state death taxes) are deductions, not credits, from the gross estate
in determining the taxable estate.

For more information, see Publication 559, Survivors, Executors and Administrators.

19. Question ID: 94850231 (Topic: The Estate Tax)

Karen died on June 3, 2024. The executor of her estate is her brother, Felix, who was
the named executor and beneficiary in her final will. What form must Felix file with the
IRS, to notify the IRS of his fiduciary relationship?

 A. Form 1310
 B. Form 2848
 C. Form 56correct
 D. Form 8821
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Felix should file Form 56 with the IRS, along with the letters testamentary from the
courts naming him as the executor of his sister's estate. A personal representative or
executor should file Form 56, Notice Concerning Fiduciary Relationship to notify the IRS
of the existence of a fiduciary relationship. A fiduciary (trustee, executor, administrator,
receiver or guardian) stands in the position of a taxpayer and acts as the taxpayer.

23. Question ID: 94850245 (Topic: The Estate Tax)

Mai-Lin is a citizen of China and a nonresident of the United States. Mai-Lin is wealthy
and owns a valuable real estate property in Hawaii that she uses when she comes to
the U.S. on vacation. She does not work or own a business in the United States. On
December 30, 2024, Mai-Lin dies, and due to the value of her vacation home, her estate
has a U.S. filing requirement. Which form is used for reporting a nonresident alien
ESTATE tax return?

 A. Schedule NR.
 B. Form 706.
 C. Form 706NA.correct
 D. Form 1040NR.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for C:

Form 706-NA, United States Estate Tax Return - Estate of Nonresident Not a Citizen of
the United States, is used for reporting a nonresident alien estate tax return. The estate
tax is applied to estates of non-U.S. citizens residing abroad who owned at least
$60,000 worth of property within the U.S. at the time of death (note that this is a much
lower threshold than the exemption amount that is allowed to U.S. citizens).

26. Question ID: 94850209 (Topic: The Estate Tax)

Harvey died on July 7, 2024. His gross estate was valued at $26 million when he died,
so an estate tax return must be filed. When is his estate tax return due (Form 706)?
 A. April 7, 2025correct
 B. July 7, 2025
 C. April 15, 2025
 D. January 7, 2025
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for A:

Estate tax returns (Form 706) are due nine months after the date of death, unless an
extension of time to file is requested. Harvey died on July 7, so 9 months later would be
April 7 (of the following year). For more information, see Publication 559, Survivors,
Executors and Administrators.

42. Question ID: 94850197 (Topic: The Estate Tax)

Helene’s father died on October 9, 2024. He left his entire estate, which consisted
primarily of stock and vacant land, to Helene, his daughter. Her father’s basis in all the
assets was $1.5 million. On the date of his death, the estate’s fair market value was $7
million ($2 million for the stock and $5 million for the land). Six months after his death
(the alternate valuation date) the assets were valued at $6.9 million, because the value
of her late father's stock had gone down. No estate tax return was filed (Form 706),
because the estate's value was under the exemption threshold. What is Helene’s basis
in the estate property?

 A. $1.5 million
 B. $6.9 million
 C. $7 millioncorrect
 D. $5.5 million
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for C:

Helene's basis in the inherited property is $7 million, which is the FMV of the property
on the date of her father's death. The basis of an estate’s assets is the fair market value
on the date of death of a decedent, unless an alternate valuation date is chosen. An
executor can also elect an alternate valuation date that is six months after the date of
death, but only if the estate’s value and any related estate tax are less than they would
have been on the date of death, and only if an estate tax return is filed. Since an estate
tax return was not filed, the answer is $7 million.
For more information, see Publication 559, Survivors, Executors and Administrators.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94849557 (Topic: Retirement Income)

Which of the following is NOT a type of retirement savings account?

 A. 401(k) plan.wrong
 B. Roth IRA.
 C. Traditional IRA.
 D. HSA.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 97% of students.

Correct Answer Explanation for D:

An HSA is a Health Savings Account meant for medical expenses. All of the other
choices are types of retirement savings accounts.

2. Question ID: 94849561 (Topic: Retirement Income)

How are Required Minimum Distributions from a traditional IRA taxed?

 A. RMDs are taxed as self-employment income.wrong

 B. RMDs are taxed as capital gains.
 C. They are tax-free.
 D. RMDs are taxed at the taxpayer's regular income tax rate.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for D:

A required minimum distribution (RMD) from an IRA or other retirement account is taxed
at the taxpayer's regular income tax rate. It is treated as pension income and not subject
to self-employment tax. However, to the extent the RMD is a return of basis or is a
qualified distribution from a Roth IRA, it is tax free.

See more details about RMDs on the IRS page for Required Minimum Distributions.

3. Question ID: 94850085 (Topic: Retirement Income)

Della is 49. She earns $56,000 in wages in 2024. She wants to contribute to both her
traditional IRA and her Roth IRA during the year. What is the maximum in combined
contributions she can make into both IRA accounts?
 A. She can make a $6,500 contribution into each IRA account. But only the
traditional IRA contribution will be deductible.wrong
 B. Her combined contributions are limited to $7,000 for the year.correct
 C. She can make a $7,500 contribution into each IRA account. But only the traditional
IRA contribution will be deductible.
 D. She can contribute a maximum of $7,000 to one account. Taxpayers cannot fund a
traditional IRA and a Roth IRA in the same year.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

Della's combined contributions are limited to $7,000 in 2024. If an individual contributes

to both a traditional IRA and a Roth IRA, the combined contributions are limited to
$7,000 a year ($8,000 if the taxpayer is age 50 or older).

4. Question ID: 94849770 (Topic: Retirement Income)

Form 8606 is used to report which of the following retirement plan transactions?

 A. A taxpayer made a contribution to a Roth IRA.wrong

 B. A taxpayer had a prohibited transaction in a self-directed IRA.
 C. A taxpayer requested a participant loan from a 401(k)
 D. A taxpayer converted $10,000 from a traditional IRA to a Roth IRAcorrect
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for D:

Form 8606 is used to report:

 Nondeductible contributions to traditional IRAs, and

 Conversions from traditional IRA, SEP-IRA, or SIMPLE IRAs to a Roth IRA.
Failure to file Form 8606 could result in an individual paying income tax and/or an early
distribution penalty on amounts that should be tax-free and penalty-free.

6. Question ID: 94850156 (Topic: Retirement Income)

Joyce is 31 years old and recently divorced. She would like to save for retirement, but
she's unsure how much she can contribute to her traditional IRA. During the year, she
receives the following income:

 $1,000 in wages
 $1,200 in municipal bond interest
  $30,000 in rental income from an investment property
 $2,150 in gambling winnings
 $10,000 in nontaxable alimony
 $1,200 in self-employment income.
Based on this information, how much can she contribute to an IRA?

 A. $6,500wrong
 B. $2,200correct
 C. $3,200
 D. $1,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 60% of students.

Correct Answer Explanation for B:

She can contribute $2,200. Only the self-employment income and the wages are
qualifying income for IRA contribution purposes. None of the other income is “qualifying
income” for the purposes of an IRA contribution. See IRS Topic No. 451, Individual
Retirement Arrangements (IRAs) for more information.

7. Question ID: 94849753 (Topic: Retirement Income)

Tabitha has a self-directed IRA account, which means she can choose her own
investments. Which of the following types of investments would be PROHIBITED within
the IRA account?

 A. S Corporation stockcorrect
 B. Mutual fundswrong
 C. Real estate
 D. Municipal bonds
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for A:

Almost any type of investment is permissible inside an IRA, including stocks, bonds,
mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs),
and even real estate (as long as the real estate is not for personal use). However, an
IRA cannot invest in:

 Collectibles: like art, antiques, gems, coins, alcoholic beverages, and certain
precious metals (See IRC Section 590)
  S-Corporation stock.
 Or life Insurance contracts
8. Question ID: 94849639 (Topic: Retirement Income)
To find out if a taxpayer's Social Security benefits may be taxable, all of the following
are taken into account EXCEPT:

 A. Non-taxable interest from municipal bonds.

 B. Self-employment income.wrong
 C. Passive interest income.
 D. The exclusion for foreign earned income.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for D:

To find out if a taxpayer's Social Security benefits may be taxable, all of the items listed
above are taken into account EXCEPT the exclusion for foreign earned income. In order
to calculate the taxable portion of Social Security, you must take one half of your Social
Security benefits and add that amount to all your other income, including tax-exempt
interest. This number is known as your combined income, and it is compared to the
base amounts. If the resulting calculation is less than $25,000 single or $32,000 for
MFJ, then your Social Security benefits are generally not taxable.

Calculation:

Your adjusted gross income

+ Nontaxable interest

+ ½ of your Social Security benefits = Your "combined income"

(Note: This question is modified from a released EA exam question).

9. Question ID: 94850083 (Topic: Retirement Income)

Sandra, 52, works and has a traditional IRA. Sandra earned $2,000 in wages, $400 in
interest income, and $19,000 in rental income which she reports on Schedule E. She is
not a real estate professional. What is the maximum she can contribute to her IRA in
2024?

 A. $2,000correct
 B. $6,500wrong
 C. $2,400
 D. $7,500
 Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

She can only contribute $2,000 to her IRA account because the wage income is the
only "qualifying compensation" for IRA purposes. The interest income and rental income
would not be qualifying compensation in order to fund an IRA. See more details about
IRAs, review the IRS page on Individual Retirement Arrangements (IRAs).

10. Question ID: 94849724 (Topic: Retirement Income)

Paolo and Evangeline are married and file jointly. Paolo received $10,000 of Social
Security benefits and Evangeline received $12,000. They received no other income
during the year. What part of their Social Security benefits will be taxable for the year?

 A. $0correct
 B. $26,000wrong
 C. $16,000
 D. $6,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Paolo and Evangeline’s benefits are probably not taxable. If the only income received
by the taxpayer is Social Security, the benefits generally are not taxable, and the
taxpayers probably do not have to file a return.

Note: Senior citizens whose only source of income is Social Security generally will not
owe any federal taxes and therefore don't need to file a return with the IRS. If a taxpayer
has other income in addition to Social Security, the taxpayer may have to file a return,
even if none of the Social Security benefits are taxable. See the IRS tutorial page
on Social Security.

11. Question ID: 94849740 (Topic: Retirement Income)

Karinna is 63 years old and married. She lived with her spouse, Benjamin, for the first
two months of the tax year. They started to have marital troubles, and Benjamin moved
out in March. They will both file MFS this year. Karinna has Social Security income as
well as wages during the year. What is her "base amount" for figuring out the taxable
portion of her Social Security benefits?

 A. $32,000
 B. $25,000wrong
 C. zerocorrect
 D. $36,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for C:

Karinna's base amount is zero, because she is filing MFS and she lived with her spouse
for part of the year. Generally, a taxpayer's Social Security income will only be taxed if
the taxpayer has income from other sources and their combined income is more than a
certain "base amount". The “base amount” is associated with filing status:

 $25,000 for single, head of household, qualifying surviving spouse, and married
filing separately and lived apart from your spouse for all the tax year; or
 $32,000 for married filing jointly; or
 $0 for married filing separately and lived with your spouse at any time during the
tax year.
See Publication 915, Social Security and Equivalent Railroad Retirement Benefits to
find out more about "base amounts" and Social Security.

12. Question ID: 94849766 (Topic: Retirement Income)

If you contribute more than the traditional IRA or Roth IRA contribution limit, tax law
imposes a ____ excise tax per year on the excess contribution.

 A. 6%correct
 B. 5%wrong
 C. 15%
 D. 10%
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for A:

If you contribute more than the traditional IRA or Roth IRA contribution limit, tax law
imposes a 6% excise tax per year on the excess contribution. This 6% penalty applies
for each year the excess contribution remains in the IRA. Taxpayers who have made
excess contributions should remove the excess contribution as soon as it is discovered.
The IRS lets you pull out excess IRA contributions without penalty as long as you do it
before the tax filing deadline (usually April 15, extensions are permitted).

15. Question ID: 94850187 (Topic: Retirement Income)

 Sarah, age 52, is married with $650 of self-employment income and $4,000 of interest
income for 2024. Her husband, Reuben, age 49, earned $79,000 in wages. How much
can Sarah contribute to a traditional IRA if they file jointly?

 A. $650wrong
 B. $690
 C. $8,000correct
 D. $7,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

Sarah may contribute $8,000 to her IRA (the 2024 maximum amount of $7,000 plus an
additional $1,000 contribution for age 50 and over). Since Sarah and her husband filed
a joint return, Sarah may contribute the maximum to her IRA even though she only had
$650 in taxable compensation, because her spouse made enough qualifying
compensation to cover a full contribution for both of them. The amount of the combined
contributions cannot exceed more than the qualifying compensation reported on the
taxpayer’s joint return. See IRS Topic No. 451, Individual Retirement Arrangements
(IRAs).

16. Question ID: 94849562 (Topic: Retirement Income)

Which of the following retirement plans may allow participant loans?

 A. SIMPLE IRA wrong

 B. Traditional IRA
 C. 401(k) plan correct
 D. ROTH IRA
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for C:

Some types of retirement plans may offer loans to participants; profit-sharing, money
purchase, 401(k), 403(b) and 457(b) plans may offer loans (at the employer's
discretion). Loans are never permitted from IRA-based plans, such as traditional IRAs,
Roth IRAs, and SIMPLE IRA plans. For more information on this topic, see the IRS
page for Retirement Plan Loans.

21. Question ID: 94849593 (Topic: Retirement Income)

 Aspen is 64 and unmarried. He wants to contribute to his traditional IRA before the end
of the year. He received $20,000 of rental income, $8,000 of interest income, and
$3,000 of wages from a part-time job during the year. What is his maximum IRA
contribution?

 A. $7,500wrong
 B. $3,000correct
 C. $4,000
 D. $6,500
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

The rental and interest income are not considered for purposes of determining his IRA
contribution. Therefore, the maximum he can contribute to his traditional IRA is $3,000,
the amount of his wages.

23. Question ID: 94849670 (Topic: Retirement Income)

Basma and Rayan are both age 63, married, and lived together all year in Florida, which
is a noncommunity property state. Each has their own traditional IRA. Rayan is mostly
retired, and Basma still works full-time. During the year, Rayan earned $5,200 of wages
from working part time at a retail shop. He also received $32,000 of passive rental
income from a rental that he owns himself. Basma earned $42,500 in wages. They
prefer to file separate tax returns. If they file MFS, what is the maximum that Rayan can
contribute to his traditional IRA in 2024?

 A. $0wrong
 B. $6,500
 C. $5,200correct
 D. $7,500
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

Since Rayan is married and lived with his wife during the year but is filing separately, he
can contribute no more than $5,200, the amount of his "qualifying compensation" (his
wages) for IRA purposes. The passive rental income is not qualifying compensation for
the purposes of contributing to an IRA.

24. Question ID: 94850084 (Topic: Retirement Income)

 What is the tax treatment of distributions from an inherited Roth IRA to a surviving
spouse?

 A. Tax-freecorrect
 B. Subject to income tax, but not an early withdrawal penaltywrong
 C. Fully taxable
 D. Partially taxable
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

Distributions from an inherited Roth IRA to a surviving spouse are generally tax-free,
just like they would have been for the original owner of the IRA. Surviving spouses can
also treat the account as they would their own.

25. Question ID: 94849741 (Topic: Retirement Income)

Khepri is 64 years old and single. She received $13,400 in social security benefits
during the year. Social security was the only source of her income this year. What is her
base amount for determining the taxable portion of Social Security?

 A. $32,000wrong
 B. $12,000
 C. $25,000correct
 D. Zero
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for C:

Khepri's base amount is $25,000. Her social security benefits aren’t taxable because
one-half of her Social Security benefits is less than her base amount of $25,000, and
she has no other income to report. Generally, a taxpayer's Social Security income will
only be taxed if the taxpayer has income from other sources and their combined income
is more than a certain "base amount". The “base amount” is associated with filing
status:

 $25,000 for single, head of household, qualifying surviving spouse, and married
filing separately and lived apart from your spouse for all the tax year; or
 $32,000 for married filing jointly; or
  $0 for married filing separately and lived with your spouse at any time during the
tax year.
See Publication 915, Social Security and Equivalent Railroad Retirement Benefits to
find out more about "base amounts" and Social Security.

28. Question ID: 94850082 (Topic: Retirement Income)

Jennifer, age 73, has a traditional IRA. Because of her age, she is required to make
annual RMDs. Rather than take her required minimum distribution (RMD) this year, she
would like to make a donation to the SPCA (her favorite charity) directly from her IRA
account. Which of the following statements is correct?

 A. She can make a tax-free distribution from her traditional IRA directly to a qualified
charity, and the excluded amount can be used to satisfy the required minimum
distribution.correct
 B. She cannot make a tax-free distribution from her traditional IRA directly to a
qualified charity.wrong
 C. She can make a tax-free distribution from her traditional IRA directly to a qualified
charity, but the amounts will still be subject to income tax.
 D. She can make a tax-free distribution from her traditional IRA directly to a qualified
charity, and she can also take a charitable deduction on Schedule A for the amount of
the gift.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for A:

Jennifer can choose to make a tax-free distribution from her traditional IRA directly to a
qualified charity, and the excluded amount can be used to satisfy the required minimum
distribution for the year. This is called a QCD, or "qualified charitable distribution." She
will not pay any income tax on the amount, as long as the donation is made directly by
her IRA trustee to the qualified charity. The amount of the QCD is not included in her
taxable income, and she cannot deduct the amounts on Schedule A as a charitable gift
(no double-dipping!).

Qualified charitable distributions: Taxpayers age 70 ½ or older can make a qualified

charitable distribution, up to $100,000, directly from their IRA, to a qualified charitable
organization. It's a nontaxable distribution made by the IRA trustee directly to a
charitable organization. A qualifying deduction may count toward the taxpayers required
minimum distribution (RMD) requirement for the year. Review Publication 590-B,
Distributions from Individual Retirement Arrangements for more information.

29. Question ID: 94849739 (Topic: Retirement Income)

 Barnard is a 72-year-old single taxpayer who receives Social Security as well as wages
during the year. What is his "base amount" for computing the taxable portion of his
Social Security benefits?

 A. Not enough information to answer.

 B. $12,000wrong
 C. $25,000correct
 D. $32,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for C:

Generally, a taxpayer's Social Security income will only be taxed if the taxpayer has
income from other sources and their combined income is more than a certain "base
amount". The “base amount” is associated with filing status:

 $25,000 for single, head of household, qualifying widow(er), and married filing
separately and lived apart from your spouse for all the tax year; or
 $32,000 for married filing jointly; or
 $0 for married filing separately and lived with your spouse at any time during the
tax year.
See Publication 915, Social Security and Equivalent Railroad Retirement Benefits to
find out more about "base amounts" and Social Security.

31. Question ID: 94849555 (Topic: Retirement Income)

Janice, 52, and Marcus, 61, are married. Janice dies on May 30, 2024. At the time of
her death, she has $83,000 in her traditional IRA account. Marcus inherits his late wife's
IRA. He doesn't want to withdraw any of the money in his late wife's IRA and would
rather have the invested amount continue to grow. What options does he have?

 A. He can choose to roll over the entire amount into his own IRA account, thereby
avoiding taxation on the income until he retires and starts taking distributions.correct
 B. He must start taking distributions from the IRA in the form of an annuity.wrong
 C. He must start taking required minimum distributions from the IRA by April 1 of the
following year.
 D. He must withdraw the amounts in the inherited IRA either (1) in a lump sum or (2) an
annuity within 10 years (or less).
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

 Marcus can choose to roll over the entire amount into his own IRA account, thereby
avoiding taxation on the income until he retires and starts taking distributions at a later
date. This option is only available to spousal beneficiaries of a deceased taxpayer.

Inherited from someone other than spouse: If the inherited traditional IRA is from
anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own.
This means that the beneficiary cannot make any contributions to the IRA or roll over
any amounts into or out of the inherited IRA. See more details about inherited IRAs on
the IRS website on the Retirement Topics page.

32. Question ID: 94849558 (Topic: Retirement Income)

Which of the following is true of Roth IRA required minimum distributions?

 A. Roth IRA required minimum distributions must begin at age 59 1/2.wrong

 B. Roth IRA required minimum distributions are taxable.
 C. There are no required minimum distributions for Roth IRAs that are not
inherited.correct
 D. If a taxpayer misses a required minimum distribution from a Roth IRA, a 50% penalty
may apply.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for C:

There are no required minimum distributions for Roth IRAs that are not
inherited. Contributions to Roth IRAs are not tax-deductible for federal income tax
purposes, and there is no age limit for making contributions. Generally, Roth IRA
withdrawals are not taxable for federal income tax purposes, if the individual has had
the retirement account for more than five years and has reached 59 ½ years of age.

34. Question ID: 94849680 (Topic: Retirement Income)

Vinder has contributed $2,000 every year to a traditional IRA. Each year he deducted
his traditional IRA contribution from his income. This year, he turned 73, and he
withdrew his first distribution from his traditional IRA, which he used to take a vacation
in Cancun. How is the distribution taxed?

 A. Vinder must recognize the full amount as taxable income. The amount is also subject
to a 10% penalty.
 B. The distribution is only taxable if he receives other income. wrong
 C. Vinder must recognize the entire distribution as taxable income. correct
 D. None of the distribution is taxable.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

 Correct Answer Explanation for C:

The distribution is fully taxable. Vinder will pay income tax on the distributions he
receives, which represent the contributions he made and deducted as well as the
earnings on these contributions. The amounts are not subject to a penalty, because he
is over the age of 59 1/2.

36. Question ID: 94850088 (Topic: Retirement Income)

Adrian, age 57, has two IRA accounts in different banks. He has a traditional IRA as
well as a Roth IRA. He earned $75,000 in wages during the year. Adrian contributed
$2,000 to his Roth IRA on December 8. He also wants to contribute to his traditional
IRA. What is the maximum he can contribute to a traditional IRA for 2024?

 A. $3,500
 B. $6,000correct
 C. $4,000wrong
 D. $0
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for B:

The 2024 maximum for combined contributions to all types of IRAs is $8,000 for
taxpayers who are 50 or older. Since Adrian is 57, and has sufficient qualifying
compensation, he is allowed to contribute $6,000 to a traditional IRA in addition to the
$2,000 contributed to the Roth IRA, for a combined total of $8,000 for the year. To see
more details about contribution limits for IRAs, review the IRS page on Individual
Retirement Arrangements (IRAs).

37. Question ID: 94849743 (Topic: Retirement Income)

Olaf is age 39 and has a traditional IRA. During the year, he contributed the maximum
amount of $7,000 to his IRA account. He later forgets about this contribution and
contributes an additional $2,000 to his IRA by mistake. What are the consequences of
this action?

 A. A 10% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.
 B. A 6% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.correct
 C. A 50% excise tax applies on the excess amount for each year in which Olaf
does not withdraw the excess contribution.wrong
 D. A 100% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.
Study Unit 16: Individual Retirement Accounts covers the information for this question.
 This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for B:

A 6% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution. Generally, a taxpayer can avoid the 6% penalty if the
taxpayer withdraws the extra contribution and any earnings before the tax deadline.

39. Question ID: 94849765 (Topic: Retirement Income)

Shawn is self-employed and also owns several rental properties. He has a traditional
IRA. He contributed $4,000 to his traditional IRA during the year. However, when he
goes to prepare his tax return, he realizes he has a ($5,000) business loss on his
Schedule C. His only other income is $37,000 in passive rental income on his Schedule
E. What are the consequences of this?

 A. Shawn does not have qualifying compensation for an IRA contribution, and must
withdraw the $4,000 from his IRA account or face penalties.correct
 B. Shawn should transfer the $4,000 contribution to a SEP-IRA in order to avoid
penalties.wrong
 C. Shawn is not required to do anything.
 D. Shawn must convert the traditional IRA to a Roth IRA in order to avoid penalties from
his excess contribution.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for A:

Shawn does not have any qualifying compensation for any type of IRA contribution, (the
passive rental income does not qualify) so he must withdraw the $4,000 from his IRA
account or face penalties. The entire $4,000 would be considered an "excess
contribution." Excess contributions are taxed at 6% per year for each year the excess
amounts remain in the IRA. Excess contributions can be corrected. The excess IRA
contribution (plus any net gain or loss), will need to be removed by the tax filing
deadline (generally April 15, but extensions are permitted), in order to avoid a penalty.

40. Question ID: 94850182 (Topic: Retirement Income)

Which of the following types of government benefits are NEVER taxable?

 A. Equivalent Railroad Retirement Benefits.

 B. Social security benefits.wrong
 C. Unemployment compensation.
 D. Supplemental Security Income (SSI) payments.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.
 This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for D:

Social security benefits may include: monthly retirement, survivor and disability benefits.
These benefits are taxable in some instances. Equivalent Railroad Retirement Benefits
are benefits that a railroad employee or beneficiary would have been entitled to receive
under the social security system. These benefits are also taxable in some scenarios.
Unemployment compensation is another type of government benefit, but it is taxable for
federal tax purposes. Do not confuse any of these payments with Supplemental
Security Income (SSI) payments, which are NOT taxable. For more information,
see Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

41. Question ID: 94849564 (Topic: Retirement Income)

Which of the following is generally a prohibited transaction related to a taxpayer’s
traditional IRA?

 A. Withdrawing funds for qualified medical expenses.

 B. Withdrawing funds to purchase a first home.wrong
 C. Withdrawing funds for qualified higher education expenses.
 D. Pledging an IRA account as security for a secured loan.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

A taxpayer cannot use an IRA as collateral for a loan. This would be a prohibited
transaction. Generally, a prohibited transaction is the improper use of an IRA by the
owner, a beneficiary, or a disqualified person (typically a fiduciary or family member).
Prohibited transactions related to an IRA include:

 Borrowing money from it.

 Selling property to it.
 Using it as security for a loan.
 Buying property for personal use with IRA funds.
If a prohibited transaction occurs at any time during the year, the account ceases to be
treated as an IRA and its assets are treated as if having been distributed on the first day
of the year. If the total fair market value as of that date is more than the taxpayer’s basis
in the IRA, the excess amount is reportable as taxable income. It may also be subject to
the additional 10% tax on early distributions.

