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Individual Income Tax

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1) Denzel earns $120,000 this year through his job as a sales manager. What is his FICA tax?
A) $9,180. B) $7,803. C) $7,459. D) $8,362.

2) Sarah receives a $9,000 scholarship from City University. The university specifies that $3,000 is
for tuition, books, supplies, and equipment for classes. The other $6,000 is for room and board.
As part of the condition of the scholarship, Sarah must also work ten hours per week as a
grader, for which she is paid $5,500 for the year. Of the total amount received, Sarah may not
A) $7,500. B) $5,500. C) $13,500. D) $11,500.

3) Which of the following statements is incorrect?
A) Excise taxes are assessed on items such as gasoline and telephone use.
B) The estate tax is based on the fair market value of property at death or the alternate
valuation date.
C) Gift taxes are levied on the recipient of a gift.
D) Property taxes are levied on real estate.

4) In 2009 Sela traveled from her home in Flagstaff to San Francisco to seek medical care. Because
she was unable to travel alone, her mother accompanied her. Total expenses included:
Hotel room en route ($100 × 2 rooms) $200
Mileage, 900 miles
Doctors bills in San Francisco 1,600
Meals for mother while in San Francisco 220
The total medical expenses deductible before the 7.5% limitation are
A) $1,600. B) $1,916. C) $1,800. D) $2,016.

5) On May 8, 2008 Tec Manufacturing purchases $300,000 of five-year equipment and elected to
expense $100,000 under Sec. 179. In 2009 Tec sells the equipment for $250,000. MACRS
depreciation deductions for 2008 and 2009 total $72,000, excluding the Sec. 179 deduction. What
is the amount and character of Tec's gain?
A) $100,000 Sec. 1231 gain and $22,000 of Sec. 1245 gain
B) $22,000 Sec. 1245 gain
C) $122,000 Sec. 1245 gain
D) $50,000 Sec. 1231 loss

6) Carla redeemed EE bonds which qualify for the educational exclusion. The redemption
consisted of $14,000 principal and $6,000 interest. The net qualifying educational expenses are
$8,000. No reduction of the exclusion is required. The taxable interest is
A) $6,000. B) $0. C) $3,600. D) $2,400.

7) For a taxpayer who is not insolvent nor under bankruptcy proceedings, the discharge of debt
(for loans other than mortgages) is generally:
A) nontaxable B) taxable.
C) partially taxable. D) none of the above.

8) Shawn, who is single and has no dependents, has a regular tax liability of $15,820, taxable
income of $70,000, tax preferences of $25,000, and positive adjustments attributable to
limitations on itemized deductions of $15,000 this year. Shawn's alternative minimum tax for
2009 is
A) $11,310. B) $1,717. C) $2,614. D) $17,537.

9) Matt paid the following taxes:
Real estate taxes on rental property he owns $4,000
Real estate taxes on his own residence 3,500
Federal income taxes 7,000
State income taxes 2,500
Local city income taxes 500
State sales taxes 700
What amount can Matt deduct as an itemized deduction on his tax return?
A) $17,500 B) $6,500 C) $10,500 D) $7,200

10) Which of the following serves as the highest authority for tax research, planning, and
compliance activities?
A) Internal Revenue Code B) Revenue Procedures
C) Revenue Rulings D) Income Tax Regulations

11) In the current year, Marcus reports the following casualty gains and losses on personal-use
property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second
Reduction Adjusted Holding
Asset in FMV Basis Insurance Period
X $8,000 $2,000 $7,000 2 years
Y 3,000 5,000 2,000 10 months
Z 2,500 1,300 1,000 8 months
As a result of these losses and insurance recoveries, Marcus must report
A) a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a
short-term capital loss of $200 on asset Z.
B) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $500 on asset Y;
and a short-term capital loss of $300 on asset Z.
C) a net gain of $4,500.
D) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $500 on asset Y.

