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Last year, Bill paid $4,000 in investment interest on funds borrowed

to purchase tax-free municipal bonds. If he had $6,000 of tax-exempt interest last year, how much of his investment interest may he deduct on his federal income tax return?

- a. $4,000
- b. $2,000
- c. $1,000
- d. $0

With respect to what needs to be compiled and assembled for the initial filing of an individual tax return:

- a. All forms and schedules must be sent to the IRS.
- b. Some forms and schedules are sent to the IRS, whereas others are kept for records.
- c. Leaving out optional worksheets from the initial filing can result in an automatic delay of any refund due the taxpayer.
- d. When a taxpayer files a return on January 1, the IRS processes any refund by January 3.

A substantial underpayment penalty is not:

- a. an accuracy-related penalty
- b. applies if the understatement exceeds the greater of 10% of the tax that should have been shown on the return and $5,000
- c. might be abated for reasonable cause
- d. applies if the understatement exceeds the greater of 20% of the tax that should have been shown on the return and $10,000

 A married couple paid $4,000 in real estate taxes for the year. They received a rebate of $500 from their city for overpayment of real estate taxes in the same year. What can they claim as a deduction on Schedule A for taxes paid?

- a. $3,500
- b. $4,000
- c. $2,000
- d. $4,500

Bruce paid $3,000 for an acoustic guitar signed by the members of a popular singing group, but he later found out the signatures were forgeries and the fair market value of the guitar was only $500. Several months later the uninsured guitar was totally destroyed in a small fire at his home. What is the amount that Bruce must use for the value of the guitar when he calculates his casualty loss from the fire?

- a. $2,500
- b. $3,000
- c. $500
- d. $100

Landlord Kathy had some work done on her rental house last year. The side fence was fixed for a total of $600, of which half was paid by the next-door neighbor. Several plumbing leaks were fixed for $200 and some broken tiles in the bathroom were fixed for $100. She also spent $2,500 to install a carport on the side of the house. How will she report these expenditures on her tax return?

- a. $3,100 as a direct expense
- b. $900 as a direct expense; $2,500 depreciated over time
- c. $3,400 as a direct expense
- d. $600 as a direct expense; $2,500 depreciated over time

When compiling and assembling the tax return, which of the following items or pieces of information need to be included with the submission of the return to the Treasury?

- a. all worksheets used to compute figures that appear on the return
- b. the date by which the taxpayer expects a refund
- c. the following year's first-quarter estimated tax payment
- d. the address of the taxpayer

Mega Mutual credited $5,000 of interest to Sarah's deferred annuity's cash value in the current year. How much of the credited interest must Sarah recognize as income in the year credited, assuming she did not take a distribution?

- a. $5,000
- b. $2,500
- c. $500
- d. $0

Arthur moved after he was transferred by his employer to a new office on the other side of town. His commute to his old office from his old home had been just five miles, whereas it had been 60 miles to drive from the old house to the new office. The expenses related to this move of the family added up to $2,000. How much of these expenses could Arthur deduct on his 2019 tax return?

- a. $2,000
- b. $0
- c. $560
- d. $1,000

Until the TCJA, certain itemized deductions had income-based phase-outs. What does this mean?

- a. A taxpayer may be able to deduct more total itemized deductions than before (if their deductions were limited because their AGI exceeded certain thresholds)
- b. All itemized deductions were eliminated
- c. The 2% threshold applies to all itemized deductions
- d. If a taxpayer has income above a certain threshold, he or she has to reduce the standard deduction

In July, Anthony begins renting a town home he owns. The tenant pays $1,500 for July's rent and $2,000 as a security deposit. The tenant pays the monthly electric bill of $200 and deducts it from her $1,500 rent. How much should Anthony report as rental income?

- a. $3,700
- b. $1,500
- c. $1,300
- d. $1,700

Which of the following is false with respect to penalty taxes?

- a. Even if the tax return is timely filed, there might be a penalty on taxes owed but not paid by the due date of the filing.
- b. The IRS may wave penalties if the required payments are missed because of casualty events, disasters, or other situations in which it would be unfair to impose the penalty
- c. An underpayment may be excused if the taxpayer paid by credit card and the charge was declined without corrective action by the taxpayer
- d. The IRS may waive penalties for a taxpayer who retired after age 62 or became disabled

Krista was offered a $24,000 severance package from her employer. She chose an alternative severance package under which the employer would provide $21,000 in cash and agree to pay for certain outplacement services valued at $3,000. How much of the severance package must Peggy include in her income?