42. Question ID: 94849903 (Topic: Retirement Income)

 Which of the following types of retirement income is fully taxable at ordinary income tax
rates?

 A. Traditional IRA distributionscorrect

 B. Roth IRA distributionswrong
 C. Life insurance proceeds
 D. Social Security benefits
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

Traditional IRA distributions are fully taxable at ordinary income rates. Roth IRA
distributions are generally tax-free, while Social Security benefits may be partially
taxable depending on your other income. Life insurance proceeds are usually not
taxable to the beneficiary of the policy.

43. Question ID: 94849589 (Topic: Retirement Income)

On February 1, 2024, Lydia (age 40) withdraws $20,000 from her traditional IRA to pay
off some credit card debt, but changes her mind almost immediately and redeposits the
entire sum back into her IRA on March 1, 2024. Which of the following is true of her
situation?

 A. Lydia will have to pay a 10% penalty but will not be subject to income taxes on
her withdrawal.wrong
 B. Lydia has made an excess contribution to her IRA.
 C. This is a non-taxable event.correct
 D. Lydia will pay income tax and penalties on the amount withdrawn.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for C:

This is an indirect rollover. Lydia will not be taxed for the money she withdrew and then
returned, because it is within the 60-day rollover period. With an indirect rollover, the
taxpayer takes possession of funds from one retirement account and personally
reinvests the money into another retirement account, or back into the same one. Indirect
rollovers are limited to one per year.

To learn more about rollover rules for retirement plans, see IRS Topic No. 413 Rollovers
From Retirement Plans.

45. Question ID: 94849681 (Topic: Retirement Income)

 Karen is 65 and unmarried, and receiving Social Security every month. Which of the
following items must be considered when she calculates if any of her Social Security
benefits are taxable?

 A. Tax-exempt muni bond interestcorrect

 B. Interest on education loanswrong
 C. A cash inheritance that she received when her brother died.
 D. Employer-provided adoption benefits
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for A:

To find out if her Social Security benefits may be taxable, none of the items listed above
are taken into account EXCEPT tax-exempt muni bonds, which must be added back to
figure the taxable portion of her Social Security. In order to calculate the taxable portion
of Social Security, you must take one half of your Social Security benefits and add that
amount to all your other income, including tax-exempt interest. This number is known as
your combined income, and it is compared to the base amounts. If the resulting
calculation is less than $25,000 single or $32,000 for MFJ, then your Social Security
benefits are generally not taxable.

Calculation:

Your adjusted gross income

+ Nontaxable interest

+ ½ of your Social Security benefits = Your "combined income"

(Note: This question is modified from a released EA exam question).

46. Question ID: 94849997 (Topic: Retirement Income)

Shabana is 63 years old and has a 17-year old daughter, named Nijah, that she claims
as a dependent. Shabana receives child support in the amount of $500 per month for
Nijah from her ex-husband. Shabana received $13,500 in Social Security during the
year, as well as income from several sources, including unemployment benefits,
municipal bond interest, and income that she earned as a notary public. To find out if
her Social Security benefits may be taxable, all of the following types of income are
taken into account EXCEPT:

 A. Unemployment benefits
 B. Tax exempt interestwrong
 C. Notary fees received
 D. Child supportcorrect
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for D:

Child support is never taxable to the receiver, so child support is not taken into account
when figuring the taxable portion of Social Security. All the other types of income listed,
including tax-exempt interest, would be included in the calculation of the taxable portion
of Social Security. See Publication 915, Social Security and Equivalent Railroad
Retirement Benefits for more information about taxable Social Security.

47. Question ID: 94850086 (Topic: Retirement Income)

Leigh, age 56, files as single. She is a self-employed business owner who has set up a
traditional IRA for herself. After calculating her business income and expenses for the
year, Leigh’s Schedule C business shows an overall loss of $3,000. She also has
$7,000 of interest income and $41,000 in rental income. She has no other items of
income or loss during the year. Leigh wants to contribute the maximum to her IRA. How
much is she allowed to contribute?

 A. She can contribute $6,500 to her traditional IRA.

 B. She cannot contribute to a traditional IRA.correct
 C. She can contribute $3,000 to her traditional IRA.wrong
 D. She can contribute $7,500 to her traditional IRA.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for B:

Leigh cannot contribute to her traditional IRA because she has no qualifying income
during the year. Her only source of active income (her self-employment business)
showed a loss for the year. In order to contribute to a traditional IRA, the taxpayer must
have qualifying taxable compensation, such as wages, salaries, or net income from self-
employment. Alimony and nontaxable combat pay are also treated as qualifying
compensation for IRA purposes. However, qualifying compensation for IRA purposes
does not include earnings and profits from the rental of property, interest and dividend
income, or any amount received as pension or annuity income. Since Leigh has a loss
from self-employment and no other sources of qualifying compensation, she is not
allowed to make an IRA contribution.

48. Question ID: 94850089 (Topic: Retirement Income)

Minh is 34, unmarried, and covered by a 401(k) retirement plan through his work. He
has already contributed the maximum to his 401(k) for the year, but he would also like
 to make a contribution to a traditional IRA. His AGI is $189,000 for the year, and all of
his income comes from wages. What are his options?

 A. He can make a nondeductible contribution to his traditional IRA. correct

 B. He cannot make a contribution to any type of IRA, because he is covered by a 401(k)
at work.
 C. He can make a contribution to a Roth IRA, but not a traditional IRA.wrong
 D. He can make a deductible contribution to his traditional IRA.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for A:

Minh can make a nondeductible contribution to his traditional IRA. A taxpayer can
contribute to a traditional IRA even if they participate in another retirement plan through
their employer or business. However, a taxpayer may not be able to deduct all of their
traditional IRA contributions if they participate in another retirement plan at work. If a
taxpayer is covered by a retirement plan at work and their income exceeds a certain
threshold, they may not be able to deduct their traditional IRA contributions. To report
his nondeductible IRA contributions, Minh must file Form 8606, Nondeductible IRAs, to
report his nondeductible IRA contribution.

To see more details about nondeductible IRA contributions, review the IRS page
on Individual Retirement Arrangements (IRAs).

49. Question ID: 94850092 (Topic: Retirement Income)

Which of the following distributions from a traditional IRA may be subject to an
additional 10% withdrawal penalty?

 A. Distributions made prior to age 59½. correct

 B. Distributions made after age 72.
 C. Distributions made to an unrelated beneficiary after the IRA owner’s
death.wrong
 D. Distributions made due to an IRS levy.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 93% of students.

Correct Answer Explanation for A:

Distributions made prior to age 59½ may be subject to a 10% early withdrawal
penalty, unless one of the following exceptions applies:
  Distributions made to a beneficiary or estate after death.
 Distributions made because of permanent disability.
 Distributions made as part of a series of substantially equal periodic payments.
 Distributions to the extent of deductible medical expenses (medical expenses
that exceed 7.5% of adjusted gross income), whether or not the taxpayer
itemizes deductions for the year.
 Distributions made due to an IRS levy.
 Distributions that are qualified reservist distributions.
 Qualified disaster distributions (for FEMA disaster areas).
Although the distributions listed above are not subject to the 10% early withdrawal
penalty, they are still subject to income tax at the taxpayer’s regular tax rate.
Review Publication 590-B, Distributions from Individual Retirement Arrangements for
more information.

50. Question ID: 94815884 (Topic: Retirement Planning)

Frederick is 45 and single. During the tax year, Frederick contributed $3,200 to a
traditional IRA and $2,100 to a Roth IRA. His AGI was $89,000 and he was not covered
by a retirement plan at work. What is the maximum amount that he can deduct as an
IRA contribution on Form 1040?

 A. $6,000wrong
 B. $5,300
 C. $0, because his AGI is too high to make a deductible IRA contribution.
 D. $3,200correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for D:

The most Frederick will be able to deduct is the $3,200 contribution to his traditional
IRA. Roth IRA contributions are never deductible.

52. Question ID: 94850158A (Topic: Retirement Planning)

Generally, which of the following rules apply to BOTH traditional IRAs and Roth IRAs?

 A. Contributions are always non-deductible.

 B. Contributions are always deductible.wrong
 C. Non-rollover contributions are generally limited to the annual compensation limit, or
100% of qualifying compensation, whichever is less.correct
 D. Contribution phase-out limits are always the same for both traditional IRA and ROTH
IRAs.
Study Unit 16: Individual Retirement Accounts covers the information for this question.
 This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

Non-rollover contributions are generally limited to the annual compensation limit, or

100% of qualifying compensation, whichever is less. See more information here on the
IRS website regarding: IRA Contribution Limits.

53. Question ID: 94815896 (Topic: Retirement Planning)

Hugh is 30 and single. He has a traditional IRA at his bank, and another traditional IRA
through his online brokerage account. He also opened a Roth IRA this year with his
credit union. Can he contribute to all these accounts in the current tax year?

 A. He cannot have three IRA accounts. It is a prohibited transaction. wrong

 B. Yes, he may contribute to all the accounts, as long as the combined contributions for
the tax year do not exceed the general IRA contribution limit or his qualifying
compensation for the tax year.correct
 C. He may contribute to both traditional IRA accounts, but not to the Roth IRA in the
same year.
 D. He may contribute to one traditional IRA and one Roth IRA, but not all three.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for B:

Hugh may contribute to all the accounts, as long as the combined contributions for the
tax year do not exceed the general IRA contribution limit or his qualifying compensation
for the tax year.

54. Question ID: 94850068 (Topic: Retirement Planning)

Ronald would like tax-free growth and tax-free withdrawals from his retirement account,
but he is confused about his choices. He doesn't understand which retirement accounts
will provide tax-free growth and which will provide only tax-deferred growth. Which of
the following retirement plans provides tax-free growth?

 A. A traditional IRA only.

 B. A 401k only.wrong
 C. A SEP-IRA only.
 D. A Roth IRA only.correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 88% of students.

 Correct Answer Explanation for D:

Only a Roth IRA provides tax-free growth. Other types of retirement accounts do not.
However, a major tax disadvantage of a Roth IRA is that the contributions to a Roth IRA
are not deductible. The other choices listed allow for pre-tax contributions or deductible
contributions. To learn more about Roth IRAs, see the IRS page for Roth IRAs.

55. Question ID: 94850095 (Topic: Retirement Planning)

Reggie is age 76 and has a traditional IRA. He is required to take an RMD this year.
Instead of taking an RMD, he wants to do a qualified charitable distribution (QCD) to a
charity. Which of the following exempt organizations would NOT be a qualifying
organization to receive a QCD?

 A. Church
 B. Animal rescue organization wrong
 C. Local Chambers of Commercecorrect
 D. Little League Baseball
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

Not all nonprofits are charities. For QCD purposes, a "qualifying organization" is
typically a 501(c)3; an organization that has been granted tax-exempt status by the IRS
and is eligible to receive tax-deductible charitable contributions. Examples of qualified
charitable organizations include: religious organizations (Churches, mosques, etc.)
scientific, literary or educational institutions, colleges and schools, organizations for the
prevention of cruelty to animals or children, or the development of youth or amateur
sports (an example would be the Special Olympics, or Little League Baseball).

NON-qualifying organizations would include: Civic leagues, business leagues (like local
chambers of commerce), Homeowners associations, and Labor unions. While these
entities are non-profits, they are NOT charities.

Qualified charitable distributions: Taxpayers age 70 ½ or older can make a qualified

charitable distribution, up to $100,000, directly from their IRA to a qualified charitable
organization. It's a nontaxable distribution made by the IRA trustee directly to a
charitable organization. A qualifying deduction may count toward the taxpayer's required
minimum distribution (RMD) requirement for the year. Review Publication 590-B,
Distributions from Individual Retirement Arrangements, for more information.

56. Question ID: 94850176 (Topic: Retirement Planning)

Franco is a 22-year old unmarried college student working part-time. He is claimed as a
dependent by his parents. He earns $2,500 in wages during the year. He also won an
additional $300 in gambling income from a scratch-off ticket that he purchased at a gas
 station. His grandmother gifted him $2,000 this year for his birthday. Franco would like
to contribute to a traditional IRA in order to start saving for his future. What is his
maximum IRA contribution for the year?

 A. $2,800
 B. $6,500wrong
 C. $0, he cannot contribute to an IRA because he can be claimed as a dependent.
 D. $2,500correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for D:

He can contribute $2,500, the amount of his "qualifying compensation", to a traditional

or Roth IRA for the year. The $300 in gambling income is not qualifying compensation
for the purposes of an IRA contribution, and the gift that he received from his
grandmother is not taxable, nor is it qualifying income for IRA contribution purposes.
See IRS Topic No. 451, Individual Retirement Arrangements (IRAs) for more
information.

57. Question ID: 94815916 (Topic: Retirement Planning)

Karen and William are married and both are 51 years old. They both work and each has
a traditional IRA. During the year, William earned $3,000 in wages and also received
$7,000 in unemployment compensation. Karen earned $57,000 in wages. If they file
separate returns, what is the maximum that William can contribute to his IRA?

 A. $0, neither can contribute to an IRA if they file separate returns.

 B. $3,000correct
 C. $6,500wrong
 D. $7,500
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

If Married Filing Separately, William can contribute no more than $3,000, the amount of
his qualifying compensation. Unemployment compensation payments do not qualify as
"compensation" for the purposes of making an IRA contribution.

58. Question ID: 94850070 (Topic: Retirement Planning)

Hassan, age 21, is an unmarried college student who earned $3,500 in wages from a
part-time job during the year. He also has $400 in capital gains from selling a collectible.
 Hassan is claimed as a dependent by his parents. Can he contribute to a retirement
account?

 A. He can contribute $3,500 to a Roth IRA or a Traditional IRAcorrect

 B. He can contribute $3,900 to a Traditional IRA only
 C. He can contribute $3,900 to a Roth IRA or a Traditional IRA
 D. He cannot contribute to an IRA because he is claimed as a dependent.wrong
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Hassan can contribute $3,500, the amount of his qualifying compensation, to either a
Roth IRA or a Traditional IRA for the year. The fact that he is claimed as a dependent is
not relevant, as long as he has qualifying compensation (his wages) he would be able to
contribute.

59. Question ID: 94850160 (Topic: Retirement Planning)

Joshua is 49, works full-time, and earned $65,000 in wages during the year. His wife,
Adrienne, is 50 and earned $3,600 in wages during 2024 Adrienne also received
$27,000 in royalties from an oil and gas investment, in which she is a limited partner.
They choose to file separate returns. What is Adrienne's maximum IRA contribution?

 A. $0
 B. $7,500
 C. $6,500wrong
 D. $3,600correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for D:

They chose to file MFS. Therefore, Adrienne is limited to a $3,600 IRA contribution, the
amount of her qualifying compensation. Oil and gas royalties from a limited partnership
are typically reported as investment income (not "earned income") and reported on
Schedule E. Joshua may contribute the full $7,000 that is allowable in 2024 to his own
IRA account, since he has enough qualifying compensation to make a full contribution.

60. Question ID: 94850174 (Topic: Retirement Planning)

Which of the following is a penalty for early withdrawal from a traditional IRA before age
59 1/2?
 A. 10% penaltycorrect
 B. 50% penalty
 C. 25% penalty
 D. 20% penaltywrong
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

If you withdraw money from a traditional IRA before age 59.5, you generally have to pay
a 10% early withdrawal penalty in addition to regular income tax. To see more details
about IRAs, review the IRS page on Individual Retirement Arrangements (IRAs).

5. Question ID: 94850091 (Topic: Retirement Income)

At what age are you required to take minimum distributions from a traditional IRA?

 A. 70 1/2
 B. 73correct
 C. 59 1/2
 D. 72
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for B:

The RMD rules require individuals to take withdrawals from their IRAs (including
SIMPLE IRAs and SEP IRAs) every year once they reach age 73 in 2024 or later, even
if they're still employed.

Note: The age for required minimum distributions increased to 73 because of the
changes implemented by the SECURE Act. See more rules about RMDs on the IRS
page for Required Minimum Distributions.

13. Question ID: 94849509 (Topic: Retirement Income)

Taxpayers receiving Social Security benefits may have to pay federal income tax on a
portion of those benefits. Which of the following types of income is NEVER taxable?

 A. Social Security monthly retirement benefits

 B. Supplemental Security Income (SSI) paymentscorrect
 C. Social Security Survivor benefits
 D. A lump sum Social Security payment
Study Unit 16: Individual Retirement Accounts covers the information for this question.
 This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

Taxable Social Security benefits include monthly retirement, survivor and disability
benefits. They also include lump-sum payments, which is a large payment that was paid
in the current year as back pay for previous years. Supplemental security income (SSI)
payments are not the same as Social Security; SSI is never taxable. SSI is a needs-
based benefit program for low-income people who are over 65, blind or disabled.

14. Question ID: 95396387 (Topic: Retirement Income)

What is the major tax advantage of a Roth IRA over a traditional IRA?

 A. Contributions to a Roth IRA are fully deductible when made.

 B. Withdrawals from Roth IRAs are generally not subject to income tax.correct
 C. Contributions to a Roth IRA can be matched 100% by employers.
 D. Taxpayers can contribute more to Roth IRAs than they can contribute to other IRAs.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for B:

The Roth IRA has many of the same advantages as a traditional IRA. However,
withdrawals from a Roth IRA made during retirement are tax-free.

17. Question ID: 94849529 (Topic: Retirement Income)

Johnathan has three traditional IRAs at three different financial institutions: IRA-1, IRA-
2, and IRA-3. On January 9, 2024, he took a distribution from IRA-1 in the form of a
check. He rolled the entire amount over into IRA-2 a week later (this was an indirect
rollover). He also wants to transfer his IRA-3 to a different bank in December of 2024.
Which of the following is true?

 A. This is a prohibited transaction.

 B. He can only transfer his IRA-3 to another bank if he makes a "trustee-to-
trustee" transfer. He cannot do another indirect rollover in the same year. correct
 C. He can make an indirect transfer of his IRA-3 or a trustee-to-trustee transfer.
 D. He can do unlimited rollovers of any of his IRA accounts and none of the rollovers
need to be reported on his tax return.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for B:

 Johnathan cannot make another indirect rollover in the same year. However, he can
make a trustee-to-trustee transfer. A taxpayer can make only one indirect rollover from
an IRA to another (or the same) IRA in any 1-year period, regardless of the number of
IRAs he owns. The limit applies by aggregating all of an individual's IRAs, including SEP
and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as one
IRA for purposes of the limit. However, "trustee-to-trustee" transfers between IRAs
aren't limited and rollovers from traditional IRAs to Roth IRAs (IRA conversions) aren't
limited.

To learn more about rollover rules for retirement plans, see IRS Topic No. 413 Rollovers
From Retirement Plans.

18. Question ID: 94849595 (Topic: Retirement Income)

Alexander e-files his 2024 tax return on March 2, 2025, and claims a $4,000 deduction
for an IRA contribution, but at the time he filed his return, he hadn't made the
contribution yet. He filed an extension, so he would have had until October 15 to
actually file his tax return. What is the last day that he can make an IRA contribution for
the 2024 tax year?

 A. October 15, 2025

 B. April 15, 2025correct
 C. It is too late for him to make an IRA contribution for 2024, he would have to make it
by December 31.
 D. March 2, 2025 (the same date he files his return)
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

Alexander may wait as late as April 15, 2025, (the un-extended due date of his return),
to make the IRA contribution for the 2024 tax year.

Note: April 15, 2025, is the Tax Deadline for 2024 individual returns.

19. Question ID: 94849587 (Topic: Retirement Income)

Danica, age 42, withdraws $10,000 from her traditional IRA and uses the entire amount
to pay for her college tuition. Which of the following is true about her withdrawal?

 A. She will not owe income tax on the amount because it was used for qualified
education expenses.
 B. She will owe income taxes on the amount, but will not pay a penalty.correct
 C. She will not owe income tax on the amount, but she will owe a 10% penalty.
 D. The withdrawal will be subject to a 10% penalty, in addition to income taxes.
 Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 48% of students.

Correct Answer Explanation for B:

Although she will be required to pay income taxes on the money she withdrew, she is
not required to pay any penalties. She qualifies for an exception because she used the
amounts to pay for tuition. Money in an IRA can be withdrawn early to pay for tuition
and other qualified higher education expenses without the 10% early withdrawal
penalty. For the purposes of this rule, qualified higher education expenses include
tuition, fees, books, and required supplies.

20. Question ID: 94849590 (Topic: Retirement Income)

Chow-Lin, 34, decides to roll his 401k into a traditional IRA. He meant for this to be a
trustee-to-trustee rollover, but he made an error when filling out the forms and the funds
were sent to him directly in the form of a check. What must he do in order to avoid
paying a penalty?

 A. Chow-Lin could choose to deposit only part of the gross distribution into an IRA and
keep the rest. He would not pay taxes and penalties on the amount he kept, because he
has proof that the trustee committed the error.
 B. Chow-Lin has 60 days to deposit an amount equal to the gross distribution into
an IRA if he wants to avoid taxes and penalties.correct
 C. The distribution was subject a 3% mandatory excise tax, and this must be paid in
order to avoid the additional 10% penalty.
 D. Chow-Lin has no recourse and must pay taxes and a 10% penalty on the entire
distribution.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for B:

If he deposits an amount equal to the gross distribution into an IRA within the next 60
days, he will not be required to pay taxes on the money or be penalized for the mistake.
This is also called an "indirect rollover".

To learn more about rollover rules for retirement plans, see IRS Topic No. 413 Rollovers
From Retirement Plans.

22. Question ID: 94849656 (Topic: Retirement Income)

Rosa received Form 1099-R for the current tax year. IRA/SEP/SIMPLE is checked in
box 7 of the form. What does it indicate?
 A. It means that Rosa made an IRA contribution.
 B. It means that Rosa received an IRA-type distribution. The distribution must be
reported on her tax return.correct
 C. It means that Rosa received an IRA-type distribution. The distribution does not have
to be reported on her tax return if it is a rollover.
 D. It means that Rosa has retired.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

A checkmark in the IRA/SEP/SIMPLE checkbox in box 7 of Form 1099-R indicates that

the taxpayer received an IRA-type distribution. This doesn't necessarily mean that the
distribution is taxable (it could be a rollover), but the distribution must be reported on
Rosa's return.

26. Question ID: 94850101 (Topic: Retirement Income)

Brynn is age 34 and needs to have her car fixed. She withdraws $5,000 from her
traditional IRA in order to do so. What type of mandatory withholding is likely to occur on
her distribution?

 A. Withholding for Social Security tax.

 B. Federal income tax withholding.correct
 C. Federal Unemployment Tax withholding.
 D. Withholding for Medicare tax.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

Her IRA withdrawal will be subject to income tax withholding. When a taxpayer
distributes funds from their retirement plan (regardless of the reason), the funds are
typically subject to federal income tax withholding.

Note: An IRA distribution is generally subject to 10% withholding unless the taxpayer
elects out of withholding or chooses to have a different amount withheld. A taxpayer can
avoid withholding taxes by doing a trustee-to-trustee transfer to another IRA. See more
information on the IRA Rollover Page.

27. Question ID: 94849761 (Topic: Retirement Income)

 If an owner of a traditional IRA does not claim a deduction for a regular contribution, the
amount contributed is after-tax and is considered basis. How should a nondeductible
contribution be reported to the IRS?

 A. Form 8275
 B. Form 8606correct
 C. Form 1040
 D. Schedule J
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

If an owner of a traditional IRA does not claim a deduction for a regular contribution, the
amount contributed is after-tax and is considered basis. Therefore, the IRA owner must
file IRS Form 8606 for the year to inform the IRS that the contribution is nondeductible.
A Form 8606 must be filed for EVERY YEAR a nondeductible contribution is made.

30. Question ID: 94849902 (Topic: Retirement Income)

Which of the following retirement plans offer tax-free distributions?

 A. Savings Incentive Match Plan for Employees (SIMPLE) IRA

 B. Solo 401(k)
 C. Roth IRAcorrect
 D. Simplified Employee Pension (SEP) IRA
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for C:

Qualified distributions from a Roth retirement account are tax-free. In addition, a Roth
IRA has no mandatory distributions (RMDs), allowing for tax-free growth
and withdrawal at the accountholder's discretion.

33. Question ID: 94849583 (Topic: Retirement Income)

Jacques, age 40, is single and covered by a retirement plan at work. He earns too much
to contribute to a Roth IRA or make a deductible contribution to a traditional IRA, and he
has maxed out his contributions to his 401(k) plan at work. He has decided to make a
contribution to his traditional IRA before the end of the year. Which of the following is
true about his contribution?
 A. He can make a nondeductible IRA contribution. His contribution will grow on a
tax-deferred basis, despite the fact that it is nondeductible.correct
 B. He can contribute whatever amount he wishes, with no limits, because there are no
tax benefits to his contribution.
 C. He is not allowed to make a non-deductible contribution to a traditional IRA, because
he is covered by a 401(k) plan at work.
 D. His distributions will not be taxed when he reaches retirement age, because he did
not deduct the contribution when made.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for A:

He can make a nondeductible IRA contribution. Even if a taxpayer isn't eligible to deduct
their traditional IRA contribution on their taxes, many taxpayers still choose to make a
non-deductible IRA contribution. Jacques' contribution will grow on a tax-deferred basis,
despite the fact that it is nondeductible. Form 8606 is used by taxpayers to report
nondeductible contributions to their traditional IRAs.

35. Question ID: 94850107 (Topic: Retirement Income)

Noelle, age 51, has a traditional IRA and a Roth IRA. On March 1, she contributes
$3,000 to her traditional IRA. She earned $40,000 in wages for the year. How much can
she contribute to her Roth IRA account?

 A. $7,500
 B. $4,500correct
 C. $0
 D. $3,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for B:

Because she is over the age of 50, she can contribute a total of $8,000 to either one or
both for 2024. Since she already contributed $3,000 to a traditional IRA, she can
contribute a maximum of $5,000 to her Roth IRA for the year.