12) All of the following items are generally excluded from income except
A) life insurance proceeds paid by reason of death.
B) receipt of child support payments.
C) interest on corporate bonds.
D) interest on state and local government bonds.

13) Hoyt rented office space two years ago to Harris, receiving the first and last months' rent plus a
security deposit of $2,400. In early January of this year, Harris moves and Hoyt refunds $1,050 of
the deposit and keeps the remainder to cover $750 which is spent for repairs to the office space
and one week of unpaid rent that amounts to $600. How would this information be reflected on
Hoyt's tax return this year?
A) $1,350 income and $750 deduction B) $600 income and $750 deduction
C) $1,350 income and no deduction D) $2,400 income and $750 deduction

14) Norman traveled to San Francisco for four days on vacation, and while there spent another two
days conducting business for his employer. Norman's plane fare for the trip was $500; meals cost
$150 per day; hotels cost $200 per day; and a rental car cost $100 per day that was used for all six
days. Norman was not reimbursed by his employer for any expenses. Norman's AGI for the
year is $30,000 and he did not have any other miscellaneous itemized deductions. Norman may
deduct (after limitations)
A) $150. B) $900. C) $750. D) $600.

15) Edward purchased stock last year as follows:
Month Shares Total Cost
March 100 $ 2,700
July 200 6,000
October 600 $12,000
In April of this year, Edward sells 80 shares for $2,500. Edward cannot specifically identify the
stock sold. The basis for the 80 shares sold is
A) $1,600. B) $1,840. C) $2,400. D) $2,160.

16) A single taxpayer provided the following information for 2009:
Salary $70,000
Interest on local government bonds 4,000
(qualifies as a tax exclusion)
Allowable itemized deductions 13,000
What is taxable income?
A) $51,300 B) $60,650 C) $53,350 D) $57,000

17) During the year, Cathy received the following:
· Dividends of $1,000 from Lindsay corporation. Cathy's father owned the stock and directed
the corporation to send the dividends to Cathy.
· A car worth $20,000 for being the 100th customer at a car dealership.
· $2,500 cash gift from her uncle.
· $10,000 inheritance from her grandmother.
What amount must Cathy include in gross income?
A) $31,000 B) $33,500 C) $20,000 D) $21,000

18) With respect to alimony and property settlements in a divorce or separation, all of the following
are true with the exception of
A) no tax deduction is allowed for payment of a property settlement.
B) no deduction is allowed for alimony paid to the former spouse, if a property settlement is
also paid.
C) the spouse receiving a property settlement has a basis equal to the basis of that property to
the paying spouse prior to payment.
D) a property settlement does not result in income to either spouse.

19) Mr. Moore inherited 1,000 shares of Corporation Zero stock from his father who died on March
4, of the current year. His father paid $30 per share for the stock on September 2, 1985. The FMV
of the stock on the date of death was $100 per share. On September 4 this year, the FMV of the
stock was $110 per share. The executor did not elect the alternate valuation date. Mr. Moore sold
the stock for $130 per share on December 3. What is the amount and nature of any gain or loss?
A) $ 30,000 LTCG B) $ 20,000 STCG
C) $ 30,000 STCG D) $ 20,000 LTCG

20) On August 1 of the current year, Terry refinances her home and borrows $120,000. Terry is
required to pay two points on the loan. The loan is secured by the residence and the charging of
points is an established business practice in the area. The term of the loan is 20 years, beginning
on August 1 of the current year. How much, if any, of the points may Terry deduct in the current
A) $120 B) $2,400 C) $0 D) $50

21) In 2006, Leo's wife died. Leo has two small children, ages 2 and 4, living at home whom he
supports entirely. Leo does not remarry for five years and is not claimed as a dependent on
another's return during any of this period. In 2007, 2008, and 2009, Leo's most advantageous
filing status is, respectively
A) surviving spouse, surviving spouse, head of household
B) surviving spouse, surviving spouse, single.
C) head of household for all three years.
D) single for all three years.