- a. $24,000
- b. $21,000
- c. $3,000
- d. $0

In 2018, Taxpayer Tom included $4,000 of his Social Security income as income because he thought he had an unrestricted right to it. Based on the Social Security/Claim of Right rules, if Tom didn't really have an unrestricted right to it, what may he do on his 2019 return?

- a. He may be able to reduce his income for 2019
- b. He may be able to deduct the amount repaid to him as a miscellaneous itemized deduction
- c. File an amended return
- d. a and b

Last year, Dan paid $1,200 of interest on credit card debt, $15,400 of interest on his home mortgage, $800 of interest on money borrowed to invest in common stock, and $4,000 of interest on a car loan. How much interest may he normally deduct on his federal income tax return? 

-a. $21,400
- b. $16,200
- c. $19,400
- d. $17,400

Which of the following is true with respect to distributions from pensions or annuity plans? 

-a. If the taxpayer originally made contributions in after-tax dollars, distributions are partially tax-free
- b. If the taxpayer originally made contributions that were deductible at that time, distributions are fully tax-free
- c. If the taxpayer funded his or her pension entirely with income from tips and he kept a daily record of those tips, distributions are tax-free
- d. Distributions from pension and annuity plans are always tax-free

Mark and Kelly bought a house in 1999. At their divorce, the home is valued at $310,000 with an adjusted cost basis of $150,000. They have paid off the mortgage. Kelly wants to buy out Mark's share in cash. She will pay him $100,000. What is Kelly's adjusted basis after she buys out Mark?

- a. $150,000
- b. $230,000
- c. $250,000
- d. $310,000

John and Eli are cash-basis taxpayers. John sent Eli a check for services rendered on December 30, 2019. The check arrives in Eli's post office box on December 31, 2019. Eli does not deposit the check until January 3, 2020. On which year's return will this income be included and why?

- a. 2018, because Eli is not an accrual-basis taxpayer.
- b. 2020, because Eli is a cash-basis taxpayer.
- c. 2019, because Eli was in constructive receipt of the payment in 2019.
- d. 2019, because John sent the payment in 2019.

Elise is insured under a $5,000 monthly disability insurance plan for which her employer pays premiums of $1,000 annually and she pays premiums of $3,000. She was totally disabled last year and received $60,000 of disability benefits under the plan. How much of the benefit, if any, is tax free?

- a. $60,000
- b. $0
- c. $45,000
- d. $15,000

 Jo-Jo had three employers in 2019. One withheld too much Social Security. Which of the following is true? 

-a. Jo-Jo can claim the excess as a credit against income tax
- b. Jo-Jo can file an amended return
- c. Jo-Jo can file a claim for refund and request for abatement
- d. None of the above

Julie is single and has $115,000 of wages, $10,000 of rental income from property A, and $40,000 of rental loss from property B. Julie is an active participant in both properties A and B. What amount, if any, can Julie use from the rental activities to offset her wages?

- a. $0
- b. $17,500
- c. $25,000
- d. $30,000

Shane has three passive activities. Activity A reported income of $20,000. Activity B reported a loss of $15,000. Activity C reported a loss of $10,000. How should Shane report these activities?

- a. $20,000 of passive income offset by $20,000 of passive losses; $5,000 passive loss carryforward for Activity B
- b. $20,000 of passive income offset by $20,000 of passive losses; $5,000 passive loss carryforward for Activity C
- c. $20,000 of passive income offset by $20,000 of passive losses; $3,000 passive loss carryforward for Activity B and $2,000 passive loss carryforward for Activity C
- d. $20,000 of passive income offset by $25,000 of passive losses; no carryforward

Assume a taxpayer has a non-qualified IRA. The taxpayer gets divorced, and there is no withholding made for taxes. Under which of the following circumstances would the distribution be taxable?

- a. The owner or receiving spouse of the IRA needed to withdraw money to meet living expenses, to pay off credit cards, buy out the spouse's interest in their primary residence, etc.
- b. Distributions were made because of disability
- c. Distributions were made for a first-time home purchase
- d. Distributions were made for qualified higher education expenses

A taxpayer is most likely to be subject to penalties for underpayment of estimated tax for tax year 2019 in which of the following situations:

- a. He or she paid 90% of the tax shown on the 2018 return
- b. He or she paid 100% of the tax shown on the 2017 return, and his her or AGI was $160,000
- c. He or she paid 100% of the tax shown on the 2018 return, and his her or AGI was $160,000
- d. He or she paid 110% of the tax shown on the 2017 return, and his her or AGI was $160,000

Which statement is correct? Transfers between spouses prior to their divorce:

- a. are effectively treated as gifts
- b. have a carryover basis and holding period.
- c. are not taxable unless the recipient is a nonresident alien.
- d. All of the above are correct.

Answer & Explanation
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