38. Question ID: 94850094 (Topic: Retirement Income)

Sandy, age 51, is married to Jim. Sandy does not work and has no earned income for
the year. She did win $1,000 on a scratcher ticket. Jim, age 49, earned $39,000 in
wages and also had $79,000 in capital gains from the sale of stock. How much can
Sandy contribute to a traditional IRA in 2024, if she and Jim file jointly?
 A. $0, because she had no qualifying compensation.
 B. $7,000
 C. $8,000correct
 D. $1,000
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

Sandy may contribute $8,000 to her IRA for 2024 ($7,000 plus an additional $1,000
contribution for age 50 and over). Jim, her husband, may also contribute $7,000 to an
IRA for 2024. Jim has enough wage income to cover a maximum IRA contribution for
them both. Each can contribute to a traditional IRA, even if only one spouse has
qualifying compensation. This is commonly called a "spousal IRA contribution". It only
applies when the spouses file a joint return. See these rules on the IRS page for IRA
Contribution Limits.

44. Question ID: 94849647 (Topic: Retirement Income)

Joshua is 50, works full-time, and earned $55,000 in wages during the year. His wife,
Philomena, is 51 years of age and earned $3,600 in wages during the year, and also
had $30,000 in capital gains from the sale of cryptocurrency. They live together but
choose to file MFS. They both plan to contribute to their retirement accounts this year.
Based on this information, what is Philomena's maximum allowable IRA contribution in
2024?

 A. $0
 B. $3,600correct
 C. $7,500
 D. $6,500
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for B:

They chose to file MFS. Therefore, Philomena is limited to a $3,600 IRA contribution,
the amount of her qualifying compensation. Her spouse may contribute the maximum
that is allowable to his own IRA account (in 2024, the maximum allowable IRA
contribution limit for taxpayers who are 50 or older is $8,000).

51. Question ID: 94849909 (Topic: Retirement Planning)

Wally received a qualified disaster distribution from his traditional IRA in the amount of
$90,000 in 2023. Wally elected to have the full income from the distribution recognized
 in 2023, and it was properly reported on his return. In 2024, he changes his mind and
decides to repay the distribution. He makes a repayment of $45,000 on December 1,
2024. How should this repayment be reported?

 A. The entire $45,000 repayment must be carried back to 2023, the year the
distribution was made. The repayment will be treated as a rollover.correct
 B. The entire repayment of $45,000 will offset income in 2024.
 C. The entire $45,000 repayment must be carried forward to 2025.
 D. The repayment of $45,000 will not be reported, it is treated as a nondeductible
contribution in 2024.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 33% of students.

Correct Answer Explanation for A:

The entire $45,000 repayment must be carried back to 2023. This question is based
directly on an example in the Form 8915-F instructions. In general, participants who
take a disaster distribution and later wish to repay these amounts, may repay all or part
of the distribution within three years. The repayment is treated as a rollover.

Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments, will be
used to report this type of distribution and repayment in future years. Form 8915-F will
also be used to report:

 Qualified disaster distributions;

 Repayments of qualified disaster distributions; and
 Other qualified distributions received in 2024 and later years.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

1. Question ID: 94850178 (Topic: Alternative Minimum Tax)

Oliver was very high-income, and he made more than $2.5 million dollars in the prior
year. As a result, he was forced to pay the Alternative Minimum Tax in the prior year. In
2024, his income drops significantly because of business losses, and he is no longer
subject to the Alternative Minimum Tax. He now has an Alternative Minimum Tax credit
in the current year. How can he claim an AMT credit on his individual tax return?

 A. He should use Form 6251 to calculate his AMT credit.

 B. AMT credits no longer exist because of tax law changes.
 C. He should file an amended return to claim the AMT credit. wrong
 D. He should use Form 8801 and attach it to his individual tax return. correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for D:

Oliver should use Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates,
and Trusts and attach it to his individual tax return in order to claim his AMT credit for
the tax he paid in the prior year.

A nonrefundable credit may be available to individuals, estates, and trusts for alternative
minimum tax paid in prior years to the extent that a taxpayer’s regular tax in the current
year is greater than their tentative minimum tax. The AMT is the excess of the tentative
minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum
tax for the year is greater than the regular tax for that year. The tentative minimum tax is
figured separately from the regular tax. In general, compute the tentative minimum tax
by:

 Computing taxable income, eliminating or reducing certain exclusions and

deductions,
 Subtracting the AMT exemption amount,
 Multiplying the amount computed in by the appropriate AMT tax rates, and
 Subtracting the AMT foreign tax credit.
The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the
special capital gain rates in effect for the regular tax if they're lower than the AMT tax
rates that would otherwise apply. In addition, some tax credits that reduce regular tax
liability don't reduce AMT tax liability. Learn more about the AMT on Topic No. 556
Alternative Minimum Tax.

2. Question ID: 94850149 (Topic: Alternative Minimum Tax)

 For individual taxpayers, certain deductions and exclusions are eliminated or reduced in
the determination of the alternative minimum tax (AMT). These items include the
following:

 A. Investment interest expense.

 B. Standard deduction.wrong
 C. State, local, and foreign taxes.
 D. All of the above.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for D:

When calculating the AMT, many common items considered in the computation of the
regular income tax liability are either adjusted downward or eliminated entirely. The
alternative minimum tax (AMT) applies to taxpayers with high economic income by
setting a limit on certain deductions. A nonrefundable credit (the AMT Credit) may be
available to individuals, estates, and trusts for alternative minimum tax paid in prior
years to the extent that a taxpayer’s regular tax in the current year is greater than his
tentative minimum tax. If applicable, the credit is calculated on Form 8801, Credit for
Prior Year Minimum Tax – Individuals, Estates, and Trusts.

The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT
is owed only if the tentative minimum tax for the year is greater than the regular tax for
that year. The tentative minimum tax is figured separately from the regular tax. In
general, compute the tentative minimum tax by:

 Computing taxable income, eliminating or reducing certain exclusions and

deductions,
 Subtracting the AMT exemption amount,
 Multiplying the amount computed in by the appropriate AMT tax rates, and
 Subtracting the AMT foreign tax credit.
The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the
special capital gain rates in effect for the regular tax if they're lower than the AMT tax
rates that would otherwise apply. In addition, some tax credits that reduce regular tax
liability don't reduce AMT tax liability. Learn more about the AMT on Topic No. 556
Alternative Minimum Tax.

3. Question ID: 94850125 (Topic: Alternative Minimum Tax)

Larry is not liable for the AMT this year, but he paid AMT in the previous year. How can
he get a credit for the prior year's minimum that he paid?

 A. He should complete and attach Form 8801 to his individual return.correct

 B. He should claim the prior year's tax as an itemized deduction in the current
year.wrong
 C. He should complete and attach Form 6251 to his individual return.
 D. He should complete and attach the Schedule J to his individual return.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

He should complete and attach Form 8801 to his individual return. A nonrefundable
credit may be available to individuals, estates, and trusts for alternative minimum tax
paid in prior years to the extent that a taxpayer’s regular tax in the current year is
greater than his tentative minimum tax. If applicable, the credit is calculated on Form
8801, Credit for Prior Year Minimum Tax – Individuals, Estates, and Trusts.

The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT
is owed only if the tentative minimum tax for the year is greater than the regular tax for
that year. The tentative minimum tax is figured separately from the regular tax. In
general, compute the tentative minimum tax by:

 Computing taxable income eliminating or reducing certain exclusions and

deductions,
 Subtracting the AMT exemption amount,
 Multiplying the amount computed in by the appropriate AMT tax rates, and
 Subtracting the AMT foreign tax credit.
The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the
special capital gain rates in effect for the regular tax if they're lower than the AMT tax
rates that would otherwise apply. In addition, some tax credits that reduce regular tax
liability don't reduce AMT tax liability. Learn more about the AMT on Topic No. 556
Alternative Minimum Tax.

4. Question ID: 95034458 (Topic: Alternative Minimum Tax)

Which of the following would not be a part of the computation of alternative minimum
tax?

 A. Depletion
 B. Interest on private activity bondswrong
 C. Self-employment taxcorrect
 D. Certain state and local taxes
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

 Correct Answer Explanation for C:

A taxpayer's regular taxable income is increased by certain tax preference items in

determining alternative minimum taxable income (AMTI). After adjustment and
preference items are added or subtracted, the taxpayer is left with alternative minimum
taxable income, or AMTI. However, self-employment tax is not affected by the
Alternative Minimum Tax calculation. To learn more about the AMT, see IRS Topic No.
556, Alternative Minimum Tax.

5. Question ID: 98894238 (Topic: Alternative Minimum Tax)

Which of the following would not be a part of the computation of alternative minimum tax
for an individual taxpayer?

 A. Interest on private activity bonds

 B. Excess Intangible drilling costswrong
 C. Depletion
 D. Self-employment taxcorrect
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for D:

Self-employment tax would not be a part of the computation of alternative minimum tax.
The AMT preference items include:

 Depletion
 Excess Intangible drilling costs
 Interest on private activity bonds
For more information, see Topic No. 556 Alternative Minimum Tax.

7. Question ID: 94815974 (Topic: Kiddie Tax on Investment Income)

At which income threshold does the Kiddie Tax come into effect in 2024?

 A. When a child has unearned income above $2,600. correct

 B. When a child has investment income above $1,300. wrong
 C. When a child has gross taxable income above $4,700.
 D. When a child has gross income above the standard deduction amount for his or her
filing status.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for A:

 The Kiddie Tax comes into effect when a child has unearned income above $2,600 in
2024. For 2024, the first $1,300 of a child's unearned income qualifies for the standard
deduction, the next $1,300 is taxed at the child's income tax rate, and unearned income
above $2,600 is taxed at the parent's marginal income tax rate.

9. Question ID: 94815902 (Topic: Kiddie Tax on Investment Income)

Spencer has a 12-year-old daughter named Lucinda. He provides all of his daughter's
support and claims her as a dependent. Lucinda had $1,045 of interest income from an
investment that was given to her by her grandparents. Lucinda had no other income for
the year. Which of the following statements regarding Lucinda's unearned income is
correct?

 A. Spencer may elect to report Lucinda's interest income and pay any applicable
tax on his own tax return.wrong
 B. Tax will be assessed to Spencer and is calculated using Lucinda's tax rate.
 C. Lucinda is required to file a tax return and she will be subject to the kiddie tax.
 D. Lucinda is not required to file a return. She is not subject to the kiddie tax. correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

Lucinda is not required to file a tax return, because her unearned income is less than
the standard deduction amount for dependents. Lucinda has no filing requirement, and
her income will not be subject to the kiddie tax. For more information on the Kiddie Tax,
see Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie
Tax).

10. Question ID: 94815946 (Topic: Kiddie Tax on Investment Income)

Which of the following individuals would NOT be subject to the kiddie tax in 2024?

 A. Matt, age 15, who has $19,500 of wages from a small role in a TV
commercial.correct
 B. Corinna, age 17, who has $5,200 of Alaska Permanent Fund dividends.wrong
 C. Ginger, who is 15 and has $3,800 in interest income and no other income for the
year.
 D. Amelia, age 19, who is a full-time college student who lives at home with her parents.
She has $4,800 of investment income from dividends and interest.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for A:

 Since Matt only has wages (no passive income or investment income), he would not be
subject to the kiddie tax. "Active income" such as wages or self-employment income is
never subject to the kiddie tax. For 2024, the first $1,300 of a child's unearned income
qualifies for the standard deduction, the next $1,300 is taxed at the child's income tax
rate, and unearned income above $2,600 is subject to the "kiddie tax" by being taxed at
the parent's marginal income tax rate.

For more information on the Kiddie Tax, see Topic No. 553 Tax on a Child's Investment
and Other Unearned Income (Kiddie Tax).

12. Question ID: 94815837 (Topic: Kiddie Tax on Investment Income)

Rubina is 16 years old and lives with her parents, who claim her as a dependent on
their joint return. Rubina has a small part-time job and also receives investment income
from stocks that were given to her by her aunt and uncle. In 2024, she received the
following income:

 Dividends: $1,200
 W-2 Wages: $2,200
 Taxable interest: $1,300
 Tax-exempt interest: $200
 Capital gains: $500
 Capital losses: ($300)
Is Rubina subject to the kiddie tax, and what is her unearned income for the year?

 A. No, she is not subject to the kiddie tax. Her unearned income totals
$1,100.wrong
 B. Yes, she is subject to the kiddie tax. Her unearned income totals $3,000.
 C. Yes, she is subject to the kiddie tax. Her unearned income totals $2,900.
 D. Yes, she is subject to the kiddie tax. Her unearned income totals $2,700.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for D:

Rubina is subject to the kiddie tax, but only the unearned income would be subject to
the kiddie tax. Her unearned income is figured as follows:

 Dividends: $1,200
 Taxable interest: $1,300
 Capital gains: $200 ($500 gains - $300 losses)
 =$2,700 in unearned income
 Her wages are considered earned income because they are for work performed. Her
tax-exempt interest is not considered in determining unearned income for this purpose.
A child’s unearned income includes income produced by property given as a gift to the
child, such as the qualified dividends on stock given to Rubina by her aunt and uncle.
The Kiddie Tax "unearned income threshold" is $2,600 in 2024. This means that a
child's unearned income above $2,600 shall be taxed at the parent's marginal income
tax rate in 2024.

13. Question ID: 94850129 (Topic: Kiddie Tax on Investment Income)

Johnathan is widowed and has four children. He claims them all as his dependents.
Which of his children might be subject to the Kiddie Tax?

 A. Thomas, age 14, with taxable capital gains of $2,900 from the sale of a collectible
toy.correct
 B. Angie, age 16, with wage income of $7,500 from a part-time job. She also has $500
in capital gains from investments gifted by her grandparents.
 C. Kerrie, age 22, and a full-time college student, with self-employment income of
$4,500.
 D. Jenny, age 18 with municipal bond interest income of $3,850.wrong
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for A:

Thomas would be subject to the Kiddie Tax. The tax applies to dependent children
under the age of 18 at the end of the tax year (or full-time students younger than 24)
that have unearned income over a certain threshold. Wages and self-employment
income are not subject to the Kiddie Tax. Jenny would also not be subject to the Kiddie
tax, because municipal bonds are exempt from federal income tax. Learn more about
the kiddie tax on Topic No. 553 Tax on a Child's Investment and Other Unearned
Income (Kiddie Tax).

14. Question ID: 94815877 (Topic: Kiddie Tax on Investment Income)

Moses is a widowed father with four dependents, all of which he claims on his tax
return. All of his dependents have some income, but none of them provide more than
one-half of their own support. Based on the information below, which of his following
dependents may be subject to the kiddie tax?

 A. Janelle, his 18-year-old daughter who has a part-time job and earned $5,500 in
wages.
 B. Nina, his 15-year-old daughter who has $3,100 in tax-exempt interest from
municipal bonds. wrong
 C. Harry, his 21-year-old son who is a full-time college student and has $2,900 in
dividend income. correct
 D. Betty, his 77-year-old elderly mother who lives with him and has $3,000 of interest
income.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for C:

Harry, his 21-year-old son who is a full-time college student and has $2,900 in dividend
income would be the only one subject to the kiddie tax. The Kiddie Tax only applies to
the investment income of dependent children who are younger than 19 years old, or
who are full-time students who are between the ages of 19 and 23. His mother Betty is
over these age limits, so she would not be subject to the kiddie tax. Janelle would not
be subject to the Kiddie tax because she has no investment income, only wages.
Earned income is never subject to the Kiddie tax. And Nina would not be subject to the
Kiddie Tax, because her investment income is not taxable.

For tax year 2024, the Kiddie Tax applies when a child's unearned income exceeds
$2,600.

15. Question ID: 94850141 (Topic: First-Time Homebuyer Credit Repayment )

Anastasia and Pushkin are married and file jointly. They purchased their main home for
$189,000 on April 30, 2008, and took the maximum $7,500 First Time Homebuyer
credit. They have been paying back the credit in yearly installments of $500 on their tax
return. On December 1, 2024, Anastasia dies. Pushkin remains in the home and
continues to live in it as his primary residence. What are the tax consequences of
Anastasia's death with regards to the repayment of the First Time Homebuyer Credit?

 A. Pushkin is required to pay the entire remaining balance of the credit.

 B. Pushkin is required to pay only his half of the remaining credit balance.
Anastasia's estate is responsible for paying her portion of the remaining amount
of the credit.wrong
 C. Pushkin is required to pay only his half of the remaining credit balance; his deceased
spouse's half is no longer owed.correct
 D. Because of one spouses' death, the First Time Homebuyer credit repayment is
completely forgiven. No further payments are required to be made.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for C:

Pushkin is required to pay only his half of the remaining credit balance; his deceased
spouse's half is no longer owed (i.e., it is forgiven). Taxpayers who received a $7,500
first-time homebuyer credit on their joint income tax return will have to repay the credit
 with $500 in additional taxes over 15 years. However, if one spouse dies, the repayment
amount lowers to $250 for the surviving spouse.

See Topic No. 611 Repayment of the First-Time Homebuyer Credit. (This question is
modified from an actual EA exam question released by the IRS).

17. Question ID: 94850065 (Topic: Tax on Household Employees)

Carter employs a part-time nanny in his home to take care of his children while he
works. He pays her $15,000 in wages during the year. Which form must he attach to his
personal return (Form 1040) to report household employment taxes for the nanny?

 A. Form 941
 B. Schedule H.correct
 C. Schedule J.wrong
 D. Schedule E.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

A taxpayer who is required to pay Social Security and Medicare taxes or federal
unemployment taxes for household employees, or who withholds income tax for them,
must file Schedule H, Household Employment Taxes, with his Form 1040. The taxpayer
will need an employer identification number (EIN) to file Schedule H. He also must file
Form W-2, Wage and Tax Statement, and furnish a copy of the form to the employee.

The "nanny tax" threshold is $2,700 for 2024.

To learn more about the Schedule H and household employees, see IRS Topic No. 756
Employment Taxes for Household Employees.

19. Question ID: 94850073 (Topic: Tax on Household Employees)

Danny does not own a business, but he hires various family members to help him
around the house. Which of the following scenarios would require Danny to file a
Schedule H and to report household employee wages in 2024?

 A. Danny pays his father $1,200 to mow his lawn during the year.
 B. Danny pays his 27-year-old niece $2,790 to babysit his infant daughter in his
home. correct
 C. Danny pays his mother $2,200 to clean his house occasionally. wrong
 D. All of the payments would need to be reported on Schedule H.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for B:

Danny paying his 27-year-old niece $2,790 in 2024 to babysit his infant daughter in his
home would trigger the filing of the Schedule H, because she is an adult doing work in
his home, and she was paid more than $2,700 in 2024, which is the household
employee reporting threshold. The payments to his father and mother are under the
threshold, and would not need to be reported on Schedule H. To see more guidance on
household employees, Topic No. 756 Employment Taxes for Household Employees.

22. Question ID: 95092425 (Topic: Tax on Household Employees)

During the tax year, Lillian earned $2,100 providing occasional childcare, cleaning, and
cooking services for a household. Her employer did not withhold federal income taxes
from her wages, and did not issue a Form W-2 for her. He simply paid her in cash. What
should Lillian do?

 A. Lillian needs to request a Form W-2 from her employer.

 B. Her employer is not required to issue her a W-2, but Lillian must report all her income
on Form 1040.correct
 C. Lillian and her employer all owe Social Security and Medicare tax on all of her
wages.wrong
 D. The income is not taxable to Lillian.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

This is a question about household employees. Lillian's employer is not required to

issue her a W-2, but Lillian must report all her income on Form 1040. Generally, an
employer is not required to provide Form W-2 to a household employee who earns less
than the threshold amount for the year (the household employee wage base is $2,700
or more in cash wages in 2024). In this situation, neither the employer nor the employee
will owe Social Security or Medicare tax on those wages. Regardless of whether Form
W-2 is issued, the income must be included on Lillian's Form 1040. (Question modified
from an example in the IRS official VITA training module).

For more information on household employees, see Publication 926, Household

Employer's Tax Guide.

25. Question ID: 95034459 (Topic: Tax on Household Employees)

Roger does not own a business. He works full-time as an engineer and earns $175,000
per year. He pays Anne, his neighbor, $300 per week to come to his home and care for
his children while he works full-time. Anne requests that Roger withhold $15 of federal
income tax from each paycheck. Roger has no other employees. He must do which of
the following?
 A. File Schedule H (Form 1040) quarterly, reporting social security only.
 B. File Schedule F (Form 1040) as an attachment to his Form 1040 reporting social
security and Medicare on the wages paid. File Form 940 reporting federal income tax
withheld.
 C. File Schedule C (Form 1040) as an attachment to his Form 1040 reporting
social security and Medicare on the wages paid. File Form 944 reporting federal
income tax withheld.wrong
 D. File Schedule H (Form 1040) as an attachment to his Form 1040 and report Social
Security, Medicare, and federal tax withholding.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

Roger should file Schedule H (Form 1040) as an attachment to his Form 1040 and
report social security, Medicare, and federal tax withholding because Anne is his
household employee. He should not file business returns, such as Schedule C or
Schedule F, for a household employee. For more information on household employees,
see Publication 926, Household Employer's Tax Guide. (This question is based on a
prior-year EA exam question).

26. Question ID: 94850110 (Topic: Tax on Household Employees)

Rayford owns a large business and also has household employees. Which of the
following employees would NOT be classified as a household employee?

 A. A nanny that cares for Rayford's children.

 B. A nurse that cares for Rayford's disabled mother. wrong
 C. A private chauffeur that drives Rayford to his business office daily.
 D. A custodian that works at Rayford's business office. correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

A custodian that works at Rayford's business office would not be a household

employee. All the other employees listed would typically be classified as household
employees. These may include: a private chauffeur, babysitters, maids, nannies,
people and private nurses. To learn more about household employees, see IRS Topic
No. 756 Employment Taxes for Household Employees.

27. Question ID: 94849996 (Topic: Qualified Business Income Deduction)

Shirley is a self-employed dentist who files on Schedule C. She is unmarried and does
not have any dependents. As a medical doctor, her business is classified as an SSTB.
 The net self-employment income from her business is $148,000 on Schedule C. She
also has $95,000 of capital gains from the sale of cryptocurrency, which brings her total
taxable income to $243,000. Based on this information, what is her allowable Qualified
Business Income (QBI) deduction in 2024?

 A. $0correct
 B. $28,000wrong
 C. $37,000
 D. $42,000
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 37% of students.

Correct Answer Explanation for A:

Shirley is not eligible for the QBI deduction, because her business is an SSTB and her
total income is above the threshold amount. High-earning taxpayers owning a business
deemed to be a SSTB are subject to deduction limitations. In general, the SSTB income
limitation for single filers that have an SSTB is $191,950 to $241,950, and the full
limitation applies at $241,951 in 2024.

The SSTB limitation does not apply to any taxpayer whose taxable income (before the
qualified business deduction) is at or below these threshold amounts.

To see more information about the 199A QBI deduction, see the IRS page for
the Qualified Business Income Deduction.

29. Question ID: 94850011 (Topic: Qualified Business Income Deduction)

With regards to the QBI deduction, QBI excludes all of the following types of income
except:

 A. Qualified items of business income earned by a decedent's estate.correct

 B. Reasonable compensation paid to the shareholder of an S Corporation.
 C. Commodities transactions or foreign currency gains or losses.wrong
 D. Guaranteed payments paid to a partner of a partnership.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 29% of students.

Correct Answer Explanation for A:

Qualified items of income earned by an estate would be considered QBI. QBI is the net
amount of qualified items of income, gain, deduction and loss from any qualified trade or
business, including income from partnerships, S corporations, sole proprietorships,
estates, and certain trusts. None of the other items listed would be QBI. To see more
 information about the 199A QBI deduction, see the IRS page for the Qualified Business
Income Deduction.

30. Question ID: 94935551 (Topic: Qualified Business Income Deduction)

Which of the following businesses would NOT be classified as an "SSTB" for the
purposes of the 199A QBI deduction?

 A. Financial planner
 B. Professional athlete
 C. Veterinarianwrong
 D. Engineercorrect
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

An engineer would not be classified as an SSTB, because engineers and architects are
specifically exempted from being categorized as an SSTB. A specified service trade or
business (SSTB) is any trade or business offering the following services: attorneys,
physicians and other medical professionals (including veterinarians), consultants,
professional athletes, financial planners, accountants, or businesses who receive
income for endorsing products or services, for the use of the taxpayer’s image, likeness,
name, signature, voice, trademark, or any other symbols associated with the taxpayer’s
identity, or for appearing at an event or on radio, television, or another media format.

31. Question ID: 94850010 (Topic: Qualified Business Income Deduction)

Which of the following entities would not be eligible for the QBI deduction?

 A. The estate of a deceased taxpayer.

 B. An irrevocable trust.
 C. A farmer who runs his business as a sole-proprietorship.wrong
 D. C Corporation.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for D:

C corporations are not eligible for the QBI deduction. Individuals, estates, and trusts
may take a QBI deduction. S corporations and partnerships are not eligible to take the
deduction directly on their business returns, instead, the QBI deduction is "passed-
through" to individual shareholders and partners. To see more information about the
199A QBI deduction, see the IRS page for the Qualified Business Income Deduction.
 33. Question ID: 94850096 (Topic: Qualified Business Income Deduction)
Alexander runs two separate businesses. Business #1 is a small farm that grows
grapes. Business #2 is a pawn shop. Both are sole-proprietorships. The farm is
profitable, and the qualifying business income (QBI) is $12,000 for the year. The pawn
shop has a net operating loss. QBI is -$5,000. What is Alexander's total QBI for the
year, and what is his QBI loss carryover?

 A. QBI is $7,000. There is no QBI loss carryover. correct

 B. QBI is $12,000. QBI loss carryover is $5,000. wrong
 C. QBI is $12,000. There is no QBI loss carryover.
 D. QBI is $7,000. QBI loss carryover is $5,000.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for A:

Alexander's QBI is $7,000 ($12,000 -$5,000 loss). There is no QBI loss carryover,
because he doesn't have a net loss for the year (between the two businesses).

Note: When calculating a taxpayer's qualified business income deduction, the taxpayer
must calculate their QBI separately for each business, but combine them as one in
order to calculate total QBI and/or any carryover (if applicable). So, if a taxpayer has
a loss in one business and a net profit from another, the loss will reduce the QBI from
the business that is showing a net profit. In other words, negative QBI from one
business will offset positive QBI from other trades or businesses.