22) For the years 2005 through 2009 (inclusive) Mary, a surgeon, has been involved in operating an
antique store. Only in 2007 and 2008 did her income exceed the expenses from the activity.
Which statement is correct?
A) The activity is presumed to be a hobby. However, Mary may prove it is a business.
B) The activity is presumed to be a business. However, the IRS may prove it is a hobby.
C) The activity is a business. The IRS cannot prove it is a hobby.
D) The activity is a hobby. Mary cannot prove it is a business.

23) Nancy reports the following income and loss in the current year.
Salary $80,000
Income from activity A 20,000
Loss from activity B ( 9,000)
Loss from activity C ( 10,000)
All three activities are passive activities with respect to Nancy. Nancy also has $21,000 of
suspended losses attributable to activity C carried over from prior years. During the year, Nancy
sells activity C and realizes a $15,000 taxable gain. What is Nancy's AGI as a result of these
A) $75,000 B) $80,000 C) $86,000 D) $89,000

24) Erin's records reflect the following information:
Paid $5,500 to a church of which $3,000 was contributed to the church and $2,500 was paid to
enroll her child in its school
Paid $200 dues to a social club
Donated stock having a fair market value of $1,500 to a qualified charitable organization. She
purchased the stock 2 years earlier for $3,000.
Paid $1,600 cash to qualified public charitable organizations
Erin's adjusted gross income for this year was $20,000. What is the amount of her charitable
contribution deduction for the year?
A) $7,600 B) $6,100 C) $7,800 D) $6,300

25) On April 1, 2009, Grace leases and places into service an automobile with a FMV of $50,000. The
business use of the automobile is 60%. The "inclusion amount" for the initial year of the lease
from the IRS tables is $175. The lease payments are $800 per month. What are the tax
consequences of this lease?
A) deduction for lease payments of $4,320
B) deduction for lease payments of $4,320; include $105 in income
C) deduction for lease payments of $7,200; include $175 in income
D) deduction for lease payment of $7,200

26) John has $55,000 net earnings from a sole proprietorship. John is also employed by a major
corporation and is paid $25,000. The OASDI limit is $106,800 and the health insurance portion
has no limit. The rates for employee withholding are 6.2% and 1.45%, respectively. Those rates
are doubled for self-employment income. John' self-employment tax (rounded) is
A) $8,415. B) $4,590. C) $7,771. D) $4,239.

27) Charles is a single person, age 35, with no dependents. In 2009, Charles has gross income of
$60,000 from his sole proprietorship. Charles also incurs $70,000 of deductible business expenses
in connection with his proprietorship. He has interest and dividend income of $22,000. Charles
has no itemized deductions. Charles's taxable income is
A) $8,350. B) $12,000. C) $6,300. D) $2,650.

28) Sarah had a $30,000 loss on section 1244 stock, a $15,000 loss on sale of a personal use
automobile and a $8,000 loss on stock that is not classified as 1244. Without regard to net capital
loss limitations, Sarah should recognize
A) a capital loss of $53,000.
B) an ordinary loss of $30,000 and a capital loss of $23,000.
C) an ordinary loss of $30,000 and a capital loss of $8,000.
D) a ordinary loss of $38,000.

29) For purposes of the accrual method of accounting, the economic performance test is met when
A) the property or services are actually provided.
B) the taxpayer pays the party providing the services or property.
C) all events have occurred that establish the fact of a liability.
D) all events have occurred that fix the taxpayer's right to receive income.