If the total QBI from all trades or businesses is less than zero, the taxpayer's QBI
Component will be zero and any negative amount is carried forward to the next taxable
year. The carried forward negative QBI will be treated as negative QBI from a separate
trade or business for the purpose of determining the QBI Component in the next taxable
year.

For more information, see the IRS detail page on the Qualified Business Income
deduction.

35. Question ID: 94850100 (Topic: Qualified Business Income Deduction)

Does a taxpayer have to materially participate in a business in order to qualify for the
QBI deduction? (Choose the best answer)

 A. Yes, a taxpayer must materially participate in a business activity in order to

claim the QBI deduction. wrong
 B. No. Material participation is not required for the QBI deduction.correct
 C. Material participation is only required if the taxpayer is a sole-proprietorship.
 D. Material participation is not required as long as the taxpayer satisfies the 250-hour
safe harbor.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 55% of students.

Correct Answer Explanation for B:

Material participation is not required for the QBI deduction. Eligible taxpayers with
income from a trade or business may be entitled to the QBI deduction (if they otherwise
satisfy the requirements of section 199A) regardless of their involvement in the trade or
business. (See more information about the QBI deduction on the IRS Qualified
Business Income Deduction FAQs page).

37. Question ID: 94850168 (Topic: Qualified Business Income Deduction)

Veronica is unmarried and files single. She runs a small farming business that grows
roses. After calculating all her income and losses from the business, her qualified
business income on Schedule F is $95,000. She also had $10,000 in partnership
income from a limited partnership interest in which she did not materially
participate. She also earned $12,000 in wages from a seasonal job on her brother's
Christmas tree farm. She has no dependents, and she does not plan to itemize her
deductions. What is her Qualified Business Income Deduction for the year?

 A. $21,000 correct
 B. $19,000wrong
 C. $26,250
 D. $23,400
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for A:

Veronica's Qualified Business Income Deduction is $21,000 ($105,000 [$95,000 +

$10,000] × 20%). The deduction allows eligible taxpayers to deduct up to 20 percent of
their qualified business income (QBI), plus 20 percent of qualified real estate investment
trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Material
participation is not required for the QBI deduction, but only her business income is
included in the calculation of the QBI deduction. The QBI deduction does not apply to
regular wages. The Qualified Business Income Deduction reduces taxable income, not
adjusted gross income (AGI). The deduction does not reduce self-employment income.
The QBI deduction is available whether a taxpayer itemizes or not. Learn more about
the Qualified Business Income Deduction.

38. Question ID: 94850012 (Topic: Qualified Business Income Deduction)

 Which of the following businesses would be classified as an "SSTB" for the purposes of
the Qualified Business Income Deduction?

 A. An engineerwrong
 B. An architect
 C. A professional athletecorrect
 D. A farmer
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for C:

A professional athlete would be classified as an "SSTB". An SSTB is a trade or

business involving the performance of services in the fields of health, law, accounting,
actuarial science, performing arts, consulting, athletics, financial services, investing and
investment management, trading or dealing in certain assets, or any trade or business
where the principal asset is the reputation or skill of one or more of its employees or
owners. The principal asset of a trade or business is the reputation or skill of its
employees or owners if the trade or business consists of the receipt of income from
endorsing products or services, the use of an individual's image, likeness, voice, or
other symbols associated with the individual's identity, or appearances at events or on
radio, television, or other media formats. To see more information about the 199A QBI
deduction, see the IRS page for the Qualified Business Income Deduction.

43. Question ID: 95092411 (Topic: Foreign Income and Taxes)

Benny is a U.S. citizen who lives and works in Romania. He has income from many
different sources. Benny claims the foreign earned income exclusion. For the purposes
of claiming the exclusion, "foreign earned income" does NOT include which of the
following?

 A. Self-employment income.
 B. Interest.correct
 C. Salaries and wages.wrong
 D. Commissions.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 79% of students.

Correct Answer Explanation for B:

The interest would not be "foreign earned income". By definition, "foreign earned
income" is income a taxpayer receives for performing personal services in a foreign
country. "Earned income" is compensation for personal services performed, such as
wages, salaries, commissions, tips, or professional fees. Income from passive sources,
 such as interest, dividends, and capital gains, would not be considered earned income
and therefore would not be excludable using the foreign earned income exclusion.

44. Question ID: EA1 0623 03 (Topic: Foreign Income and Taxes)
For the purposes of the foreign tax credit, which statement below is false?

 A. The purpose of the credit is to eliminate double taxation of income

 B. MFJ Taxpayers can claim FTC directly on Form 1040 when not more than $600
subject to other requirements
 C. Some foreign countries do not have an income taxwrong
 D. Property taxes may be creditable under some circumstancescorrect
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 53% of students.

Incorrect Answer Explanation for C:

For the purposes of the foreign tax credit, property taxes are not creditable, because
property taxes are not an income tax. U.S. taxpayers can claim a credit for foreign taxes
that are imposed by a foreign country. Generally, only income taxes, war profits taxes,
and excess profits taxes qualify for the foreign tax credit.

Correct Answer Explanation for D:

For the purposes of the foreign tax credit, property taxes are not creditable, because
property taxes are not an income tax. U.S. taxpayers can claim a credit for foreign taxes
that are imposed by a foreign country. Generally, only income taxes, war profits taxes,
and excess profits taxes qualify for the foreign tax credit.

Show Other Explanations

46. Question ID: EA1 0623 02 (Topic: Foreign Income and Taxes)
Which of the following is classified as “foreign earned income” (assume that all the
income was earned by a U.S. citizen)?

 A. Income earned in international airspace

 B. Income earned in a U.S. territorywrong
 C. Income earned by a self-employed person living and working overseascorrect
 D. Wages paid by the U.S. government to a U.S. government employee working in a
foreign country
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Incorrect Answer Explanation for B:

 Income earned by a self-employed person living and working overseas would be
classified as “foreign earned income.” The other choices listed would not be treated as
foreign earned income.

Correct Answer Explanation for C:

Income earned by a self-employed person living and working overseas would be

classified as “foreign earned income.” The other choices listed would not be treated as
foreign earned income.

Show Other Explanations

47. Question ID: 95092383 (Topic: Foreign Income and Taxes)

Foreign earned income does NOT include which of the following types of income?

 A. Wages received during a period in which the taxpayer's tax home is in a

foreign country.wrong
 B. The fair market value of housing provided by a foreign employer.
 C. Pay received as a military servicemember of the U.S. Government.correct
 D. Foreign-earned self-employment income.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

Foreign earned income is income you receive for services you perform in a foreign
country during a period your tax home is in a foreign country. In addition,
certain noncash income (and allowances or reimbursements) are considered "foreign
earned" income. The fair market value of property or facilities provided to you by your
employer in the form of lodging, meals, or use of a car in a foreign country may also be
considered "foreign earned income". Foreign earned income does NOT include the
following amounts:

 Pay received as a military servicemember of the U.S. Government.

 Pay for services conducted in international waters (not a foreign country).
 Pay in specific combat zones, as designated by an Executive Order from the
President, that is excludable from income.
 Payments received after the end of the tax year following the year in which the
services that earned the income were performed.
 The value of meals and lodging that are excluded from income because it was
furnished for the convenience of the employer.
 Pension or annuity payments, including social security benefits.
 This list is not exhaustive, see Publication 54, Tax Guide for U.S. Citizens and Resident
Aliens Abroad for a full listing.

48. Question ID: 94815977 (Topic: Foreign Income and Taxes)

All of the taxpayers listed below resided outside the United States all year long. Which
of the following may be eligible to claim the foreign earned income exclusion?

 A. Penny, a U.S. citizen who lives in Canada all year. Penny has $50,000 in capital
gains from the sale of stock and no other income. wrong
 B. Gary, a U.S. citizen who lives and works in Greece. Gary works online as a freelance
editor and earns $40,000 in self-employment income during the year. correct
 C. Alek, a U.S. citizen who lives in Brazil. Alek is retired and only has Social Security
income and income from dividends.
 D. Harold, a U.S. citizen and active-duty Army personnel, living on base in Germany for
the entire year.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for B:

Gary is the only taxpayer who would qualify for the foreign earned income exclusion.
Certain taxpayers can exclude income earned in foreign countries. The foreign earned
income exclusion, the foreign housing exclusion, and the foreign housing deduction are
based on "earned" income, not passive income, investment income, or retirement
income. Penny and Alek would not qualify to take the exclusion, because none of their
income is "earned" income. Harold would not qualify, even if he earns wages, because
the foreign earned income exclusion doesn't apply to the wages and salaries of military
and civilian employees of the U.S. Government.

To learn more about this topic, see the dedicated IRS page about the Foreign Earned
Income Exclusion.

50. Question ID: 94815874 (Topic: Foreign Income and Taxes)

Shane is a U.S. citizen who works as a freelance photographer primarily in Costa Rica
and Bolivia. He is not a resident of either country. Instead, he spends a few months in
one country, and then a few months in the next, never spending more than 2-3 months
in any one place. To qualify for the foreign earned income exclusion under the
substantial presence test, he must be physically present (outside the U.S.) in a foreign
country for _______________ full days during a period of twelve consecutive months.

 A. 180wrong
 B. 300
 C. 330correct
 D. 183
 Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 63% of students.

Correct Answer Explanation for C:

Shane must be physically present for 330 full days during a period of 12 consecutive
months to meet the physical presence test for the foreign earned income exclusion. The
330 qualifying days do not have to be consecutive. The physical presence test is based
only on how long a taxpayer stays in a foreign country (or countries, if the taxpayer is in
multiple countries). Days abroad are counted for any purpose, even vacation, and a
taxpayer does not have to be in a foreign country to work. The physical presence test
applies to U.S. citizens and U.S. resident aliens. Learn more about the Physical
Presence Test on the IRS website.

51. Question ID: 95092382 (Topic: Foreign Income and Taxes)

The foreign earned income exclusion allows qualified taxpayers to voluntarily exclude
foreign earnings from taxable income. Which of the following taxpayers would NOT
qualify for the foreign earned income exclusion?

 A. U.S. Citizens working in Mexico or Canada.

 B. Married couples where only one spouse is working and living overseas (both
must qualify).wrong
 C. Green card holders that reside outside the U.S. in a foreign nation for more than a
year.
 D. Members of U.S. Armed Forces or U.S. government employees.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for D:

Members of U.S. Armed Forces and U.S. government employees do not qualify for the
foreign earned income exclusion. "Foreign earned income" is generally income earned
for personal services performed overseas, such as wages, salaries, or professional
fees. It does not include amounts paid by the United States to an employee of the
United States or Armed Services Personnel, (although there is an exception specifically
for foreign military contractors). See IRS Publication 54, Tax Guide for U.S. Citizens and
Resident Aliens Abroad for more information.

52. Question ID: 94849511 (Topic: Foreign Income and Taxes)

Landon is single and lives in the US. He owns a number of investments, including
foreign stock through an online brokerage account with his credit union. At the end of
the year, he gets a Form 1099-DIV showing $430 in foreign taxes paid. What must he
do in order to deduct these foreign taxes?
 A. Landon can deduct his foreign taxes on page 1 of his Form 1040.
 B. Landon must file Form 3520 in order to deduct the foreign taxes.wrong
 C. Landon must attach Form 1116 to his individual return in order to deduct the foreign
taxes.correct
 D. Foreign taxes are only deductible if the taxpayer has a foreign tax home.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for C:

Landon must attach Form 1116 to his individual return in order to deduct the foreign
taxes, because the amount of foreign tax exceeds $300. Single filers who paid $300 or
less in foreign taxes, and married joint filers who paid $600 or less, are not required to
file Form 1116; they can deduct the foreign tax paid directly on Form 1040.

53. Question ID: 95033975 (Topic: Foreign Income and Taxes)

Taxpayers who are filing Married Filing Separately can claim which of the following
deductions/credits?

 A. The Foreign Earned Income Exclusioncorrect

 B. The American Opportunity Credit
 C. The Lifetime Learning Creditwrong
 D. Student loan interest deduction
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Taxpayers who are filing Married Filing Separately cannot claim deductions for the
American Opportunity Credit, Lifetime Learning Credit, or the student loan interest
deduction. They can claim the Foreign Earned Income Exclusion. The filing status,
married filing jointly or separately, does not affect the amount of exclusion.

55. Question ID: 95092855 (Topic: Foreign Income and Taxes)

Freida is a U.S. citizen who lives in Brazil. Her income included $42,000 in wages
earned entirely in Brazil. She also earned $300 in interest from her U.S. bank account.
What is her total income, and how should it be reported?

 A. She must report only the $300 in interest. The remaining income does not have to be
reported because it was earned overseas.
 B. She must report $42,300 in income on Form 1040.correct
 C. She must report $42,300 in income on her Form 1040-NR.wrong
 D. She must report only the $42,000 in wages. The interest does not have to be
reported.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for B:

Frieda's gross income includes her wages and interest, both of which should be
reported on her tax return. Therefore, her Form 1040 will show $42,300 in gross
income. Although she might be eligible for the earned income tax credit, she must still
report all her worldwide income. U.S. citizens and U.S. resident aliens are required to
report worldwide income on a U.S. tax return regardless of where they live and even if
the income is taxed by the country in which it was earned. Income is treated the same
on the return regardless of the country from which it is derived. U.S. citizens and U.S.
residents always file Form 1040, never Form 1040-NR (Example from Publication
4491).

56. Question ID: 94815854 (Topic: Foreign Income and Taxes)

Marisol, a U.S. citizen, lived in Germany for 9 months. Her current year income included
$32,000 in wages earned in Germany. She also earned $300 in interest from her U.S.
bank, and an additional $500 in tax-exempt interest on municipal bonds. Marisol does
not qualify to take the foreign income exclusion. Before calculating any other
deductions, what is her gross income, as reflected on her Form 1040?

 A. $300
 B. $32,800wrong
 C. $0
 D. $32,300correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for D:

Marisol's total income is $32,300, which includes her wages and taxable interest, both
of which should be reported on her tax return. The tax-exempt municipal bond interest
would be reported on her return, but it would not be included in her gross income or her
taxable income.

58. Question ID: 94849887 (Topic: Foreign Income and Taxes)

Which of the following foreign taxes are deductible by individual taxpayers?

 A. Foreign sales taxes.

 B. Foreign property taxes.
 C. Foreign real estate taxes.wrong
 D. Foreign income taxes.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for D:

Foreign income taxes are deductible. A taxpayer can claim a credit or a deduction for
foreign taxes that are imposed by a foreign country. Generally, only foreign income
taxes qualify for the credit. In most cases, it is to the taxpayer’s advantage to take
foreign income taxes as a tax credit, rather than a deduction, but taxpayers may choose
which method gives them a better tax result.

Note: The Tax Cuts and Jobs Act eliminated the deduction for foreign real estate taxes.
In previous years, a taxpayer was allowed to deduct foreign property taxes on Schedule
A, but that deduction is no longer permissible.

59. Question ID: 94849808 (Topic: Foreign Income and Taxes)

Ramiro and Fatima are married and file jointly. They own a number of foreign stocks,
and their Form 1099-DIV shows foreign tax paid in the amount of $590. They want to
claim the Foreign Tax Credit for the foreign income tax that they paid. What is the
easiest way for them to claim the foreign tax credit on their return?

 A. They are required to file Form 1116 in order to claim the foreign tax credit.
 B. They can report the foreign taxes paid on Schedule E.
 C. They can report the foreign taxes paid on Schedule B. wrong
 D. They are not required to complete Form 1116 to take the foreign tax credit. They can
report the taxes directly on Form 1040. correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for D:

The couple is not required to complete Form 1116, because their foreign taxes are less
than $600. They may still claim the Foreign Tax Credit. Taxpayers can claim the
Foreign Tax Credit directly on Form 1040 (without filing any additional forms) if, among
other conditions, all foreign income is specified passive category income and total
foreign taxes paid do not exceed $300 ($600 MFJ).

For more information about the foreign tax credit, see the IRS detail page
for the Foreign Tax Credit.

60. Question ID: 94815876 (Topic: Foreign Income and Taxes)

In order for a taxpayer to claim the foreign earned income exclusion, what is required?
 A. The taxpayer's principal employment must be with a foreign employer.
 B. The mailing address listed on the taxpayer's tax return must be a foreign address.
 C. The taxpayer must have a passport that pertains to a foreign country.wrong
 D. The taxpayer must meet either the bona fide residence test or the physical presence
test, and their tax home must be in a foreign country.correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for D:

In order for a taxpayer to claim the foreign earned income exclusion, the taxpayer must
meet either the bona fide residence test or the physical presence test, and their tax
home must be in a foreign country.

61. Question ID: 94850183 (Topic: Foreign Income and Taxes)

To qualify for the foreign earned income exclusion, the taxpayer must have:

 A. A foreign employer
 B. A tax home within the United States
 C. A tax home in a foreign countrycorrect
 D. Be stationed outside the U.S. as a military servicememberwrong
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

Correct Answer Explanation for C:

To qualify for the foreign earned income exclusion, the taxpayer must have a tax home
in a foreign country. To qualify for the foreign earned income exclusion, individuals must
have a tax home in a foreign country and meet either the Physical Presence Test or the
Bona Fide Residence Test.

6. Question ID: 94849505 (Topic: Alternative Minimum Tax)

Which of the following items will NOT increase a taxpayer’s refund?

 A. Withholding payments that exceed tax liability.

 B. Refundable credits.
 C. The alternative minimum tax.correct
 D. Excess Social Security tax withheld.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

 Correct Answer Explanation for C:

The alternative minimum tax will not increase a taxpayer’s refund. In fact, it may do the
opposite. The AMT attempts to ensure that higher-income earners pay at least a
minimum amount of tax. The AMT provides an alternative set of rules for calculating
income tax.

8. Question ID: 94815947 (Topic: Kiddie Tax on Investment Income)

The "kiddie tax" may apply when a dependent child’s investment income exceeds
_____ in 2024.

 A. $1,050
 B. $13,850
 C. $2,600correct
 D. $4,400
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for C:

The "kiddie tax" applies when a child’s investment income exceeds $2,600 in 2024. For
2024, the first $1,300 of a child's unearned income qualifies for the standard deduction,
the next $1,300 is taxed at the child's income tax rate, and unearned income above
$2,600 is subject to the "kiddie tax" by being taxed at the parent's marginal income tax
rate.

For this purpose, “unearned income” includes all taxable income other than earned
income, such as taxable interest, ordinary dividends, capital gains, rents, royalties, etc.
It also includes taxable Social Security benefits, pension and annuity income, taxable
scholarship and fellowship grants not reported on Form W-2, unemployment
compensation, alimony, and income received as the beneficiary of a trust.

For more information on the Kiddie Tax, see Topic No. 553 Tax on a Child's Investment
and Other Unearned Income (Kiddie Tax)

11. Question ID: 94815972 (Topic: Kiddie Tax on Investment Income)

Freddy and Evie are married and file jointly. They have one son, named Colin, who is
10 years old. Freddy and Evie claim Colin as their qualifying child. Colin owns a number
of investments that he inherited from his grandparents. These investments generate
$4,900 in interest and dividend income in 2024, so Colin's income is subject to the
Kiddie Tax. Freddy and Evie would like to report Colin's investment income on their own
return rather than filing a separate return for their minor child. Is this possible?
 A. It is not possible for Freddy and Evie to report Colin's investment income on their
return.
 B. Freddy and Evie can elect to include Colin's investment income on their return
by using Form 8814 and attaching it to their own return. correct
 C. Freddy and Evie can elect to include Colin's investment income on their return by
using Form 8615 and attaching it to their own return.
 D. Freddy and Evie can elect to include Colin's investment income by reporting the
investment income as their own.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for B:

Freddy and Evie can elect to include Colin's investment income on their return by using
Form 8814 and attaching it to their own return. This is ONLY POSSIBLE if a child has
investment income only; if the child has any other type of income (such as wages) then
the child must file their own return. If a child's interest, dividends, and other unearned
income total more than $2,600 in 2024, the child may be subject to the kiddie tax. If a
child is subject to the Kiddie Tax, the parents can choose to report the tax in one of two
ways:

 The child can file their own tax return and use Form 8615, Tax for Certain
Children Who Have Unearned Income, to report the tax.
 If the child's only income is interest and dividend income (including capital gain
distributions) and totals less than $13,000 in 2024, the parents may elect to
include that income on their own return rather than file a return for the child by
using Form 8814, Parents' Election To Report Child's Interest and Dividends.
For more information on the Kiddie Tax, see Topic No. 553 Tax on a Child's Investment
and Other Unearned Income (Kiddie Tax)

16. Question ID: 94850127 (Topic: First-Time Homebuyer Credit Repayment )

Aiden purchased a home in 2008. At the time of the purchase, he claimed the maximum
amount of the First-Time Homebuyer Credit, which he must repay. His 15-year
repayment period started with 2010, the second taxable year from 2008. Aiden still lives
in the same home. How much must Aiden pay in additional tax in 2024?

 A. $0
 B. $500 correct
 C. $250
 D. $1,000
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

 Correct Answer Explanation for B:

Aiden claimed the maximum credit of $7,500, so he must repay $500 per year as an
additional tax, since he is still within the repayment period and still lives in the same
home. First-time homebuyers who claimed a special tax credit in 2008 are required to
repay a portion of the funds received over a 15-year period. The First-Time Homebuyer
Credit took the form of a loan in 2008. Taxpayers who still owe on this repayment must
file Form 5405, Repayment of the First-Time Homebuyer Credit, and attach it to their
return. For more information, see IRS Topic No. 611 Repayment of the First-Time
Homebuyer Credit.

18. Question ID: 94850054 (Topic: Tax on Household Employees)

Xavier hires a full-time nanny to work in his home, taking care of his two toddlers. He
pays the nanny $23,000 in wages during the year. Which of the following is a way for
Xavier to avoid an estimated tax penalty for taxes reported on Schedule H?

 A. He can pay the nanny in cash and simply report her wages on a Form 1099-MISC.
 B. Pay the taxes when he files his Form 1040 on April 15.
 C. Make estimated tax payments by filing Form 1040-ES.correct
 D. He will not owe additional taxes if he files Schedule H.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 58% of students.

Correct Answer Explanation for C:

Household employees commonly include housekeepers, maids, nannies and

gardeners. A taxpayer may need to increase the federal income tax withheld from his
pay or pension or make estimated tax payments to avoid an estimated tax penalty
resulting from his liability for employment taxes in connection with household
employees, as shown on Schedule H. The taxpayer has several options. He can:

 Increase his federal income tax withheld by giving his employer a new Form W-4,
or
 Make estimated tax payments by filing Form 1040-ES, Estimated Tax for
Individuals.
Estimated taxes must be withheld or paid as the tax liability is incurred, so a taxpayer
cannot wait until he files his return (and Schedule H) to pay any household taxes owed.
Learn more about household employee taxes on IRS Topic No. 756 Employment Taxes
for Household Employees.

20. Question ID: 94850143 (Topic: Tax on Household Employees)

Mazie hired a part-time nanny to work in her home. She paid the nanny $1,950 in
wages during 2024. The nanny then quit, because she obtained a full-time job
elsewhere. Which of the following statements is correct?
 A. No reporting is required by either party if the wages are paid in cash.
 B. Mazie can deduct the nanny’s wages as a business expense on Schedule C.
 C. Mazie is not required to issue a Form W-2 to the nanny, and does not have to
report or pay Social Security and Medicare taxes on the nanny’s wages.correct
 D. The income is not taxable to the nanny.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 85% of students.

Correct Answer Explanation for C:

Mazie is not required to issue a Form W-2 to the nanny, and does not have to report or
pay Social Security and Medicare taxes on the nanny’s wages. If an employer pays a
household employee wages of less than $2,700 in 2024, the employer is not required to
report or pay Social Security and Medicare taxes on that employee's wages. However,
an employer who withholds federal income taxes from an employee's wages must issue
a Form W-2. Regardless of whether Form W-2 is issued, the employee (the nanny or
other household worker) is always required to report the income on their Form 1040.

Note: Schedule H is used by the employer to report household employment taxes. See
IRS Tax Topic 756, Employment Taxes for Household Employees.

21. Question ID: 94850181 (Topic: Tax on Household Employees)

Bartley pays Crissy to babysit his child and do light housework four days a week in his
home. Crissy follows Bartley's specific instructions about household and child-care
duties. Bartley provides the supplies that Crissy needs to do her work and pays her
approximately $700 per month. How should Crissy be classified for tax purposes?

 A. Crissy is a statutory employee.

 B. Crissy is a transient worker.
 C. Crissy is likely Bartley's household employee. correct
 D. Crissy is likely an independent contractor.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for C:

Crissy is Bartley's household employee. Household employees include: housekeepers,

maids, babysitters, gardeners, and others who work in or around your private residence
as your employee. This question is modified from an example in Publication 926,
Household Employer's Tax Guide.

23. Question ID: 94850142 (Topic: Tax on Household Employees)

 Kerry pays an in-home senior caregiver to take care of his disabled mother in his home
while he is working. In 2024, at what threshold is Kerry required to pay employment
taxes on the wages that he pays to the caregiver?

 A. $13,850 in wages.
 B. Any amount of wages.
 C. $2,700 in wages.correct
 D. $4,700 in wages.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

If a household employee (like a housekeeper, nanny, or an in-home caregiver), earn

$2,700 or more in cash wages in 2024, Social Security and Medicare taxes must be
paid by the family and the employee. These taxes are commonly referred to as “nanny
taxes". If the amount of wages paid to an employee during the year is less than this
threshold, no Social Security or Medicare taxes are owed, but the income is still taxable
to the household employee. Schedule H is used by the employer to report household
employment taxes. See IRS Tax Topic 756, Employment Taxes for Household
Employees.

24. Question ID: 94850180 (Topic: Tax on Household Employees)

Hamline is a tax attorney. He has seven employees who work for him at his business
office in downtown Chicago. He also has several employees that work at his home.
Which of the following would NOT be classified as Hamline's household employee?

 A. Babysitter.
 B. Bookkeeper.correct
 C. Groundskeeper.
 D. Housekeeper.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

A bookkeeper would typically not be a household employee. According to IRS

Publication 926, Household Employer's Tax Guide, "household employees" include
housekeepers, maids, personal chauffeurs, babysitters, gardeners, and others who
work in or around the taxpayer's private residence as their employees. Schedule H is
used to report wages paid to a household employee.
 To learn more about Schedule H and household employees, see IRS Topic No. 756
Employment Taxes for Household Employees.

28. Question ID: 94849547 (Topic: Qualified Business Income Deduction)

Regarding the Qualified Business Income deduction (the 199A QBI deduction), which of
the following taxpayers would NOT be entitled to claim it?

 A. A self-employed taxpayer who does not have any employees.

 B. A taxpayer that only has wage income.correct
 C. An individual taxpayer who has pass-through income from an S corporation reported
on a Schedule K-1.
 D. A taxpayer who reports a rental activity on Schedule E.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

A taxpayer that only has income from wages would not qualify for the 199A deduction
(although there is a very narrow exception in the law for statutory employees only).

C Corporations also do not qualify for the deduction. Owners of sole proprietorships,
partnerships, S corporations and some trusts and estates may be eligible for a qualified
business income (QBI) deduction (also called Section 199A). The deduction allows
eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI),
plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified
publicly traded partnership (PTP) income.

To see more information about the 199A QBI deduction, see the IRS page for
the Qualified Business Income Deduction.

32. Question ID: 94935549 (Topic: Qualified Business Income Deduction)

For the purposes of the 199A Qualified Business Income Deduction, which of the
following businesses would be considered an SSTB?

 A. Engineer
 B. Truck driver
 C. Certified Public Accountantcorrect
 D. Architect
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

 A Certified Public Accountant would be classified as an SSTB. A specified service trade
or business (SSTB) is any trade or business offering the following services: attorneys,
physicians and other medical professionals, including veterinarians, consultants,
athletes, financial planners, accountants, or businesses who receive income for
endorsing products or services, for the use of the taxpayer’s image, likeness, name,
signature, voice, trademark, or any other symbols associated with the taxpayer’s
identity, or for appearing at an event or on radio, television, or another media format.
Engineers and architects are specifically exempted from being categorized as an SSTB.

34. Question ID: 94850105 (Topic: Qualified Business Income Deduction)

With regards to the QBI deduction, what does the unadjusted basis immediately after
acquisition (UBIA) of qualified property mean?

 A. UBIA is tangible property subject to depreciation that is held and used in the
production of QBI by a business.correct
 B. UBIA is inventory held by a business.
 C. UBIA refers to non-business property.
 D. UBIA refers to securities held by a business, including stocks and bonds.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

With regards to the QBI deduction, UBIA is tangible property subject to depreciation that
is held and used in the production of QBI by a business. UBIA can include assets like
business machinery, office buildings, and livestock for farmers. In most cases, UBIA is
the original purchase price of the asset. UBIA does not include inventory or land
(because land and inventory are never depreciated).

For more information about UBIA, see the IRS detail page on the Qualified Business
Income (QBI) deduction.

36. Question ID: 94849565 (Topic: Qualified Business Income Deduction)

The section 199A "Qualified Business Deduction" is a deduction of income from a
qualified trade or business that individual taxpayers can claim on their Form 1040
individual returns. The QBI deduction has two components. What are these two
components?

 A. The Self-Employed Component and the Investment Component.

 B. The QBI Component and the REIT / PTP Component.correct
 C. The QBI Component and the Real Property Component.
 D. The Royalty Component and the Profit Component.
Study Unit 15: Additional Taxes and Credits covers the information for this question.
 This question is answered correctly on the first attempt by 74% of students.

Correct Answer Explanation for B:

The Section 199A deduction has two components.

 The QBI Component. This component of the deduction equals 20 percent of QBI
from a domestic business operated as a sole proprietorship or through a
partnership, S corporation, trust or estate.
 The REIT / PTP Component. This component of the deduction equals 20 percent
of the combined qualified REIT dividends (including REIT dividends earned
through a regulated investment company (RIC) and qualified PTP income.
To see more information about the 199A QBI deduction, see the IRS page for
the Qualified Business Income Deduction.

39. Question ID: 94850099 (Topic: Qualified Business Income Deduction)

With regards to the 199a qualified business income deduction (QBI deduction), which of
the following types of income would NOT be classified as QBI?

 A. Income from a rental activity that is reported on Schedule E as passive income.

 B. Income that is effectively connected with the conduct of a business outside the
United States.correct
 C. Income that is earned by the estate of a deceased taxpayer.
 D. Income that is earned by an irrevocable trust.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 64% of students.

Correct Answer Explanation for B:

Income that is not effectively connected with the conduct of a business within the United
States would NOT be qualifying business income, or QBI. In other words, foreign
business activities would not qualify. All of the other choices/entities listed could
potentially produce qualifying business income. QBI is the net amount of income, gain,
deduction, and loss from any qualified trade or business (QTB), including those
conducted through:

 Sole proprietorships,
 S corporations,
 Partnerships,
 Trusts and estates.
QBI Does Not Include:
  Items that are not properly includable in taxable income.
 Investment items such as: capital gains and losses, dividends, or interest.
 Income not properly allocable to a trade or business.
 Wage income reported on Form W-2 (with the exception of statutory employees).
 Income that is not effectively connected with the conduct of a business within the
United States.
 Income earned by a C Corporation.
For more information, see the IRS detail page on the Qualified Business Income (QBI)
deduction.

40. Question ID: 94850353 (Topic: Qualified Business Income Deduction)

Which of the following is not considered a “Specified Service Trade or Business” for the
purposes of calculating the 199A Qualified Business Income Deduction?

 A. Accounting professionals.
 B. Actuarial science.
 C. Licensed engineers. correct
 D. Medical professionals.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for C:

For the purposes of calculating the 199A Qualified Business Income Deduction, the
fields of architecture and engineering are specifically excluded as “Specified Service
Businesses.” Specified Service Businesses (SSTBs) include: medical professionals,
law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the principal asset of such
trade or business is the reputation or skill of one or more of its employees or owners.
Architecture and engineering are specifically not included in the list.

To see more information about SSTBs and the 199A deduction, see the IRS page for
the Qualified Business Income Deduction.

41. Question ID: EA1 0623 04 (Topic: Foreign Income and Taxes)
Diego is a U.S. citizen who earned $1,000 in passive income in Mexico. Diego had $150
in foreign income tax withheld. The U.S.-Mexico tax treaty stipulates a 10% withholding
rate on passive income. What is the maximum amount of Mexican income tax that
Diego can claim on his Form 1040 for Foreign Tax Credit purposes?

 A. $300
 B. $100correct
 C. $200
 D. Actual amount withheld by Mexican taxing agencies ($150)
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 33% of students.

Correct Answer Explanation for B:

Because there is a tax treaty, Diego is only permitted to claim the lower tax treaty rate
(10% x $1,000 = $100) for Foreign Tax Credit purposes. The qualified foreign tax is the
amount figured using the lower treaty rate and not the amount actually paid. (This
question is based on an example in the Form 1116 instructions.)

42. Question ID: 94849757 (Topic: Foreign Income and Taxes)

Between January and August, Alexander earned $40,000 while working in Texas, for a
U.S. Corporation. On September 1, 2024, he transferred to their office in Germany.
While in Germany, he earned $30,000 in wages (in equivalent U.S. dollars). Alexander
did not receive a Form W-2 for the wages he earned overseas. How much income will
Alexander report on his Form 1040?

 A. His Form 1040 will show $40,000 in wages.

 B. His Form 1040 will show $70,000 in wages.correct
 C. His Form 1040 will show $40,000 in wages and $30,000 in self-employment income.
 D. His Form 1040 will show $40,000 in wages and $30,000 in "other income."
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 69% of students.

Correct Answer Explanation for B:

All of Alexander's wages, including the income he earned in Germany, must be included
in his gross income. His Form 1040 will show $70,000 in wages. U.S. citizens and U.S.
resident aliens are required to report worldwide income on a U.S. tax return regardless
of where they live and even if the income is taxed by the country in which it was earned.
Income is treated the same on the return regardless of the country from which it is
derived. (Example from Publication 4491).

45. Question ID: 94849968 (Topic: Foreign Income and Taxes)

Barney is a U.S. citizen and a 2% minority shareholder in a Greek corporation. During
the year, he receives a $1,000 refund of the tax paid to Greece by the corporation on
the earnings distributed to him as dividend. The foreign government imposes a 15%
withholding tax ($150) on the refund Barney received. He receives a check for $850. He
includes the $1,000 of dividends in his taxable income. Barney also paid $5,000 in
foreign property taxes on a second residence that he owns in Greece, and $400 in
foreign sales taxes when he purchased a vehicle for use when he travels overseas.
 How much of these amounts would be a qualified foreign tax, eligible for a credit or
deduction on Barney's individual tax return?

 A. $150correct
 B. $5,550
 C. $0
 D. $5,150
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 56% of students.

Correct Answer Explanation for A:

The $150 of tax withheld is a qualified foreign tax, and deductible by Barney. The other
taxes are not deductible. In most cases, only foreign income taxes qualify for the foreign
tax credit. Other taxes, such as foreign real and personal property taxes, do not
qualify. See Publication 514, Foreign Tax Credit for Individuals for more information.

49. Question ID: 94849858 (Topic: Foreign Income and Taxes)

Which of the following is NOT a requirement for a taxpayer to claim the Foreign Tax
Credit?

 A. Income taxes paid to a foreign country must have been imposed on the taxpayer.
 B. The tax must have been imposed on a nonresident alien and claimed on Form
1040NR.correct
 C. The taxpayer must have paid or accrued the tax.
 D. The tax must be a legal and actual foreign tax liability.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for B:

The Foreign Tax Credit can only be claimed by U.S. citizens or resident aliens.
Nonresident aliens are not eligible. The credit applies to any type of foreign income,
including investment income, and directly reduces tax liability. A taxpayer cannot claim
the Foreign Tax Credit for taxes paid on any income that has already been excluded
using the foreign earned income exclusion or the foreign housing exclusion.

Learn more about this topic on the IRS page that covers the Foreign Tax Credit.

54. Question ID: 94815901 (Topic: Foreign Income and Taxes)

Denny is a U.S. citizen who lives and works overseas in Serbia. He is a self-employed
writer and reports his income on Schedule C. Denny qualifies for the foreign earned
 income exclusion. His gross foreign earned income is $95,000, his business deductions
total $27,000, and his net profit is $68,000. Which of the following is true?

 A. Denny must pay FUTA tax on his net profit of $68,000, even if he is qualified for the
foreign earned income exclusion.
 B. Denny must pay self-employment tax on his net profit of $68,000, even if he is
qualified for the foreign earned income exclusion.correct
 C. Denny does not owe any taxes, because he qualifies for the foreign earned income
exclusion.
 D. Denny must pay income tax and self-employment tax on his net profit of $68,000,
even if he is qualified for the foreign earned income exclusion.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

Denny must pay self-employment tax on his net profit of $68,000, even if he is qualified
for the foreign earned income exclusion. If a US taxpayer lives and works overseas, he
or she must take into account all of their self-employment income in figuring their net
earnings from self-employment, even income that is exempt from income tax because
of the foreign earned income exclusion. (Based directly on an example from Publication
54).

57. Question ID: 95092460 (Topic: Foreign Income and Taxes)

Astrid is a U.S. citizen that is working abroad in Greece for the entire taxable year. What
tests must she satisfy BEFORE claiming the foreign earned income exclusion?

 A. The bona fide residence test OR the U.S. employer test.

 B. The bona fide residence test OR the physical presence test.correct
 C. The bona fide residence test AND the physical presence test.
 D. The foreign citizen test OR the overseas presence test.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

Astrid must meet either: (1) the bona fide residence test OR (2) the physical presence
test in order to claim the foreign earned income exclusion. The foreign earned income
exclusion, the foreign housing exclusion, and the foreign housing deduction are based
on foreign earned income. For this purpose, "foreign earned income" is income received
for services performed in a foreign country in a period during which the taxpayer's tax
home is in a foreign country and the taxpayer meets either the bona fide residence test
or the physical presence test.
 Below is a review of your answers, with the incorrectly answered questions first,
followed by the correctly answered questions:

2. Question ID: 94815818 (Topic: Qualifications for Dependency)

Adelise is unmarried and files as head of household. She has four dependent children
who live with her, all of whom are under 17. Adelise's mother, Racine, also lives with
them. Racine has no income, and Adelise provides all of her mother’s financial support.
Based on this information, how many dependents can Adelise claim on her return?

 A. Three.wrong
 B. Two.
 C. Six.
 D. Five.correct
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 96% of students.

Correct Answer Explanation for D:

Adelise is entitled to claim five dependents. She can claim all of her children and also
Racine, her dependent parent.

5. Question ID: 95033701 (Topic: Net Investment Income Tax)

Which of the following are not subject to the net investment income tax (NIIT)?

 A. Trusts.
 B. Nonresident aliens.correct
 C. U.S. residents (green-card holders) that live overseas.wrong
 D. Estates of deceased taxpayers.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for B:

Nonresident aliens are not subject to the net investment income tax. A dual-resident
individual may be subject to the NIIT for the portion of the year during which he is a U.S.
resident, depending on the amount of his net investment income and MAGI. Estates
and trusts may be subject to the NIIT if they have undistributed net investment income
over certain thresholds.

6. Question ID: 94849749 (Topic: Interest Income)

Which of the following statements is CORRECT, with regard to interest income?
 A. Tax-exempt interest does not need to be reported on a taxpayer's return.
 B. All interest income must be reported on a taxpayer's return, even if it is tax-
exempt.correct
 C. Interest earned on foreign investments is never taxable.wrong
 D. All interest income is taxable.
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

Interest income may be taxable or tax-exempt. All interest income must be reported on
the tax return, even if it is tax-exempt.

7. Question ID: 94850205 (Topic: The Estate Tax)

All of the following are estates of a decedent. Which estate would be required to file
Form 1041?

 A. An estate with $200 of interest income and a beneficiary who is a nonresident

alien.correct
 B. An estate with $500 of rental income and a beneficiary who is a U.S. resident alien.
 C. An estate with $100 of tax-exempt muni bond income.wrong
 D. An estate with dividend income of $50.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for A:

An estate with a beneficiary who is a nonresident alien is always required to file a tax
return (Form 1041), regardless of the amount of income the estate earned during the
year. For more information about the filing requirements that apply to estates, see
Publication 559, Survivors, Executors and Administrators.

8. Question ID: 94815922 (Topic: Filing Requirements and Due Date)

Tomas is a U.S. citizen living in Florida. He requested an extension of time to file his
individual tax return, what is his extended due date?

 A. August 15
 B. June 15
 C. October 15correct
 D. December 15wrong
 Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for C:

With the extension, Tomas will have until October 15 to file. This is an extension of time
for the taxpayer to file, not an extension of time to pay taxes that are due.

10. Question ID: 94815952 (Topic: Taxation for Clergy and Military)
Barnard is in the U.S. armed services, fighting in a combat zone. He forgot to file an
extension. Is he allowed an automatic extension of time to file?

 A. Yes, he is allowed an automatic extension of 180 days after the last day he is in a
combat zone.correct
 B. Yes, he is allowed an automatic extension from the normal filing deadline, but only
until June 15.
 C. Yes, he is allowed an automatic extension of 180 days from the normal filing
deadline.
 D. No, he must file an extension request, just like every other taxpayer. However,
the extension request will be given special consideration because he is in a
combat zone.wrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for A:

A U.S. taxpayer serving in a combat zone is granted an automatic extension, Barnard is

given extra time to file his tax return, pay his taxes, and file a claim for refund. The 180-
day extension also applies to other service members performing active duty services in
support of combat zone operations. In addition, a taxpayer serving in a combat zone
qualifies for relief from IRS compliance actions, such as audits or collections, until 180
days after he has left the zone. See the IRS detail page on the Extension of Deadlines
for Combat Zone Service.

12. Question ID: 94849877 (Topic: Education Credits)

All of the people listed below are college students working towards their first college
degree. All are degree candidates. Which of the following taxpayers cannot claim the
American Opportunity Tax Credit?

 A. Gary, who earns $30,000 in wages and is married filing separately.correct

 B. Judy, who has $22,000 in wages and $20,000 in interest income.
 C. Hester, who is legally separated from her spouse and earns $53,000 in self-
employment income.
 D. Ricky, who is age 75 and widowed. He earns $32,000 from a part-time
job. wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Only Gary would be automatically disqualified from claiming the credit, and that is
because of his filing status, which is married filing separately. A taxpayer can’t claim an
education credit if any of the following apply:

 Their filing status is married filing separately.

 They are claimed as a dependent on another person's tax return.
 The taxpayer didn't have a social security number (SSN) by the due date of the
return (including extensions).
 The taxpayer's MAGI exceeds the phaseout thresholds for the credit.
For more information and to see similar examples, see Publication 970, Tax Benefits for
Education.

13. Question ID: 94849907 (Topic: Education Credits)

Skyler, 29, decides to go to college during the year. Which of the following will disqualify
him from taking the Lifetime Learning Credit?

 A. Skyler is not seeking a degree, and is only taking two courses to improve his job
skills.
 B. Skyler is filing Married Filing Separately.correct
 C. Skyler is pursuing a graduate degree.
 D. Skyler is attending school less than half-time.wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for B:

If Skyler is filing Married Filing Separately (MFS) then he cannot claim any education
credit, including the Lifetime Learning Credit. None of the other answers would bar him
from claiming the Lifetime Learning Credit. See Publication 970, Tax Benefits for
Education, for information about education credits.

14. Question ID: 95850113 (Topic: Taxpayer Personal Information)

 Why is collecting accurate biographical data from a client so important for tax
preparation?

 A. Accurate client information helps prevent errors on tax returns.correct

 B. Biographical information prevents future IRS enforcement.wrong
 C. Accurate client information reduces the need for IRS audits.
 D. It ensures much faster tax refunds.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Incorrect Answer Explanation for B:

Certain biographical information about the client is required when filing tax returns. Tax
preparers must also verify social security cards, ITIN letters, and other documents to
ensure that the correct TINs are used for the taxpayer, their spouse, and any
dependents listed on the return. Collecting accurate biographical information from
clients helps prevent errors on tax returns.

Correct Answer Explanation for A:

Certain biographical information about the client is required when filing tax returns. Tax
preparers must also verify social security cards, ITIN letters, and other documents to
ensure that the correct TINs are used for the taxpayer, their spouse, and any
dependents listed on the return. Collecting accurate biographical information from
clients helps prevent errors on tax returns.

Show Other Explanations

15. Question ID: 94850353 (Topic: Qualified Business Income Deduction)

Which of the following is not considered a “Specified Service Trade or Business” for the
purposes of calculating the 199A Qualified Business Income Deduction?

 A. Accounting professionals.wrong
 B. Medical professionals.
 C. Actuarial science.
 D. Licensed engineers. correct
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for D:

 For the purposes of calculating the 199A Qualified Business Income Deduction, the
fields of architecture and engineering are specifically excluded as “Specified Service
Businesses.” Specified Service Businesses (SSTBs) include: medical professionals,
law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or any trade or business where the principal asset of such
trade or business is the reputation or skill of one or more of its employees or owners.
Architecture and engineering are specifically not included in the list.

To see more information about SSTBs and the 199A deduction, see the IRS page for
the Qualified Business Income Deduction.

17. Question ID: 94849554 (Topic: Sale of Personal Residence)

Keith purchased his home seven years ago for $175,000. This year, he added another
bedroom and a sunroom to the property at a cost of $28,000. He also repaired two
broken windows at a cost of $650. His basis in the home is now:

 A. $203,000.correct
 B. $28,000.wrong
 C. $203,650.
 D. $175,000.
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

Keith's adjusted basis in the home is $203,000, the combined amount of his original
basis plus the value of the new additions to the house. The cost of the repairs are not
added to basis, because repairs do not “materially increase the value” or “substantially
prolong the useful life” of the home.

20. Question ID: 94849655 (Topic: Basis of Gifted Assets)

On January 30, Tracy received two acres of land as a gift from her brother, Matthew. At
the time of the gift, the land had an FMV of $77,000. Matthew’s adjusted basis in the
land was $74,000. Tracy then spent $2,000 of her own funds to clear tree stumps from
the land. On December 31, Tracy sold the property for $76,500. How should she report
this transaction on her tax return?

 A. $2,500 gain.wrong
 B. $500 gain.correct
 C. $2,500 loss.
 D. $500 loss.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.
 This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for B:

Tracy has to recognize a $500 gain on the sale of the land. The basis of property
received as a gift is figured differently than property that is purchased. Generally, the
basis of gifted property is the same in the hands of the donee as it was in the hands of
the donor, but may also include the amount of gift tax paid by a donor, if any. If the fair
market value of the property on the date of the gift is less than the transferred basis, the
donee’s basis for gain is the transferred basis. However, if the donee reports a loss on
the sale of gifted property, her basis is the lower of the transferred basis or the FMV of
gifted property. The sale of gifted property can also result in no gain or loss. This
happens when the sale proceeds are greater than the gift’s FMV, but less than the
transferred basis. Tracy has a $500 gain because she uses the donor's adjusted basis
at the time of the gift ($74,000) plus the amount that she spent to clear the property
($2,000) as the basis to figure gain. Therefore, since she sold the property for $76,500
she has a $500 capital gain, calculated as follows:

($74,000 + $2,000) = $76,000 basis

($76,500 - $76,000) = $500 capital gain on sale

21. Question ID: 94850166 (Topic: Marriage Divorce and Injured and Innocent
Spouse)
Aimee is a freelance editor who makes estimated tax payments on her self-employment
income. She and her husband, Enrique, have two children. This year, they claimed the
Child Tax Credit on their joint return. Enrique owes past-due spousal and child support,
so the IRS took the couple’s entire tax refund to pay his past-due debts. Aimee is not
responsible for any of Enrique's debt. As their tax preparer, what would you advise
Aimee to do?

 A. Aimee can amend the joint return to married filing separately.wrong

 B. Aimee can file a request for injured spouse relief.correct
 C. Aimee can file a request for an appeal.
 D. Aimee can file a request for innocent spouse relief.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for B:

Aimee is likely eligible for injured spouse relief (not innocent spouse relief), and she
does not need to wait to request the relief. She can request her portion of the refund by
filing Form 8379, Injured Spouse Allocation. The form can be filed with a couple’s joint
tax return or by itself when a taxpayer is notified of an offset of a debt. To be considered
an injured spouse, a taxpayer must have made and reported tax payments, such as
 federal income tax withheld from wages or estimated tax payments, or claimed a
refundable tax credit. To learn more about Injured Spouse Relief, see the IRS FAQ
page.

22. Question ID: 94849714 (Topic: Basis of Assets - General)

Floris purchased her first home this year. Which of the following costs would be added
to the basis of the home?

 A. Legal fees for the title search and preparation of the sales contract and deed.correct
 B. Fire insurance premiums.wrong
 C. Cost of a credit report.
 D. Rental costs for occupying the home before closing.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for A:

A taxpayer can include in a home's basis the settlement fees and closing costs paid for
buying the home. The following are some of the settlement fees and closing costs that
can be included in the original basis of a taxpayer's home.

 Abstract fees (abstract of title fees).

 Charges for installing utility services.
 Legal fees (including fees for the title search and preparation of the sales
contract and deed).
 Recording fees and land surveys.
 Transfer or stamp taxes.
 Owner's title insurance.
 Any amount the seller owes that the buyer agrees to pay, such as back taxes or
interest, recording or mortgage fees, cost for improvements or repairs, and sales
commissions.
These items are NOT added to a home's basis and are also not deductible:

 Fire insurance premiums.

 Charges for using utilities or other services related to occupancy of the home
before closing.
 Rent for occupying the home before closing.
 Charges connected with getting or refinancing a mortgage loan, such as: Loan
assumption fees, Cost of a credit report, and Fee for an appraisal required by a
lender.
See Publication 530, Tax Information for Homeowners, for more information.
 24. Question ID: 94815897 (Topic: Health Savings Accounts)
A health savings account (HSA) is a tax-favored medical savings account available to
taxpayers. HSAs enable taxpayers to pay for current medical expenses and save for
future qualified medical expenses on a tax-free basis. Contributions to an HSA may be
made by ______________.

 A. Only by the employer.wrong

 B. Only by the taxpayer or the taxpayer's spouse.
 C. Only by the taxpayer.
 D. By the taxpayer, the taxpayer's employer or any other person.correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for D:

HSAs are owned by individuals, but contributions may be made by an employer or any
other person. Amounts in an HSA may be accumulated over the years or distributed on
a tax-free basis to pay for or reimburse qualified medical expenses.

26. Question ID: 94815926 (Topic: Residency Status and/or Citizenship)

Mai-Lin is a citizen of China and classifies as a nonresident alien for U.S. tax purposes.
Which of the following income would not have to be reported on Mai-Lin's Form 1040-
NR?

 A. Passive income from a U.S. partnership interest.

 B. Income from foreign sourcescorrect
 C. Rental income earned from U.S. rental properties.wrong
 D. Prize winnings from a U.S. lottery ticket.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Correct Answer Explanation for B:

Mai-Lin does not have to report income from foreign sources on her Form 1040-NR.
Nonresident Aliens use Form 1040NR to report only income that is sourced in the
United States, or that is effectively connected with a United States activity or business.
However, income that is not taxable because of an income tax treaty must be reported
on a U.S. income tax return, even if no tax is due.

27. Question ID: 94815955 (Topic: Taxpayer Personal Information)

The issuance of an ITIN does not:
 A. Create a presumption regarding the individual's immigration status.
 B. Entitle the recipient to Social Security benefits or the Earned Income Tax
Credit.wrong
 C. Give the individual the right to work in the United States.
 D. All of the above.correct
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

An ITIN is used for IRS reporting purposes only and does not entitle the taxpayer to the
Earned Income Tax Credit or to Social Security benefits. An ITIN also does not create a
presumption about the taxpayer’s immigration or work status. The Individual Taxpayer
Identification Number (ITIN) is a tax processing number the IRS issues to people who
cannot get a social security number so they can comply with U.S. tax laws. To learn
more about ITINs, see the dedicated IRS page about Individual Taxpayer Identification
Numbers.