30) Kevin, a single person age 52, sold his home this year. He had lived in the house for 10 years.
Signed a contract on March 4 to sell his home
Sold May 3 for $202,000
Selling expenses 12,000
Replaced and paid for a broken window on March 2 200
Basis of old home before repairs and improvements 150,000
Purchased new home 180,000
Based on these facts, what is the amount of his recognized (not realized) gain?
A) $40,000 B) $39,800 C) $52,000 D) $-0-

31) Tiger Corporation, a calendar-year taxpayer, purchases and places into service machinery with a
7-year life that cost $268,000. The mid-quarter convention does not apply. Tiger elects to
depreciate the maximum under Section 179. Tiger's taxable income for the year before the
section 179 deduction is $350,000. Tiger does not elect bonus depreciation. What is Tiger's total
depreciation deduction related to this property?
A) $38,297 B) $152,292 C) $134,000 D) $133,000

32) In a nontaxable exchange, Reed traded in a truck having an adjusted basis of $9,000 and a FMV
of $20,000, for a new truck having a FMV of $30,000. In addition, Reed paid cash of $10,000.
What is Reed's basis in the new truck?
A) $11,000 B) $ 9,000 C) $19,000 D) $30,000

33) Pierce has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What
is the treatment of these items in Pierce's AGI?
A) Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a
$1,000 LTCL carryover.
B) The 1231 gains and losses are treated as ordinary gains and losses making Pierce's AGI for
the year $46,000.
C) Pierce has a LTCG of $12,000 and a net ordinary income of $34,000.
D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.

34) Which one of the following is a refundable credit?
A) earned income credit B) credit for the elderly and disabled
C) lifetime learning credit D) child and dependent care credit

35) Which of the following is not a characteristics of the first-time homebuyer's credit?
A) The credit is the lesser of $7,500 or 10% of the home's purchase price.
B) The credit is phased out for married taxpayers with AGI of $150,000 to $170,000.
C) The credit must be recaptured ratably over 15 years, beginning in the second year in the
tax year in which the home was purchased.
D) The taxpayer must not have previously owned a principal residence.

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Lyle and Kaye James are married, have two minor children, Jessica age 8 and Jerron age 4, and are filing a joint tax return in the current year.

1. Lyle and Kaye James are married, have two minor children, Jessica age 8 and Jerron age 4, and are filing a joint tax return in the current year. They are both employed. Lyle and Kaye, ages 38 and 37, respectively, have combined salaries of $240,000, from which $42,000 of federal income tax and $10,000 of state income tax are withheld. Lyle and Kaye own two homes. Their primary residence is located at 11620 N. Mount Ave., New Haven, Connecticut 22222, and their vacation home is on the beach in Fort Lauderdale, Florida. They often rent their vacation home to supplement their income. The following items are related to the James' ownership of the two homes:
Item New Haven Fort Lauderdale
Rental income $ ? $15,000
Qualified residence interest 7,200 5,000
Property taxes 1,400 1,000
Utilities 1,000 1,300
Repairs 200 300
Depreciation 0 3,500
Advertising 0 200
Insurance 1,500 1,500
The James family used their Fort Lauderdale home 20 days during the year. They rented the vacation home 60 days during the year. Lyle and Kaye jointly purchase stock in various corporations and make the following transactions in the current year. (None of the stock qualifies as small business stock.)
Date Transaction Price Paid/Sold
2/15 Bought 50 shares of Lake common stock (they own no other Lake stock) $1,000
5/14 Bought 100 shares of Bass common stock (they own no other Bass stock) 3,000
5/24 Sold 25 shares of Lake common stock 250
5/27 Bought 50 shares of Lake common stock 900
Sold 50 shares of Bass common stock 1,750
7/12 Bought 100 shares of Bass common stock 2,800
The James' have no other income or expense items. Lyle and Kaye's Social Security numbers are 111-22-3333 and 444-55-6666, respectively. Jessica and Jerron's Social Security numbers are 123-45-6789 and 888-99-1010. The James' use the IRS method of allocating all expenses between personal and rental use.
File the James' income tax return Form 1040, Schedules A, D, and E using the currently available forms and rates. Disregard any tax credits for which they may be eligible.

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