28. Question ID: 94849850 (Topic: Charitable Contributions)

During a fundraising auction at his local church, Lyle pays $800 for a week at a
beachfront hotel, where he spends his vacation in August. He intends his payment as a
contribution, and all the proceeds go to help the church. The FMV of the stay is $750.
What is Lyle’s charitable contribution?

 A. $0
 B. $50correct
 C. $800wrong
 D. $750
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for B:

Lyle can deduct only $50 because he received the benefit of staying at the property.
Only the portion of the contribution in excess of the FMV of the item qualifies as a
charitable contribution.

31. Question ID: 94849523 (Topic: Fringe Benefits)

Heather works at Happy Doughnuts, Inc. Her company is very concerned about
employee morale. In order to increase morale, Happy Doughnuts gives all its
employees free soda and coffee during their shifts. They also give Heather small bags
 of candy at holidays, and send her flowers on her birthday. She also occasionally
receives $20 gift cards to local stores as a reward for good work. What is the tax status
of these benefits?

 A. The gift cards are taxable to Heather, but none of the other benefits are.correct
 B. All of the benefits are taxable to Heather.
 C. Heather must report the value of the soda as taxable income if she drinks more
than $25 worth during the year.wrong
 D. None of the benefits are taxable to Heather, because they are all de minimis.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for A:

The gift cards are taxable because they are considered a cash benefit. The rest are
considered de minimis benefits and are nontaxable to Heather. To learn more about
nontaxable and taxable fringe benefits, see the IRS detail page on De Minimis Fringe
Benefits.

32. Question ID: 94849980 (Topic: Standard Deduction)

Lanie and Donald are married and file jointly. On April 1, 2024, Lanie dies. Donald is
62, and Lanie was 64 when she died. Lanie would have turned 65 in 2024, but she did
not live until her birthday, which would have been September 1, 2024. Donald plans to
file jointly with his deceased wife. What is the standard deduction that Donald can take
on his 2024 return?

 A. $29,200correct
 B. $14,600
 C. $31,050
 D. $30,700wrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 81% of students.

Correct Answer Explanation for A:

Donald can claim a standard deduction of $29,200 in 2024, which is the normal
standard deduction for taxpayers who are Married Filing Jointly. He cannot claim an
additional standard deduction amount for Lanie, because she did not turn 65 (she did
not make it to her 65th birthday). The standard deduction amounts for 2024 are:

Filing Status 2024 Standard Deduction

 Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
The "additional" standard deduction: If you're at least 65 years old or blind, you can
claim an additional 2024 standard deduction of $1,550 ($1,950 if using the single or
HOH filing status). If you're both 65 and blind, the additional deduction amount is
doubled. To review more information on the standard deduction, see IRS Topic No. 551
Standard Deduction.

33. Question ID: 94850008 (Topic: Education Credits)

Regarding qualified education expenses for education credits, which of the following is
NOT a qualifying expense for the AOTC or the Lifetime Learning Credit?

 A. Private college tuition.

 B. On-campus room and board in a college dormitory.correct
 C. Required course books.wrong
 D. Tuition at a qualifying adult vocational school.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for B:

Only certain expenses qualify for education credits. Qualified expenses include:
amounts paid for tuition, fees and other related expenses for an eligible student that are
required for enrollment or attendance at an eligible educational institution. Even if you
pay the following expenses to enroll or attend the school, the following are NOT
qualified education expenses:

 Room and board (even on-campus).

 Insurance.
 Medical expenses (including student health fees).
 Transportation Similar personal, living or family expenses.
35. Question ID: 94849630 (Topic: Other Income Items)
A customer at a casino left a $10 poker chip as a tip for Maurice, who is a hotel
employee. He did not have any other tip income for the month. What is Maurice’s
reporting requirement for this tip?

 A. The tip is a gift, and therefore not taxable income.wrong

 B. Maurice should report this tip income to his employer, and it will be taxed as wages
on his Form W-2.
 C. Maurice must report the tip income on his return at its fair market value, which would
be $10.correct
 D. The poker chip is not legal tender, and is therefore not taxable.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for C:

Although the tip was not paid in cash, it is still taxable at its fair market value, which
would be $10. The tip is not reportable to Maurice’s employer, since he earned less
than $20 of tip income during the month. He should report the tip income on his return.
It is subject to regular income tax, but it is exempt from Social Security and Medicare
taxes.

36. Question ID: 94850138 (Topic: Net Investment Income Tax)

Which of the following taxpayers would NOT be subject to the net investment income
tax (the NIIT)?

 A. An estate of a deceased U.S. citizen.

 B. An individual taxpayer with investment income.wrong
 C. A nonresident alien.correct
 D. An irrevocable trust.
Study Unit 14: The ACA and the Premium Tax Credit covers the information for this
question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for C:

Nonresident aliens are not subject to the net investment income tax. The NIIT applies at
a rate of 3.8% to certain net investment income of individuals, estates and trusts that
have income above the statutory threshold amounts. For more information, see IRS
Topic No. 559 Net Investment Income Tax.

37. Question ID: 94850169 (Topic: Tax-Free Education Assistance (including

Coverdell))
Which of the following statements is not correct about a Coverdell education savings
account (ESA)?

 A. Contributions to a Coverdell ESA are deductible.correct

 B. A Coverdell ESA is a custodial account set up to pay qualified education
expenses for a designated beneficiary.wrong
 C. Total annual contributions to a beneficiary’s account cannot exceed $2,000 per year.
 D. The beneficiary of an ESA can receive distributions to pay qualified education
expenses. The distributions are tax-free if the amount does not exceed the beneficiary’s
adjusted qualified education expenses.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

Correct Answer Explanation for A:

Contributions to a Coverdell ESA are not deductible. An ESA is a trust or custodial

account set up to pay qualified education expenses for a designated beneficiary who
must be under age 18 or a special needs beneficiary when the account is first
established. Qualified education expenses are those required for the enrollment or
attendance of the beneficiary at an eligible educational institution, which may include
either qualified higher education expenses or qualified elementary and secondary
education expenses. For more information, see IRS Topic No. 310 Coverdell Education
Savings Accounts.

38. Question ID: 95092425 (Topic: Tax on Household Employees)

During the tax year, Lillian earned $2,100 providing occasional childcare, cleaning, and
cooking services for a household. Her employer did not withhold federal income taxes
from her wages, and did not issue a Form W-2 for her. He simply paid her in cash. What
should Lillian do?

 A. Lillian and her employer all owe Social Security and Medicare tax on all of her
wages.wrong
 B. The income is not taxable to Lillian.
 C. Her employer is not required to issue her a W-2, but Lillian must report all her income
on Form 1040.correct
 D. Lillian needs to request a Form W-2 from her employer.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for C:

This is a question about household employees. Lillian's employer is not required to

issue her a W-2, but Lillian must report all her income on Form 1040. Generally, an
employer is not required to provide Form W-2 to a household employee who earns less
than the threshold amount for the year (the household employee wage base is $2,700
or more in cash wages in 2024). In this situation, neither the employer nor the employee
will owe Social Security or Medicare tax on those wages. Regardless of whether Form
W-2 is issued, the income must be included on Lillian's Form 1040. (Question modified
from an example in the IRS official VITA training module).
 For more information on household employees, see Publication 926, Household
Employer's Tax Guide.

39. Question ID: 94815900 (Topic: Dividend and Distribution Income)

Kokona receives a Form 1099-DIV reporting a dividend payment. She is a U.S. citizen,
however, she had failed to provide her correct Social Security number to the brokerage
firm that manages her investments. She ignores all of the notices that the brokerage
firm sends to her, and eventually they began to withhold taxes from her dividends.
What percentage of income is likely to be withheld from her dividend income?

 A. 28%
 B. 35%wrong
 C. 24%correct
 D. 0%
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for C:

Backup withholding occurs when certain payers, such as banks or other businesses,
are required to withhold and pay to the IRS a specified percentage of those payments.
The backup withholding rate for U.S. citizens and U.S. residents is 24% in 2024.
Backup withholding can apply to most kinds of payments that are reported on Form
1099. These include:

 Interest payments
 Dividends
 Rents, profits, other gains (Form 1099-MISC)
 Commissions, fees, or other payments for work done by independent contractors
 Payments by brokers/barter exchanges
 Royalty payments
Backup withholding applies in a number of instances, including when a payee fails to
furnish her correct taxpayer identification number or when the IRS notifies a payer to
start withholding on interest or dividends because the taxpayer has underreported them.
See the IRS detail page on Backup Withholding.

41. Question ID: 94849825 (Topic: Education Credits)

Eudora is age 27 and a full-time student in her sophomore year of college. During the
year, Eudora paid $3,000 for tuition, $200 for required books, and $5,000 for room and
board at her university. She is a degree candidate. To assist with these costs, she was
awarded a $2,000 scholarship and a $4,000 student loan. She used the scholarship to
offset her tuition costs. She is not required to pay the student loan until she graduates.
What are her qualified education expenses for the year?
 A. $1,200correct
 B. $8,000
 C. $3,200wrong
 D. $8,200
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

For purposes of the education credit, Eudora must first subtract the tax-free scholarship
from her tuition and books. The $5,000 paid for room and board is not a qualifying
expense. Unlike the scholarship, the student loan is not considered tax-free educational
assistance, so it does not reduce the qualified expenses. Eudora is treated as having
paid $1,200 of qualified expenses ([$3,000 tuition + $200 books] – $2,000 scholarship).

42. Question ID: 94849853 (Topic: Interest Expense)

Kendra and Richard are married and file jointly. During the year, they paid the following
amounts related to their main home:

 $4,280 home mortgage interest that was reported on Form 1098

 $40 late fee for paying the mortgage late one month
 $600 in credit card interest. They used the credit card to pay for a new roof on
their home.
 $1,500 paid for hazard insurance on the property
 $1,700 in property taxes on the home
 $450 in appraisal fees
How much can they report as deductible mortgage interest on Schedule A?

 A. $6,520wrong
 B. $7,970
 C. $4,320correct
 D. $4,280
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 73% of students.

Correct Answer Explanation for C:

They can deduct $4,320 as mortgage interest ($4,280 + $40 late fee) on Schedule A.
The property tax is deductible, but not as mortgage interest. Instead, it would be
 deductible as taxes, and subject to the SALT cap. The other choices would not be
deductible on Schedule A.

43. Question ID: 94850283 (Topic: The Estate Tax)

Franklin is the executor of his late mother's estate. An estate tax return must be filed,
because his mother's estate was valued at $16 million at the time of her death. His
mother died on February 13, 2024. When is the Form 706 due for the estate?

 A. November 13, 2024correct

 B. August 13, 2024
 C. February 13, 2024
 D. December 13, 2024wrong
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 72% of students.

Correct Answer Explanation for A:

If a decedent's date of death is February 13, the due date to file Form 706 is November
13 (9 months later).The due date of the estate tax return is nine months after the
decedent's date of death, however, the estate's representative may request an
extension of time to file the return for up to six months. An automatic six-month
extension of time to file the return is available to all estates, including those filing solely
to elect portability.

For more information about estate tax return due dates, see Publication 559, Survivors,
Executors and Administrators.

44. Question ID: 758501781 (Topic: Taxation of Court Awards and Damages)
Aahana was injured in a car accident where she was not at fault. She suffered serious
physical injuries. She received a monetary settlement from the other driver’s insurance
for her injuries, totaling $550,000. She settled out of court, with the help of an attorney.
She also received $5,500 in interest on the award. How much of this legal settlement, (if
any) is taxable to Aahana?

 A. $5,500 is taxable as interestcorrect

 B. $550,000 is taxable
 C. The entire $550,000 court award as well as $5,500 in interest is taxablewrong
 D. None of the award is taxable, because it is related to her physical injury
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Incorrect Answer Explanation for C:

 The $550,000 settlement is nontaxable because it is settlement payment for her
physical injuries. The $5,500 interest on the award is taxable.

Note: Compensatory damages for personal physical injury or physical sickness are not
taxable, whether they are from a legal settlement or an actual court award. Interest
payments as well as any punitive damages awarded by a court are always taxable.

Correct Answer Explanation for A:

The $550,000 settlement is nontaxable because it is settlement payment for her

physical injuries. The $5,500 interest on the award is taxable.

Note: Compensatory damages for personal physical injury or physical sickness are not
taxable, whether they are from a legal settlement or an actual court award. Interest
payments as well as any punitive damages awarded by a court are always taxable.

Show Other Explanations

45. Question ID: 95421216 (Topic: The Estate Tax)

Jack Glenn died three years ago, and his estate has been going through its period of
administration. The Glenn Estate has a net operating loss for the year. The final estate
income tax return will be filed in 2024. Which of the following statements is true?

 A. The loss may be carried forward, even if the estate terminates.

 B. The loss may be passed to the beneficiaries, because it is a termination year.correct
 C. The loss may not be passed to the beneficiaries.wrong
 D. The loss can be claimed by the executor.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 50% of students.

Correct Answer Explanation for B:

Estates filing Form 1041 may have net operating losses. In the case of an estate, any
net operating loss carryover remaining when the estate is terminated is allowed to the
beneficiaries who succeed to the estate’s property. Losses are only permitted to be
passed to the beneficiaries in the year of termination. For more information, see the
Instructions for Form 1041, U.S. Income Tax Return for Estates and Trusts.

46. Question ID: 94816028 (Topic: Qualifications for Dependency)

A taxpayer cannot claim a person as a dependent unless:

 A. That person must be related to the taxpayer by blood or marriage.

 B. That person is a qualifying child or qualifying relative.
correct
 C. That person is under age 19, or under age 24 and a full-time student.
 D. That person lives with you all year long.wrong
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for B:

A taxpayer cannot claim a person as a dependent unless that person is a qualifying

child or qualifying relative. You can see the rules for claiming a dependent
here: Overview of the Rules for Claiming a Dependent

48. Question ID: 94849955 (Topic: Adoption Credits)

To claim the adoption credit, the taxpayer must file which form along with their tax
return?

 A. Form 8308
 B. Form 8839correct
 C. Form 8275
 D. Form 8826wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for B:

To claim the adoption credit, the taxpayer must file Form 8839, Qualified Adoption
Expenses, along with their tax return.

49. Question ID: 95850159 (Topic: Basis of Gifted Assets)

In general, what is the basis of property received as a gift?

 A. The original cost basis of the property, without any adjustments.

 B. The adjusted basis of the property just before the donor made the gift.correct
 C. The fair market value (FMV) at the time of the gift.wrong
 D. The basis of gifted property is usually zero.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 51% of students.

Incorrect Answer Explanation for C:

The basis of property received as a gift is generally the donor's adjusted basis just
before making the gift. This is known as a "transferred basis."
 Correct Answer Explanation for B:

The basis of property received as a gift is generally the donor's adjusted basis just
before making the gift. This is known as a "transferred basis."

Show Other Explanations

50. Question ID: 94849983 (Topic: Standard Deduction)

Olga is 61 and unmarried. She will file as single. She is a U.S. citizen with a valid SSN.
She is also blind. What is her standard deduction in 2024?

 A. $14,600wrong
 B. $16,550correct
 C. $13,000
 D. $14,700
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for B:

Olga can claim a standard deduction of $16,550 in 2024, ($14,600 + $1,950) which is
the standard deduction for taxpayers who are single, plus an additional standard
deduction amount for taxpayers who are 65 and older/or blind. The standard deduction
amounts for 2024 are:

Filing Status 2024 Standard Deduction

Single; MFS $14,600
MFJ; QSS $29,200
Head of Household $21,900
The "additional" standard deduction: For taxpayers who are 65 years old or blind,
they can claim an "additional" 2024 standard deduction of $1,550 ($1,950 if using the
single or HOH filing status). To review more information on the standard deduction, see
IRS Topic No. 551 Standard Deduction.

51. Question ID: 98939103 (Topic: Taxable Recoveries)

A federal tax refund is a type of recovery, but it is never taxable. Why are federal
income tax refunds (IRS tax refunds) never included in a taxpayer's income?

 A. Because they are reported on Schedule B.wrong

 B. Because they are considered gifts from the government.
 C. Because they are reported on Schedule A.
 D. Because they are never allowed as a deduction.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Incorrect Answer Explanation for A:

Federal income tax refunds (i.e., IRS tax refunds) are not included in a taxpayer's
income because they are never allowed as a deduction.

Correct Answer Explanation for D:

Federal income tax refunds (i.e., IRS tax refunds) are not included in a taxpayer's
income because they are never allowed as a deduction.

Show Other Explanations

52. Question ID: 94849602 (Topic: Taxable Government Benefits)

Trina cares for her disabled son in her home. She receives Qualified Medicaid waiver
payments from the government totaling $17,000 during the year. She received a Form
1099-NEC reporting these payments as non-employee compensation. She does not
care for anyone else, other than her son, and does not have any other employment.
How should these amounts be reported on Trina's tax return?

 A. She should report the amounts as "other income" on Form 1040.

 B. She should report the amounts as royalty payments on Schedule E. wrong
 C. She should report the amounts on Schedule C and deduct any related business
expenses.
 D. The amounts are not taxable. In order to offset the income that was reported to her
on 1099-NEC, Trina should report the amount of those payments as income on
Schedule C and also report the excludable amount as a Schedule C expense.correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 65% of students.

Correct Answer Explanation for D:

The amounts are not taxable. Qualified Medicaid waiver payments are treated as
"difficulty of care" payments and are excludable from gross income. These are
payments generally issued by the state.

If the taxpayer received Qualified Medicaid waiver payments as described in IRS Notice
2014-7, they may receive a Form 1099-MISC, 1099-NEC, or even a Form W-2 reporting
the payments as non-employee compensation.
 IRS Notice 2014-7 addresses the income tax treatment of certain payments to an
individual care provider under a state Home and Community-Based Services Waiver
(Medicaid waiver) program. The notice provides that "qualified Medicaid waiver
payments" as difficulty-of-care payments are excludable from gross income. If the
taxpayer chooses to exclude the payments received from gross income, the IRS
suggests reporting the amount of those payments as income on Schedule C and also
report the excludable amount as a Schedule C expense (this question is based on an
example in the IRS' VITA courseware). Most software programs now have an override
to ease reporting for this type of income.

54. Question ID: 94850111 (Topic: Qualifications for Dependency)

Cecily is in the process of adopting an infant boy. She qualifies to claim the child as a
dependent, but she cannot obtain a Social Security number for him yet. If you were
preparing Cecily’s income tax return, what would you advise her to do?

 A. Not claim the child until the adoption is final.

 B. File a tax return on paper and write “adopted” in the line for the SSN.wrong
 C. Apply for an ATIN in order to claim the child.correct
 D. Wait until a valid Social Security number is issued in order to claim the child.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for C:

Cecily can request an ATIN and claim the child. An ATIN is an adoption taxpayer
identification number, issued by the IRS as a temporary taxpayer identification number
for the child in a domestic adoption when a taxpayer is unable to obtain the child’s
Social Security number. An adopting taxpayer can use the ATIN on her tax return to
identify the child while final domestic adoption is pending.

56. Question ID: 94850142 (Topic: Tax on Household Employees)

Kerry pays an in-home senior caregiver to take care of his disabled mother in his home
while he is working. In 2024, at what threshold is Kerry required to pay employment
taxes on the wages that he pays to the caregiver?

 A. $13,850 in wages.
 B. Any amount of wages. wrong
 C. $2,700 in wages.correct
 D. $4,700 in wages.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for C:

 If a household employee (like a housekeeper, nanny, or an in-home caregiver), earn
$2,700 or more in cash wages in 2024, Social Security and Medicare taxes must be
paid by the family and the employee. These taxes are commonly referred to as “nanny
taxes". If the amount of wages paid to an employee during the year is less than this
threshold, no Social Security or Medicare taxes are owed, but the income is still taxable
to the household employee. Schedule H is used by the employer to report household
employment taxes. See IRS Tax Topic 756, Employment Taxes for Household
Employees.

57. Question ID: 94850172 (Topic: Filing Requirements and Due Date)
A Form 1040X based on a loss from a worthless security generally must be filed within
_______ after the due date of the return for the tax year in which the security became
worthless (in order for the taxpayer to receive a refund).

 A. 5 years.
 B. 7 years.correct
 C. 3 years.wrong
 D. 10 years.
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for B:

A Form 1040X based on a loss from a bad debt or worthless security generally must be
filed within SEVEN years after the due date of the return for the tax year in which the
debt or security became worthless. This is an exception to the normal "three-year" rule.
For more information, see the Instructions for Form 1040X as well as IRS Topic No. 308
Amended Returns.

58. Question ID: 94815871 (Topic: Health Savings Accounts)

Barbara incurred $2,000 of unreimbursed qualified medical expenses when she bought
a pair of prescription eyeglasses and contact lenses. She received a $1,900 distribution
from her HSA to pay for these medical expenses. What amount of Barbara’s HSA
distribution is taxable?

 A. $1,900wrong
 B. $2,000
 C. $0correct
 D. $100
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

 Correct Answer Explanation for C:

Her HSA distribution is not taxable. If an HSA distribution is for qualified medical
expenses, it is tax-free. If the distribution is more than the amount of qualified expenses,
the difference is then taxable income. Since Barbara spent more on the eyeglasses and
contact lenses than she actually withdrew from her HSA, then none of the distribution is
taxable. See Publication 969, Health Savings Accounts, for more information.

59. Question ID: 94815903 (Topic: Qualifications for Dependency)

Benedict is unmarried and lives alone. His mother, Rosalie, only received $5,600 of
Supplemental Security Income (SSI) and $100 of taxable interest income during the
year. Rosalie paid $4,000 for her utilities and other living expenses and also paid $400
for recreation to attend painting classes. Rosalie also put $1,300 in a savings account.
Benedict spent $5,800 of his own money on his mother’s support, which paid her rent at
a small studio apartment for the entire year. Benedict and his mother did not live
together. Which of the following statements is correct?

 A. Benedict can claim his mother as a dependent, but he cannot file as head of
household.wrong
 B. Benedict can claim his mother as a dependent and also file as head of
household.correct
 C. Benedict cannot claim his mother as a dependent, but he can file as head of
household.
 D. Benedict cannot claim his mother as a dependent, and he cannot file as head of
household.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

Benedict can claim his mother as a dependent, and he can also file as head of
household. Even though his mother received a total of $5,700 ($5,600 + $100), she
spent only $4,400 ($4,000 + $400) for her own support. The rules for the determination
of a qualifying relative includes an income test. In general, family members must have
gross income that is less than $5,050 in 2024. However, Supplemental Security Income
(SSI) is tax-exempt, so those amounts aren’t included in the family members’ gross
income. Since Benedict paid more than half her support and no other outside support
was received, he has passed the support test to claim his mother. Also, Benedict paid
for all her rental expenses, so he paid more than half the cost of keeping up a home that
was the main home for the entire year for his parent. Therefore, Benedict is also eligible
to file as head of household.

60. Question ID: 95003697 (Topic: Cancellation of Debt Income)

Shane fell on hard times and stopped paying his mortgage in the prior year. His home
was later foreclosed. At the time of foreclosure, he owed a balance of $190,000 to the
 lender and the FMV of the property was $150,000 at the time of the foreclosure. For tax
purposes, the foreclosure is treated as a sale. Shane's mortgage loan was nonrecourse.
Based on this information, what would the "sale price" be for reporting this transaction?

 A. The sale price would be $0.wrong

 B. The sale price would be $150,000.
 C. The sale price would be $190,000.correct
 D. The sale price would be $40,000.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 30% of students.

Correct Answer Explanation for C:

Since Shane is not personally liable for the debt (a nonrecourse loan), the "selling price"
would be $190,000. Nonrecourse debt is satisfied by the surrender of the secured
property regardless of the FMV at the time of surrender, and the borrower is not
personally liable for the debt. If property that is subject to nonrecourse debt is
abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the
circumstances are treated as a sale of the property by the taxpayer. In determining the
gain or loss on the disposition of the property, the balance of the non-recourse debt at
the time of the disposition of the property is included in the amount realized (generally
the selling price). Since Shane is not personally liable for the debt, the difference
between the FMV of the property and the balance of the loan is not included in his gross
income (see detailed example in Publication 4491).

62. Question ID: 94850258 (Topic: The Estate Tax)

What is NOT an official duty of an executor with regards to a taxable estate?

 A. File all tax returns, including income, estate, and gift tax returns, when due.
 B. An executor must pay any and all debts that exceed the value of the estate.correct
 C. Pay the tax determined up to the date of discharge from duties.wrong
 D. Obtain an employer identification number (EIN) for the estate.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

The primary duties of a personal representative are to collect all the decedent's assets,
pay his or her creditors, and distribute the remaining assets to the heirs or other
beneficiaries. The personal representative also must perform the following duties:

 Apply for an employer identification number (EIN) for the estate.

  File all tax returns, including income, estate, and gift tax returns, when due.
 Pay the tax determined up to the date of discharge from duties.
An executor is NOT responsible for paying the decedent's tax out of pocket if there is no
money in the estate. In other words, an executor is not responsible for paying debts that
exceed the value of the estate. This includes tax debts. For more information, see
Publication 559, Survivors, Executors and Administrators.

63. Question ID: 94850286 (Topic: The Estate Tax)

The Saville Disability Trust is a qualified disability trust that has an annual filing
requirement. The trust has a fiscal year-end of June 30. When is the trust's income tax
return (Form 1041) due?

 A. October 15.correct
 B. May 15.
 C. November 15.wrong
 D. September 15.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for A:

Fiscal-year estates and trusts must file Form 1041 by the 15th day of the 4th month
following the close of the entity's tax year. In this example, the trust has a tax year that
ends on June 30, so the trustee must file Form 1041 by October 15.

64. Question ID: 758501784 (Topic: Taxation of Court Awards and Damages)
Which of the following statements is TRUE regarding the tax treatment of court awards
for lost wages or profits?

 A. They are not taxable, regardless of the nature of the underlying settlement
 B. Court awards for lost wages or profits are not taxable if received as a lump sum
 C. Court awards for lost wages or profits are generally taxable as ordinary
incomecorrect
 D. Court awards for lost wages or profits are not taxable if received as part of a
settlementwrong
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Incorrect Answer Explanation for D:

 Court awards for compensation for lost wages or profits are generally taxable as
ordinary income, regardless of how they are received. Interest payments and punitive
damages are also taxable, regardless of the origin of the claim.

Note: Only compensatory damages directly related to a personal physical injury or

physical sickness are not taxable, and this is true whether they are from a legal
settlement or an actual court award.

Correct Answer Explanation for C:

Court awards for compensation for lost wages or profits are generally taxable as
ordinary income, regardless of how they are received. Interest payments and punitive
damages are also taxable, regardless of the origin of the claim.

Note: Only compensatory damages directly related to a personal physical injury or

physical sickness are not taxable, and this is true whether they are from a legal
settlement or an actual court award.

Show Other Explanations

65. Question ID: 94816003 (Topic: Qualifications for Dependency)

Ginny and Arnold are U.S. citizens who live in Texas. They are married and file a joint
return. They financially supported Ginny's parents, Frank and Millie, throughout the tax
year. Ginny's parents are green card holders, and do not live with them. Instead, Frank
and Millie live in Canada. Frank and Millie do not have any taxable income. Do Ginny's
parents meet the tests in order to be claimed as dependents by Ginny and Arnold?

 A. Yes, her parents meet the tests. They may be claimed as qualifying relatives. correct
 B. No, her parents do not meet the tests. wrong
 C. Her parents would only meet the tests if they lived in the same household.
 D. Her parents do not meet the test because they live in Canada.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Correct Answer Explanation for A:

Ginny's parents meet the tests to be claimed as dependents. Parents can be claimed as
dependents, as long as the taxpayer satisfies all of the other dependency requirements
for parents, who would be considered “qualifying relatives.” A parent does not need to
live with the taxpayer in order to be claimed as a dependent, and since her parents are
green card holders, they are considered U.S. residents by default, and also have valid
Social Security Numbers.

66. Question ID: 94816031 (Topic: Qualifications for Dependency)

 With regard to children of divorced taxpayers, what is the most important factor for the
determination of which parent can claim a dependent?

 A. State tax law is what determines who may claim a child as a dependent.
 B. Federal tax law is what determines who may claim a child as a dependent.correct
 C. Official IRS publications determine who may claim a child as a
dependent.wrong
 D. The divorce decree is what determines who may claim a child as a dependent.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 31% of students.

Correct Answer Explanation for B:

Federal tax law is what determines who may claim a child as a dependent. Even if a
state court order or a divorce decree allocates the ability to claim the child to a
noncustodial parent, the noncustodial parent must comply with the federal tax law to
claim the dependent. The noncustodial parent must attach to his or her return a copy of
the release of claim to exemption by the custodial parent (Form
8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial
Parent).

67. Question ID: 94849930 (Topic: Earned Income Tax Credit)

Which of the following would make a taxpayer ineligible for the Earned Income Tax
Credit?

 A. Using the single filing status.

 B. Claiming the foreign earned income exclusion on Form 2555.correct
 C. Being married to a resident alien with a valid Social Security number.
 D. Filing a joint return with a spouse who died during the year.wrong
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

In order to qualify for the Earned Income Tax Credit, a taxpayer cannot file Form 2555
(which excludes foreign earned income). None of the other examples would preclude a
taxpayer from claiming the EITC. Answer A is incorrect because resident aliens (green
card holders) are generally taxed the same way as American citizens. Aliens are
considered residents for tax purposes if they are lawful permanent residents of the
United States at any time during the calendar year. Answer B is incorrect because the
single filing status does not disqualify a taxpayer from claiming the EITC. Answer D is
incorrect because taxpayers are allowed to file a joint return with a deceased spouse in
the year of death.
 68. Question ID: 95850136 (Topic: Medicare Waiver and Disability Payments)
Which type of payments can be excluded from a taxpayer’s gross income if they are for
in-home-care services provided to a disabled individual who resides in the same home?

 A. Medicare waiver paymentscorrect

 B. Unemployment compensation
 C. Vacation pay provided by an employer
 D. Sick paywrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 92% of students.

Incorrect Answer Explanation for D:

Medicare waiver payments can be excluded from income when used for in-home-care
services for a disabled individual residing in the same home.

Correct Answer Explanation for A:

Medicare waiver payments can be excluded from income when used for in-home-care
services for a disabled individual residing in the same home.

Show Other Explanations

69. Question ID: 94849958 (Topic: Other Itemized Deductions)

Which of the following investment expenses is still allowable in 2024 as an itemized
deduction on Schedule A?

 A. The cost of a safe deposit box in a bank

 B. Investment interest expensecorrect
 C. Legal fees to form a grantor trust to hold a primary residence
 D. Advisory fees paid to a financial plannerwrong
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for B:

The Tax Cuts and Jobs Act suspended certain “miscellaneous itemized deductions,”
which included investment fees and most investment expenses (i.e., tax prep fees,
advisory expenses, safe deposit box fees). However, investment interest expense is still
deductible. Investment interest expense is the interest paid on money borrowed to
purchase taxable investments.
 71. Question ID: 94849577 (Topic: Hobby Income)
Morty works full-time as a lifeguard. He is also a competitive surfer and has regularly
participated in surfing competitions for the past six years with the intent to earn prize
winnings. He has devoted significant time and effort to developing expertise in surfing,
and he keeps good records that track his income and expenses associated with the
surfing competitions. Morty has not yet earned a profit through the surfing competitions.
As his tax preparer, what would you advise Morty?

 A. Morty can choose to forego claiming the income and the expenses, since the activity
is just a hobby.
 B. The surfing competitions constitute a business activity, so he can report his income
and deduct his expenses on Schedule C.
 C. Morty does not have to claim any of the surfing competition income, but he is
allowed to capitalize the expenses to a future year, for when he starts to make a
profit. wrong
 D. Morty is likely engaging in a hobby. His hobby-related expenses are not deductible,
but his hobby income is taxable. correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for D:

The IRS is likely to determine that Morty is engaging in a hobby and the surfing
competitions are not a true business activity engaged in for profit. Although he
maintains adequate records and enters surf competitions with the intent to earn money,
he continues to enter competitions despite sustaining losses over several years,
suggesting the lack of a true profit motive. A hobby is an activity typically undertaken
primarily for pleasure. The IRS presumes that an activity is “carried on for a profit” if it
makes a profit during at least three of the last five tax years, including the current year.
Income from a hobby is taxable and reported on Form 1040 as “other income”.
Expenses related to a hobby activity are no longer deductible due to changes
implemented by the Tax Cuts and Jobs Act.

See the IRS detail page on how to distinguish between a business and a hobby.

72. Question ID: 94849605 (Topic: Involuntary Conversions)

Ingram purchased a diamond ring at an estate sale for $1,500. Later, he had the ring
appraised and discovered it was a rare antique worth $45,000. He insured the ring for
$30,000. The ring was stolen a year later during a robbery. His homeowner’s insurance
company reimbursed Ingram for $30,000 of his theft loss. How would Ingram report this
transaction on his tax return?

 A. $28,500 taxable gain.correct

 B. $15,000 capital loss.
 C. $13,500 taxable gain.
 D. $1,500 capital loss.wrong
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for A:

Ingram must report a $28,500 taxable gain, equal to the amount by which the insurance
reimbursement exceeded his basis in the ring ($30,000 - $1,500 = $28,500).

75. Question ID: 94850114 (Topic: Other Basis Topics)

Harry and Melanie are married. They live in a community property state (Texas). They
lived together all year. Harry has $2,000 per month in retirement pay, which is
considered to be community income. Harry also owns a rental (his name is on the deed,
but his wife's name is not). The rental produces $600 a month in net income. Melanie
does not have a job and does not work. Melanie and Harry decide to file separate tax
returns. How much is considered to be community income and reportable on Melanie's
separate return?

 A. $0, retirement pay and rental income is exempt from community property
rules. wrong
 B. $1,300 per month.correct
 C. $1,000 per month.
 D. $2,000 per month.
This question is answered correctly on the first attempt by 47% of students.

Correct Answer Explanation for B:

If Melanie and Harry decide to file separate tax returns, and they live in a community
property state, then one-half of the income would be treated as earned by Melanie. So
$1,300 a month would be her portion of the community income (one-half the pension
income and one-half of the rental income).

Note: Community property rules are complex and can vary from state to state. This
question is based directly on an example in Publication 555, Community Property.
According to Publication 555, in Idaho, Louisiana, Texas, and Wisconsin, income from
most separate property is treated as community income. Couples can also choose to
have a legal agreement that provides that no community property will be created during
the marriage (such as a Prenuptial Agreement between the spouses).

77. Question ID: 94815845 (Topic: Alimony Paid)

Karina and Herbert legally divorced in 2017. Under the terms of their divorce
agreement, Herbert must pay Karina $22,000 of alimony per year, which he pays in
 equal installments each month. He is also required to pay her ongoing medical
expenses. In the current year, Karina’s medical expenses were $19,500. Herbert paid
$14,500 of the medical expenses directly to the hospital. He gave the other $5,000
directly to Karina after getting a copy of the doctor’s bill. How much can Herbert deduct
for alimony in the CURRENT tax year?

 A. Herbert can claim $22,000 of alimony paid as an adjustment to income, and

$14,500 as a medical expense on Schedule A.wrong
 B. Herbert can claim $41,500 of alimony paid as an adjustment to income on his Form
1040.correct
 C. Herbert can claim $41,500 of alimony paid as a deduction on Schedule A.
 D. Herbert can claim $36,500 of alimony paid as an adjustment to income on his Form
1040.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 54% of students.

Correct Answer Explanation for B:

Herbert can claim $41,500 of alimony paid as an adjustment to income on his Form
1040, the total of the medical expenses and the regular alimony paid ($22,000 +
$19,500). He can deduct the full amount because it is required by the divorce
agreement. Alimony paid is an adjustment to income, and is claimed on Form 1040. A
taxpayer does not need to itemize deductions in order to claim an adjustment for
alimony paid. Alimony is a payment to or for a spouse or former spouse under a divorce
or separation agreement. Alimony does not include voluntary payments that are not
made under a divorce or separation decree. Payments to a third party (such as the
payment directly to the hospital) on behalf of an ex-spouse under the terms of a divorce
or separation agreement can qualify as alimony. These include payments for an ex-
spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, and tuition. The
payments are treated as received by the spouse and then paid to the third party.

Note: Under the TCJA, an individual whose divorce was finalized in 2019 (or any
subsequent tax year) will no longer be able to deduct alimony payments. However, any
divorce decree that was finalized before 2019 (so, 2018 or earlier) is considered
“grandfathered” which means that those alimony payments remain deductible to the
payor and taxable to the payee.

80. Question ID: 94849743 (Topic: Retirement Income)

Olaf is age 39 and has a traditional IRA. During the year, he contributed the maximum
amount of $7,000 to his IRA account. He later forgets about this contribution and
contributes an additional $2,000 to his IRA by mistake. What are the consequences of
this action?

 A. A 6% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.correct
 B. A 50% excise tax applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.
 C. A 10% penalty applies on the excess amount for each year in which Olaf does
not withdraw the excess contribution.wrong
 D. A 100% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

A 6% penalty applies on the excess amount for each year in which Olaf does not
withdraw the excess contribution. Generally, a taxpayer can avoid the 6% penalty if the
taxpayer withdraws the extra contribution and any earnings before the tax deadline.

83. Question ID: 94815978 (Topic: Taxpayer Personal Information)

What is IRS Form W-7 used for?

 A. It is used to report contractor payments.

 B. It is used to report backup withholding.
 C. It is used to apply for an ITIN.correct
 D. It is used to report employee withholding.wrong
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for C:

A W-7 Form is used to apply for an individual taxpayer identification number, or ITIN, for
non-citizens who aren't eligible to receive a Social Security number, but need to file a
federal tax return.

85. Question ID: 95850139 (Topic: Medicare Waiver and Disability Payments)
Which type of disability-related payments are generally not taxable at all?

 A. Retirement benefits
 B. Social Security benefits
 C. Worker's compensationcorrect
 D. Unemployment compensationwrong
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

 Incorrect Answer Explanation for D:

Workers' compensation provides cash benefits or medical care for workers who suffer
an injury due to their workplace. Worker’s compensation specifically pays workers who
are injured on the job. It is always exempt from tax.

Correct Answer Explanation for C:

Workers' compensation provides cash benefits or medical care for workers who suffer
an injury due to their workplace. Worker’s compensation specifically pays workers who
are injured on the job. It is always exempt from tax.

Show Other Explanations

86. Question ID: 94850351 (Topic: Hobby Income)

Which of the following activities would be classified as a hobby activity (rather than a
business)?

 A. A rental activity that is profitable but one in which the taxpayer does not materially
participate.
 B. A business activity that is carried on to make a profit but incurs losses for
multiple years. wrong
 C. A new business activity that incurs a net operating loss in the current year.
 D. An activity that is carried on primarily for pleasure and recreation and occasionally
turns a profit. correct
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 91% of students.

Correct Answer Explanation for D:

An activity must have a profit motive in order to be considered a business. A key

feature of a business is that people do it to make a profit. People engage in a hobby for
sport or recreation, not to make a profit. See the IRS detail page on hobby activities for
more information.

87. Question ID: EA1 S2 IA SET1 (Topic: Self-Employment Tax Deductions)

Which of the following types of income would likely be subject to self-employment tax?

 A. Wages earned by a statutory employee.

 B. Traditional IRA distribution.

wrong
 C. Punitive damages from an employee harassment lawsuit.
 D. Income earned by a direct seller.
correct
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for D:

Income earned by a direct seller would be reported on Schedule C and subject to self
employment tax. Examples of direct sellers include distributors selling products or
services directly to consumers (such as Avon, Mary Kay, or Amway sellers). Traditional
IRA distributions and punitive damages would be subject to INCOME tax, but not self-
employment tax. Wages earned by a statutory employee would be subject to Social
Security and Medicare taxes, which would be withheld by the employer.

88. Question ID: 97515841 (Topic: Interest Expense)

Larry owns three homes. Two of them are vacation properties and he does not rent any
of them out. He has an AGI of $89,000 for the year. His primary residence is in Miami,
FL, where he works as a firefighter. He also owns a home in New Orleans and a condo
in Hawaii. He hasn't used the Hawaii condo this year, and it sat empty all year. He pays
the following amounts in property tax and mortgage interest on all three properties. All
of the mortgage debt is qualifying acquisition debt. He does not have any more itemized
deductions for the year. Based on the information below, how much can he deduct in
mortgage interest and property tax on his Schedule A?

Home Mortgage interest Property tax

Main home in Miami $14,000 $7,500
New Orleans home $11,000 $5,000
Hawaii condo $6,000 $4,900

 A. He can deduct $31,000 in mortgage interest and $10,000 in property tax. wrong
 B. He can deduct $25,000 in mortgage interest and $17,400 in property tax.
 C. He can deduct $14,000 in mortgage interest and $17,400 in property tax.
 D. He can deduct $25,000 in mortgage interest and $10,000 in property tax. correct
Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for D:

He can deduct $25,000 in mortgage interest and $10,000 in property tax. A taxpayer
can deduct mortgage interest on up to two personal homes on Schedule A. So the
 interest on the third home is disallowed. Property tax is not limited by the number of
homes, but it is limited by the SALT CAP, which is $10,000. The answer is calculated as
follows:

Home Mortgage interest Property tax

Main home in Miami $14,000 $7,500
New Orleans home $11,000 $5,000
Hawaii condo $6,000 NO $4,900
Allowable deduction $25,000 Limited to $10,000 by the SALT CAP
89. Question ID: 94849608 (Topic: Student Loan Interest Deduction)
Opal started college this year. She is pursuing a degree in English, and received a
generous $6,000 scholarship from a literary organization and used it to pay most of her
educational expenses for the year. These were her expenses for the year:

 College tuition: $4,000

 Required activity fees: $100
 Books and supplies: $500
 Room and board: $2,500
 Bus pass to get to school: $70
 Student Health Center fee: $150
What portion of her scholarship, if any, is taxable to her?

 A. $0wrong
 B. $1,400correct
 C. $2,000
 D. $1,900
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for B:

She has $1,400 in taxable income. The answer is figured as follows:

Tuition $4,000
Fees $100
Books and supplies $500
Qualifying educational $4,600
 expenses
Scholarship $6,000
Taxable amount $1,400
Scholarships that pay for qualified educational costs at eligible educational institutions
are not considered taxable income. The scholarship can offset his qualifying educational
expenses. The amounts for room and board, student health center fees, and
transportation (the bus pass) are not qualifying educational expenses. If any part of a
scholarship was used for room and board, travel, or personal living expenses, etc., that
portion is taxable. (This question is based on a prior-year EA exam question). To see
more information, see IRS Tax Topic 421, Scholarships, Fellowship Grants, and Other
Grants.

90. Question ID: 94850088 (Topic: Retirement Income)

Adrian, age 57, has two IRA accounts in different banks. He has a traditional IRA as
well as a Roth IRA. He earned $75,000 in wages during the year. Adrian contributed
$2,000 to his Roth IRA on December 8. He also wants to contribute to his traditional
IRA. What is the maximum he can contribute to a traditional IRA for 2024?

 A. $0
 B. $4,000
 C. $3,500wrong
 D. $6,000correct
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

The 2024 maximum for combined contributions to all types of IRAs is $8,000 for
taxpayers who are 50 or older. Since Adrian is 57, and has sufficient qualifying
compensation, he is allowed to contribute $6,000 to a traditional IRA in addition to the
$2,000 contributed to the Roth IRA, for a combined total of $8,000 for the year. To see
more details about contribution limits for IRAs, review the IRS page on Individual
Retirement Arrangements (IRAs).

91. Question ID: EA P1 933 (Topic: Cancellation of Debt Income)

Gary is having severe financial difficulties and his main home is being lost to
foreclosure. He owes the bank more than the house is currently worth. The bank sends
Gary a Form 1099-C reporting canceled debt from the foreclosure. Gary believes that
he can exclude this canceled debt from his income. What form would should he attach
to his individual return, in order to properly exclude the canceled debt?

 A. Form 2210
 B. Form 982correct
 C. Schedule Jwrong
 D. Form 843
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 83% of students.

Incorrect Answer Explanation for C:

Gary must attach Form 982 to his individual return. Qualified principal residence
indebtedness can be excluded from income in some circumstances. Form
982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to
determine the amount of discharged indebtedness that can be excluded from gross
income. This includes canceled debt from a main home.

Correct Answer Explanation for B:

Gary must attach Form 982 to his individual return. Qualified principal residence
indebtedness can be excluded from income in some circumstances. Form
982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to
determine the amount of discharged indebtedness that can be excluded from gross
income. This includes canceled debt from a main home.

Show Other Explanations

92. Question ID: 94815819 (Topic: Taxpayer Filing Status)

Which of the following is not a valid expense used to calculate whether a taxpayer is
paying more than half the cost of maintaining a home to qualify for the Head of
Household filing status?

 A. Home mortgage payment.

 B. Medical treatments paid for a dependent.correct
 C. Property taxes.wrong
 D. Food eaten in the home.
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for B:

To qualify for head of household filing status, a taxpayer must have paid more than half
the cost of maintaining a home. In making the calculation, valid expenses include rent,
mortgage payments, property taxes, utilities, home insurance, home repairs, and food
eaten in the home. Valid expenses do not include clothing, education, medical
treatment, vacations, life insurance, or transportation.
 94. Question ID: 94849750 (Topic: Interest Income)
Interest income is earned on all of the following except:

 A. Rental propertiescorrect
 B. Deposits in savings accounts
 C. U.S. Savings Bonds
 D. Deposits in credit union accountswrong
Study Unit 5: Investment Income and Expenses covers the information for this question.

This question is answered correctly on the first attempt by 84% of students.

Correct Answer Explanation for A:

Income earned from rental properties is classified as rental income, not interest income.

95. Question ID: 94850206 (Topic: The Estate Tax)

Angela's husband, Rolando, died during the year. His estate was worth $4 million, so an
estate tax return does not need to be filed. Angela is the executor of her late husband's
estate, and she has been advised by her financial advisor that she should elect
portability. What must she do?

 A. She must file the deceased taxpayer's final individual return (Form 1040), and elect
portability on Schedule 1.
 B. She must file a gift tax return (Form 709) and the return must be filed timely.
 C. She must file an estate income tax return (Form 1041) and elect
portability. wrong
 D. She must file an estate tax return (Form 706) and the return must be filed
timely.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 59% of students.

Correct Answer Explanation for D:

Angela must timely file a Form 706 in order to elect portability. The due date of the
estate tax return is nine months after the decedent's date of death, however, the
estate's representative may request an extension of time to file the return for up to six
months. The DSUE is an election, and can only be taken if an estate tax return is filed.
This is regardless of the estate's value. For more information, see Publication 559,
Survivors, Executors and Administrators.

96. Question ID: 94850236 (Topic: The Estate Tax)

 Individual taxpayers sometimes file for bankruptcy. At the commencement of a
bankruptcy case, a "bankruptcy estate" is created. Which form must a bankruptcy estate
use to report income and losses?

 A. Form 1040.
 B. Form 706.wrong
 C. Form 1041.correct
 D. Form 709.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 67% of students.

Correct Answer Explanation for C:

A bankruptcy estate uses Form 1041 to report income and loss. A court-appointed
trustee is responsible for filing the bankruptcy estate's tax returns. The debtor (the
taxpayer who filed for bankruptcy) remains responsible for filing his or her own
individual returns on Form 1040 and paying any income taxes that do not belong to the
bankruptcy estate. For more information about the filing requirements of a bankruptcy
estate, see IRS Publication 908, Bankruptcy Tax Guide.

97. Question ID: 94815981 (Topic: Residency Status and/or Citizenship)

Jacob is a U.S. citizen and his wife Malia is a nonresident alien and a citizen of France.
They lived together all year in France. They do not have any dependents. Malia has an
ITIN, but she does not want to file jointly with Jacob. She does not have any U.S.-
source income, and she does not want to be taxed on the income she earns in France.
Based on this information, which of the following statements is correct?

 A. Jacob must file jointly with his wife because she is a nonresident alien.
 B. Jacob is required to file jointly with his wife because she is automatically
treated as a resident for tax purposes.wrong
 C. Jacob can file as head of household using his wife, Malia as his qualifying person for
HOH.
 D. Jacob can use the married filing separately filing status.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 88% of students.

Correct Answer Explanation for D:

Jacob can use the married filing separately filing status. If they file jointly, they will both
have to report all their worldwide income and pay tax on it, regardless of where the
income was earned.
 100. Question ID: 95850114 (Topic: Special Filing Requirements)
Under which of the following scenarios will a taxpayer be required to file a tax return,
even if their gross income is below the filing threshold?

 A. The taxpayer receives only Social Security income.

 B. If they earned $400 or more from self-employment.correct
 C. The taxpayer is a full-time student who receives a scholarship.
 D. A dependent who has $100 of interest income.wrong
Study Unit 1: Preliminary Work with Taxpayer Data covers the information for this
question.

This question is answered correctly on the first attempt by 94% of students.

Incorrect Answer Explanation for D:

If a taxpayer earns $400 or more from self-employment, they are required to file a tax
return, even if their gross income is below the filing threshold.

Correct Answer Explanation for B:

If a taxpayer earns $400 or more from self-employment, they are required to file a tax
return, even if their gross income is below the filing threshold.

Show Other Explanations

1. Question ID: EA P1 932 (Topic: Cancellation of Debt Income)

What is Form 982 used for?

 A. Form 982 is used to determine the amount of discharged indebtedness that

can be excluded from gross income.correct
 B. Form 982 is used to determine the amount of taxable scholarships a student may
have.
 C. Form 982 is used to report passive income earned from rental activities.
 D. Form 982 is used to request a penalty abatement for late payment of self-
employment tax.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 89% of students.

Correct Answer Explanation for A:

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is used to

determine the amount of discharged indebtedness that can be excluded from gross
income.
 Generally, debt is considered canceled when the lender either forgives or discharges
the debt for less than the full amount owed. If the taxpayer can exclude the income, they
should file Form 982 along with their Form 1040 to report the exclusion.

3. Question ID: 94849681 (Topic: Retirement Income)

Karen is 65 and unmarried, and receiving Social Security every month. Which of the
following items must be considered when she calculates if any of her Social Security
benefits are taxable?

 A. A cash inheritance that she received when her brother died.

 B. Tax-exempt muni bond interestcorrect
 C. Interest on education loans
 D. Employer-provided adoption benefits
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for B:

To find out if her Social Security benefits may be taxable, none of the items listed above
are taken into account EXCEPT tax-exempt muni bonds, which must be added back to
figure the taxable portion of her Social Security. In order to calculate the taxable portion
of Social Security, you must take one half of your Social Security benefits and add that
amount to all your other income, including tax-exempt interest. This number is known as
your combined income, and it is compared to the base amounts. If the resulting
calculation is less than $25,000 single or $32,000 for MFJ, then your Social Security
benefits are generally not taxable.

Calculation:

Your adjusted gross income

+ Nontaxable interest

+ ½ of your Social Security benefits = Your "combined income"

(Note: This question is modified from a released EA exam question).

4. Question ID: 94849711 (Topic: Taxable Government Benefits)

Supplemental wages are compensation paid in addition to an employee’s regular
wages. They do not include payments for:

 A. Payments for non-deductible moving expenses.

 B. Worker's compensation.correct
 C. Accumulated sick leave.
 D. Retroactive wage increases.
Study Unit 10: Other Taxable Income covers the information for this question.

This question is answered correctly on the first attempt by 75% of students.

Correct Answer Explanation for B:

Supplemental wages are compensation paid to an employee in addition to regular

wages and include, but are not limited to, bonuses, commissions, overtime pay,
accumulated sick leave, severance pay, retroactive wage increases, and payments for
non-deductible moving expenses. Worker's compensation is not taxable to the recipient
at the state or federal level.

9. Question ID: 94850235 (Topic: Gift Taxes)

Gerald is wealthy and likes to help his favorite grandson, Paul. Which of the following
payments made in 2024 on Paul's behalf might be subject to the generation-skipping tax
(GST)?

 A. Payment of Paul's medical expenses made directly to a hospital.

 B. A cash gift of $16,000 made directly to Paul.
 C. Payment of Paul's student loans directly to the lender.correct
 D. Payment of Paul's college tuition made directly to a university.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 49% of students.

Correct Answer Explanation for C:

The generation-skipping tax (GST) can be incurred when grandparents directly transfer
money or give property to their grandchildren. Any payments for tuition or medical
expenses on behalf of a "skip person" (i.e., a grandchild) that are made directly to an
educational or medical institution are exempt from gift tax and GST, and also do not
need to be reported on a gift tax return. Payment of a grandchild's student loan,
however, would not qualify. The cash gift would not be subject to the GST because it is
under the annual gift limit and does not need to be reported at all.

The annual gift exclusion is $18,000 (in 2024). Gifts under this threshold do not have to
be reported. Generally, the following gifts are not taxable or reportable gifts (i.e., a Form
709 does not have to be filed for these gifts).

 Gifts that are not more than the annual exclusion for the calendar year (in 2024,
this is $18,000 per person).
 Tuition or medical expenses paid on behalf of another person (the educational
and medical exclusions).
  Gifts to a spouse.
 Gifts to a charity or nonprofit group.
 Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible as long as the taxpayer has
the correct substantiation records. For additional information about reportable gifts,
review Form 709 and its instructions.

11. Question ID: 94815980 (Topic: Residency Status and/or Citizenship)

What filing statuses are available to U.S. green card holders?

 A. Green Card holders use the same filing statuses as U.S. citizens, unless they live
outside the United States for more than one year.
 B. Green Card holders can opt to be treated as unmarried nonresidents if they choose.
 C. Green Card holders can only choose between “Married Filing Separately” or “Single”.
 D. Green Card holders are U.S. residents by default, and can use all the same
filing statuses available to U.S. citizens.correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 76% of students.

Correct Answer Explanation for D:

Green card holders are automatically treated as U.S. resident aliens, regardless of
where they actually live, and they use all the same filing statuses available to U.S.
citizens. Only NONRESIDENT aliens have restrictions on filing status. To learn more
about this topic, see the dedicated IRS page about the Green Card Test.

16. Question ID: 94849518 (Topic: Capital Gains and Losses)

Lilly bought 90 shares of Roboto Inc., stock for $1,275 on January 1, 2024. On May 15,
2024, she received a non-taxable distribution of $250 on the 90 shares of stock she
owned. She sold all the stock to an unrelated party for $1,220 on December 22. What is
her gain or loss on the sale?

 A. $195 capital gaincorrect

 B. $305 capital gain
 C. $305 capital loss
 D. $55 capital loss
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 62% of students.

Correct Answer Explanation for A:

 She has a $195 capital gain on the sale. The answer is figured as follows:

Starting basis $1,275

Minus nontaxable distribution ($250)
Basis after distribution $1,025
Sale price $1,220
Gain $195
Since she held the stock for less than a year, it would be treated as a short-term gain.
(Based on a prior EA exam question).

18. Question ID: 98939126 (Topic: Other Adjustments to Income)

What is the purpose of the “other adjustments” section on Schedule 1 (Form 1040)?

 A. To claim the standard deduction.

 B. To claim more obscure adjustments to income that are not deducted
elsewhere.correct
 C. To itemize deductions.

 D. To report business expenses related to hobby income.

Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for B:

The purpose of the “other adjustments” section on Schedule 1 (Form 1040) is to claim
more obscure adjustments to income that are not deducted elsewhere. The “other
adjustments” section allows taxpayers to report various adjustments, such as: attorney
fees and court costs for actions involving certain unlawful discrimination claims.

Show Other Explanations

19. Question ID: 94850055 (Topic: Self-Employment Tax Deductions)

Torvald is a self-employed enrolled agent. He is single. After figuring his business
deductions on Schedule C, his net profit was $230,000. He does not have any other
income for the year. Which of the following statements is correct?

 A. Torvald will owe the additional Medicare tax.correct

 B. Since he is self-employed, Torvald can deduct one-half of the .9% additional
Medicare tax on his income tax return.
 C. He does not have to pay additional Medicare tax because he is self-employed.
 D. He will owe the Net Investment Income Tax.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for A:

Torvald is required to pay Additional Medicare Tax. Torvald is not able to deduct one-
half of the 0.9% tax, as he can with the FICA tax. The additional Medicare tax is applied
to earned income above certain threshold amounts. In Torvald's case, the threshold for
single filers is $200,000, so he would pay 0.9% of $30,000 ($230,000 AGI minus
$200,000 = $30,000 x .009), or $270.

To learn more about the additional Medicare Tax, see Topic No. 560 Additional
Medicare Tax.

23. Question ID: 95034458 (Topic: Alternative Minimum Tax)

Which of the following would not be a part of the computation of alternative minimum
tax?

 A. Self-employment taxcorrect
 B. Depletion
 C. Certain state and local taxes
 D. Interest on private activity bonds
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 57% of students.

Correct Answer Explanation for A:

A taxpayer's regular taxable income is increased by certain tax preference items in

determining alternative minimum taxable income (AMTI). After adjustment and
preference items are added or subtracted, the taxpayer is left with alternative minimum
taxable income, or AMTI. However, self-employment tax is not affected by the
Alternative Minimum Tax calculation. To learn more about the AMT, see IRS Topic No.
556, Alternative Minimum Tax.

25. Question ID: 94850208 (Topic: The Estate Tax)

Kristina and Louis are married and file their 2024 tax return jointly on February 15,
2025. Two weeks after filing their tax return, Kristina dies suddenly. In Kristina’s final
will, she has chosen her older sister, Tiffany, as her executor. Tiffany doesn't like Louis,
so she wants to amend her late sister’s 2024 tax return to married filing separately, so
she can obtain a refund that was allocatable to her deceased sister. Which of the
following statements is correct?
 A. Tiffany may amend her sister’s return to MFS up to a year after the filing
deadline.correct
 B. Tiffany cannot amend her sister’s return to MFS after the extended due date of the
original return.
 C. Tiffany cannot amend her sister’s return to MFS after the original due date of the
original return.
 D. Tiffany cannot amend her sister’s return to MFS after a joint return has been filed.
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 45% of students.

Correct Answer Explanation for A:

Generally, after the due date of the original return, a taxpayer cannot change from MFJ
to MFS. However, a special rule applies to tax returns filed by an executor. As the
estate’s executor, Tiffany can choose to amend her deceased sister’s return to MFS up
to a year after the filing deadline. For more information, see Publication 559, Survivors,
Executors and Administrators.

29. Question ID: 95033971 (Topic: Rental Property and Income)

What type of rental property is never depreciated?

 A. Land improvements.
 B. Residential rentals.
 C. Commercial buildings.
 D. Undeveloped land.correct
Study Unit 9: Rental and Royalty Income covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for D:

The cost of land is never depreciated, even if it is used in rental activity (for example,
rented farmland, or undeveloped land that is used as an overflow parking lot). Land
improvements, such as fencing, paved parking areas, and outdoor lighting, may be
depreciated.

30. Question ID: 95396592 (Topic: Health Savings Accounts)

Arnie has a high-deductible health plan with an HSA with his employer. His mother
contributed $200 to his HSA as a gift on his 40th birthday. Arnie withdrew the funds tax-
free and bought a pair of prescription eyeglasses. Is this an allowable contribution?

 A. No, the contribution is illegal.

 B. No, the contribution by his mother is prohibited.
 C. Yes, the contribution is allowable.correct
 D. The contribution is only allowable if it is disclosed to the HSA trustee.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 78% of students.

Correct Answer Explanation for C:

The contribution is allowable. Family members or any other person may also contribute
on behalf of an eligible individual. No additional reporting is required. See Publication
969, Health Savings Accounts, for more information on HSAs.

34. Question ID: 98939129 (Topic: Deductible Taxes)

Which of the following taxes can be deducted on Schedule A, by taxpayers who itemize
deductions?

 A. Federal income taxes

 B. State and local income taxescorrect
 C. Estate taxes
 D. Social Security taxes

Study Unit 12: Standard Deduction and Itemized Deductions covers the information for
this question.

This question is answered correctly on the first attempt by 92% of students.

Correct Answer Explanation for B:

State and local income taxes ("SALT") can be deducted on Schedule A. Taxpayers can
deduct state and local income taxes if they itemize their deductions.

Because of the Tax Cuts and Jobs Act, currently, the maximum deduction for state and
local income, sales and property taxes is limited to a combined, total deduction of
$10,000 ($5,000 if married filing separately).

Show Other Explanations

40. Question ID: 94815929 (Topic: Residency Status and/or Citizenship)

Minjun is a citizen of China, working as foreign embassy employee in the U.S. He is
treated as a nonresident alien for tax purposes. Which of the following can he deduct
when he files his Form 1040NR?

 A. A $25,000 mortgage interest deduction on his residence in Washington.

 B. Donations to a charity in his home country of China.
 C. Donations to a qualified charity in the United States.correct
 D. The standard deduction.

Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 42% of students.

Correct Answer Explanation for C:

Specific limitations on deductions apply to nonresident aliens who are required to file
Form 1040NR. They cannot claim the standard deduction. Further, except for personal
exemptions and certain itemized deductions, they can claim deductions only to the
extent they are connected with income related to their U.S. trade or business. The
following itemized deductions are allowed:

 State and local income taxes.

 Qualifying charitable contributions to U.S. charities.
 Casualty and theft losses incurred in a federally declared disaster area.
 Miscellaneous itemized deductions (only the deductions that are still allowable
under the Tax Cuts and Jobs Act).
Itemized deductions related to mortgage interest are not allowed; nor are charitable
donations to a charity in a foreign country. To review more information on this topic, see
the IRS page on figuring taxes for nonresident aliens.

47. Question ID: 95414357 (Topic: Qualifications for Dependency)

Gerry is age 62 and unmarried. He has no children, but he has several relatives living
with him. All of the people listed below lived with Gerry all year long, and did not provide
more than one-half of their own financial support. Which of them can be claimed by
Gerry as a "qualifying relative" dependent on his tax return?

 A. Karina, his 83-year-old mother, who took a $16,900 distribution from her traditional
IRA.
 B. Shawn, his cousin, who is 26 years old and earned $4,300 from a part-time job.
Shawn is not a student. correct
 C. Alex, his nephew, who is age 20 and not a student. Alex did not work, but won
$5,250 on a slot machine at a local casino.
 D. Douglas, his 85-year-old father, who took a $3,900 distribution from his 401(k), and
also had $3,100 in capital gains.
Study Unit 3: Dependency Relationships covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for B:

 Only Shawn, his cousin, could be claimed as a qualifying relative. This is because all of
the other people listed have income over the "deemed exemption" amount. Shawn
earned $4,300 from a part-time job, which is under the gross income limit for qualifying
relatives. A qualifying relative dependent must have made less than $5,050 in gross
income during 2024.

Note: Alex, his nephew, does not qualify to be claimed as a "qualifying child" because
he does not meet the age test. To meet the qualifying child test, a child must be
younger than 19 years old or be a "student" younger than 24 years old as of the end of
the calendar year. Since Alex is 20 and not a student, then he can only be claimed as a
qualifying relative dependent. And since he made more than the deemed exemption
amount, he cannot be claimed at all. Learn more about the rules for dependency
in Publication 929, Tax Rules for Children and Dependents.

53. Question ID: 94849633 (Topic: Basis of Assets - General)

Which of the following items does not decrease an asset’s basis?

 A. A casualty loss.
 B. A manufacturer’s rebate.
 C. The cost of defending a title to the property.correct
 D. Section 179 deductions.
Study Unit 6: Calculating the Basis of Assets covers the information for this question.

This question is answered correctly on the first attempt by 52% of students.

Correct Answer Explanation for C:

The cost of defending or perfecting a title increases an asset’s basis. Each of the other
answers decreases an asset’s basis.

55. Question ID: 94849661 (Topic: Fringe Benefits)

Annabelle was offered a consulting position in another state. Her new employer
reimbursed her for $5,500 for her moving truck and expenses incurred during the move.
How should this reimbursement be treated?

 A. The reimbursement is tax-exempt because it is a qualified moving expense.

 B. The expense is nontaxable as long as Annabelle’s employer makes the payment
directly to the moving company.
 C. Because this is a reimbursement of a nondeductible expense, it is treated as
wages and must be included on Annabelle’s Form W-2.correct
 D. The amounts are non-taxable to Annabelle.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 66% of students.

 Correct Answer Explanation for C:

The Tax Cuts and Jobs Act suspended the qualified moving expense exclusion and
employee deduction for moving expenses. Because this is a reimbursement of a
nondeductible expense, it is treated as paid under a nonaccountable plan and must be
included as compensation on Annabelle’s Form W-2. An employer can still reimburse
an employee for their moving expenses, but the amounts are fully taxable as wages.
The employer can then deduct the expense (as wages) but the full amount will be
subject to payroll taxes as well as income tax for Annabelle.

Note: There is an exception for active-duty members of the armed forces, who still are
entitled to claim a deduction for moving expenses. Active-duty military can also receive
non-taxable reimbursement for their qualified moving expenses.

61. Question ID: 94849828 (Topic: Education Credits)

The Lifetime Learning Credit is different from the American Opportunity Credit.
However, they do share some of the same requirements. Which of the following
requirements is true for both education credits?

 A. To be eligible for either of the education credits, taxpayers may use any filing
status other than married filing separately.correct
 B. Expenses related to housing are allowed as qualified education expenses.
 C. There is no limit to the number of years the credits can be claimed.
 D. Both education credits are available for only the first four years of post-secondary
education.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

Taxpayers who use the filing status of married filing separately are not eligible to claim
either the American Opportunity or Lifetime Learning credits. To learn more about both
these credits, see the IRS detail page on Education Credits.

70. Question ID: 94849986 (Topic: Education Credits)

Ansel has two daughters in college. He is unmarried and files as head of household
(HOH), and claims both of his children as dependents. His AGI is $65,000. Both of
Ansel's children are full-time college students. Details regarding their education
expenses are as follows:

 Jenna, age 24, a graduate student working on her master’s degree, with $8,500
of qualifying higher education expenses.
 Marcie, age 19, a college freshman working on her undergraduate degree, with
$5,600 of qualifying higher education expenses.
 Based on the facts above, which of the following statements is correct?

 A. Ansel can claim the Lifetime Learning Credit for Jenna and the American
Opportunity Credit for Marcie.correct
 B. Ansel can claim the American Opportunity Credit for both of his daughters.
 C. Ansel cannot claim any credits because his AGI is too high.
 D. Ansel can claim the Lifetime Learning Credit for both of his daughters. Neither is
eligible for the American Opportunity Credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 90% of students.

Correct Answer Explanation for A:

Ansel can claim the Lifetime Learning Credit for Jenna and the American Opportunity
Credit for Marcie. The American Opportunity Credit is a better credit, but it only applies
to the first four years of undergraduate study, so Jenna, who is a graduate student,
does not qualify. Ansel may still recover a portion of Jenna's education expenses using
the Lifetime Learning Credit.

73. Question ID: 94850085 (Topic: Retirement Income)

Della is 49. She earns $56,000 in wages in 2024. She wants to contribute to both her
traditional IRA and her Roth IRA during the year. What is the maximum in combined
contributions she can make into both IRA accounts?

 A. She can make a $6,500 contribution into each IRA account. But only the traditional
IRA contribution will be deductible.
 B. Her combined contributions are limited to $7,000 for the year.correct
 C. She can contribute a maximum of $7,000 to one account. Taxpayers cannot fund a
traditional IRA and a Roth IRA in the same year.
 D. She can make a $7,500 contribution into each IRA account. But only the traditional
IRA contribution will be deductible.
Study Unit 16: Individual Retirement Accounts covers the information for this question.

This question is answered correctly on the first attempt by 77% of students.

Correct Answer Explanation for B:

Della's combined contributions are limited to $7,000 in 2024. If an individual contributes

to both a traditional IRA and a Roth IRA, the combined contributions are limited to
$7,000 a year ($8,000 if the taxpayer is age 50 or older).

74. Question ID: 94849636 (Topic: Like-Kind Exchange)

 Nhan exchanged a rental duplex in Boise, Idaho for an apartment four-plex in Houston,
Texas; both are investment properties. The exchange is a qualified Section 1031
exchange. Nhan’s original purchase cost for the duplex was $65,000, and he had made
$20,000 of capital improvements prior to the exchange. The apartment four-plex’s fair
market value at the time of the exchange was $110,000. After the exchange is
completed, what is Nhan's basis in the new Houston four-plex?

 A. $85,000correct
 B. $110,000
 C. $65,000
 D. $20,000
Study Unit 8: Nonrecognition Property Transactions covers the information for this
question.

This question is answered correctly on the first attempt by 80% of students.

Correct Answer Explanation for A:

This is a Section 1031 exchange. Nhan does not recognize any gain from the like-kind
exchange on his individual tax return. Nhan’s adjusted basis in the Boise duplex was
$85,000 ($65,000 purchase cost + $20,000 capital improvements), so this is also the
basis of the apartment four-plex he received in the exchange.

Note: A section 1031 like-kind exchange occurs when a taxpayer exchanges business
or investment property for similar property. If the exchange qualifies under section 1031,
he does not pay tax on a resulting gain and cannot deduct a loss until he disposes of
the property. The basis of the property received is generally the adjusted basis of the
property transferred. (Note: Because of the Tax Cuts and Jobs Act, now only exchanges
of real property (i.e., real estate) qualifies for like-kind exchange treatment).

76. Question ID: 94850145 (Topic: Taxation for Clergy and Military)
Gerald is an ordained minister for the Presbyterian Church. He owns his own home. In
addition, he receives a monthly housing allowance from his church that isn’t subject to
income tax. He pays regular mortgage interest and property taxes on the home. Which
of the following is true regarding the deductibility of these expenses?

 A. Gerald can still deduct his real estate taxes and home mortgage interest. The
minister does not have to reduce their deductions by the nontaxable amount of
the housing allowance.correct
 B. The mortgage interest and property taxes are not deductible by Gerald, because he
receives a nontaxable housing allowance.
 C. Gerald can still deduct his real estate taxes and home mortgage interest, but the
housing allowance becomes taxable by the amount of deductible expenses that are
reportable on Schedule A.
 D. Gerald can still deduct his real estate taxes and home mortgage interest. However,
he must reduce his allowable deductions by the nontaxable amount of the housing
allowance.
Study Unit 4: Taxable and Nontaxable Income covers the information for this question.

This question is answered correctly on the first attempt by 27% of students.

Correct Answer Explanation for A:

If a minister receives a housing allowance that isn’t taxable, the minister can still deduct
their real estate taxes and home mortgage interest. The minister does not have to
reduce their deductions by the nontaxable amount of the housing allowance. For more
information about the special rules that apply to clergy, see Publication 517, Social
Security and Other Information for Members of the Clergy and Religious Workers.

78. Question ID: 94815876 (Topic: Foreign Income and Taxes)

In order for a taxpayer to claim the foreign earned income exclusion, what is required?

 A. The taxpayer's principal employment must be with a foreign employer.

 B. The mailing address listed on the taxpayer's tax return must be a foreign address.
 C. The taxpayer must meet either the bona fide residence test or the physical
presence test, and their tax home must be in a foreign country.correct
 D. The taxpayer must have a passport that pertains to a foreign country.
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 46% of students.

Correct Answer Explanation for C:

In order for a taxpayer to claim the foreign earned income exclusion, the taxpayer must
meet either the bona fide residence test or the physical presence test, and their tax
home must be in a foreign country.

79. Question ID: 94935551 (Topic: Qualified Business Income Deduction)

Which of the following businesses would NOT be classified as an "SSTB" for the
purposes of the 199A QBI deduction?

 A. Veterinarian
 B. Financial planner
 C. Engineercorrect
 D. Professional athlete
Study Unit 15: Additional Taxes and Credits covers the information for this question.

This question is answered correctly on the first attempt by 70% of students.

 Correct Answer Explanation for C:

An engineer would not be classified as an SSTB, because engineers and architects are
specifically exempted from being categorized as an SSTB. A specified service trade or
business (SSTB) is any trade or business offering the following services: attorneys,
physicians and other medical professionals (including veterinarians), consultants,
professional athletes, financial planners, accountants, or businesses who receive
income for endorsing products or services, for the use of the taxpayer’s image, likeness,
name, signature, voice, trademark, or any other symbols associated with the taxpayer’s
identity, or for appearing at an event or on radio, television, or another media format.

81. Question ID: 95092922 (Topic: Capital Gains and Losses)

Dolly has the following items of income and loss during the taxable year:

 $900 in income from a modeling gig

 $2,500 long-term capital gain from the sale of cryptocurrency
 ($8,000) short-term capital loss from the sale of land
 $1,000 in interest income from a CD
 $42,000 in wages.
How should she handle the capital gains and losses on her individual tax return, and
what amount, if any, can she carry over to the following year?

 A. Dolly may claim a capital loss of $3,000 in the current year, and carry over
$2,500 in losses to future years.correct
 B. Dolly may claim a capital loss of $4,500 in the current year. She may carry over
$1,000 in losses to future years.
 C. Dolly may claim a capital loss of $5,500 in the current year.
 D. Dolly may claim a capital loss of $3,000 in the current year. She may carry back the
$2,500 in excess losses to the prior tax year.
Study Unit 7: Capital Gains and Losses covers the information for this question.

This question is answered correctly on the first attempt by 87% of students.

Correct Answer Explanation for A:

Dolly has a current-year capital loss of $5,500 ($8,000 short-term loss - $2,500 long-
term capital gain). Her capital losses are limited, and she can only use $3,000 in the
current year to offset ordinary income. The remaining $2,500 in losses must be carried
over to future tax years. The losses can be carried forward indefinitely, because a
capital loss carryforward does not expire (except upon death). To learn more about
capital gains and losses, see IRS Topic No. 409 Capital Gains and Losses.

82. Question ID: 94850261 (Topic: Gift Taxes)

In general, who is responsible for paying the gift tax?
 A. The executor.
 B. The estate.
 C. The donee.
 D. The donor.correct
Study Unit 18: Estate and Gift Taxes for Individuals covers the information for this
question.

This question is answered correctly on the first attempt by 86% of students.

Correct Answer Explanation for D:

The donor (the person who gives the gift) is generally responsible for paying any gift
tax. For additional information about the reporting requirements for gifts, review Form
709 and its instructions.

84. Question ID: 94816006 (Topic: Taxpayer Filing Status)

Torie's husband died on January 5, 2023. She has not remarried during 2024, but she
has a 15-year-old dependent daughter. Torie's filing status in 2024 should be:

 A. Single
 B. Head of household
 C. Married filing jointly
 D. Qualifying surviving spouse (QSS)correct
Study Unit 2: Determining Filing Status and Residency covers the information for this
question.

This question is answered correctly on the first attempt by 82% of students.

Correct Answer Explanation for D:

Torie qualifies for Qualifying surviving spouse (QSS) as her filing status. The federal
Qualifying surviving spouse (QSS) filing status is available for two years after the year
of death of the deceased spouse. It is available to widows and widowers (surviving
spouses) with a qualifying dependent.

93. Question ID: 94815848 (Topic: Penalty for Early Withdrawal from a CD)
Hader, 20 and single, has one Form W-2 for $30,000 and one Form 1099-INT for $40
and no other income. His Form 1099-INT shows the interest he earned and an early
withdrawal penalty of $50 he paid that year. Hader has no children, does not itemize
deductions, and cannot claim any credits. Which form(s) can he use if he wants to
deduct the early withdrawal penalty?

 A. Schedule L.
 B. Schedule D.
 C. Form 1040.correct
 D. No deduction is allowed for an early withdrawal penalty.
Study Unit 11: Adjustments to Gross Income covers the information for this question.

This question is answered correctly on the first attempt by 71% of students.

Correct Answer Explanation for C:

Hader may use Form 1040 to claim the adjustment to income for the early withdrawal
penalty he paid. He does not need to itemize deductions in order to deduct the penalty.

98. Question ID: 94849878 (Topic: Education Credits)

Bernice is 25 and single. She enrolled in college for the fall semester. She meets all the
requirements to claim the American Opportunity Credit. During the year, Bernice pays
$5,000 in college tuition and $4,000 for room and board. Bernice received a $5,000 Pell
grant and took out a $2,750 student loan to pay her remaining expenses. She paid the
remaining $1,250 out of her own savings. She makes $15,000 in wages from a part-
time job. Bernice chooses to apply the Pell grant entirely to her tuition expenses. Based
on the information in this scenario, what is the amount of Bernice's American
Opportunity Credit?

 A. $2,750.
 B. $2,500.
 C. $0correct
 D. $1,250.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 61% of students.

Correct Answer Explanation for C:

Her credit amount will be $0. If she chooses to apply the Pell grant to the qualified
education expenses, it will qualify as a tax-free scholarship. Bernice will not include any
part of the Pell grant in gross income, and it will be nontaxable. After reducing qualified
education expenses by the tax-free scholarship, Bernice will have $0 ($5,000 - $5,000)
of adjusted qualified education expenses available to figure her American Opportunity
Credit. Her credit will be $0.

99. Question ID: 94849908 (Topic: Child Tax Credit and Additional Child Tax
Credit)
Sabrina is taking care of her cousin's child, age 8, who was lawfully placed in her home
on February 1, by the foster care system after her cousin went to jail. Sabrina receives
foster care payments for the child. Which of the following is true about the Child Tax
Credit?
 A. Sabrina may not take the child tax credit because her cousin's child fails the
relationship test.
 B. Sabrina may not take the child tax credit because she receives government
assistance.
 C. Sabrina is allowed to take the child tax credit for this child.correct
 D. Only the child's parent can claim the child tax credit.
Study Unit 13: Individual Tax Credits covers the information for this question.

This question is answered correctly on the first attempt by 68% of students.

Correct Answer Explanation for C:

The child is considered her Qualifying Child for the Child Tax Credit because she is the
child's foster parent. Because the relationship test is passed, Sabrina may claim the
Child Tax Credit.