Under the income tax formula, a taxpayer must choose between deductions for AGI and the standard deduction.

An increase in a taxpayer’s AGI could decrease the amount of charitable contribution that can be claimed.

Adjusted gross income (AGI) appears at the bottom of page 1 and at the top of page 2 of Form 1040.

All exclusions from gross income are reported on Form 1040.

Lee, a citizen of Korea, is a resident of the U.S. Any rent income Lee receives from land he owns in Korea is not subject to the U.S. income tax.

Kim, a resident of Oregon, supports his parents who are residents of Canada but citizens of Korea. Kim can claim his parents as dependents.

Married taxpayers who file a joint return cannot later (i.e., after the filing due date) switch to separate returns for that year.

Surviving spouse filing status begins in the year in which the deceased spouse died.

For 2018, Stuart has a short-term capital loss, a collectible long-term capital gain, and a long-term capital gain from land held as investment. The short-term loss is first applied to the collectible capital gain.

Section 212 expenses that are related to rent and royalty income are deductions for AGI.

Alice incurs qualified moving expenses of $12,000. If she is reimbursed by her employer, the deduction is classified as a deduction for AGI. If not reimbursed, the deduction is classified as an itemized deduction.

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.

If an item such as property taxes and home mortgage interest exceed the income from a hobby, the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.

Walt wants to give his daughter $1,800 for Christmas.  As an alternative, she suggests that he pay the property taxes on her residence.  If Ralph pays the property taxes, he can deduct them.

For tax purposes, a statutory employee is treated the same as a common law employee.

A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.

Georgia contributed $2,000 to a qualifying Health Savings Account in 2018. The entire amount qualifies as an expense deductible for AGI.

Tom, whose MAGI is $40,000, paid $3,500 of interest on a qualified student loan in 2018. Tom is single. He may deduct the $3,500 interest as an itemized deduction.

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

Ronaldo contributed stock worth $12,000 to the Children’s Protective Agency, a qualified charity. He acquired the stock twenty months ago for $6,000. He may deduct $6,000 as a charitable contribution deduction (subject to percentage limitations).

In the year of her death, Maria made significant charitable contributions of capital gain property. In fact, the amount of the contributions exceeds 30% of her AGI. Maria’s executor can elect to deduct charitable contributions of up to 50% of Maria’s AGI on Maria’s final income tax return.

Employee business expenses for travel qualify as itemized deductions subject to the 2% floor if they are not reimbursed.

The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.

The purpose of the tax credit for rehabilitation expenditures is to encourage the relocation of businesses from older, economically distressed areas (i.e., inner city) to newer locations.

A taxpayer who meets the age requirement and receives no Social Security benefits will be entitled to the full tax credit for the elderly.

Unused foreign tax credits can be carried back three years and forward fifteen years.

Child and dependent care expenses include amounts paid for general household services.

Juan refuses to give the bank where he maintains a savings account his Social Security number. Juan is subject to backup withholding for the interest earned on the savings account.

If a seller assumes the buyer’s liability on the property acquired, the buyer’s adjusted basis for the property is increased by the amount of the liability assumed.

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922. Milton’s adjusted basis for the building at the end of the first year is $195,078 ($200,000 – $4,922).

In a casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the shareholder-recipient’s basis in the stock investment is treated as a capital gain.

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made. The amount of the amortized premium is treated as an interest deduction.

Purchased goodwill is assigned a basis equal to cost, which is calculated using the residual method associated with the purchase of a business.

The holding period for property acquired by gift is automatically long term.

The basis of inherited property usually is its fair market value on the date of the decedent’s death.

If the alternate valuation date is elected by the executor in 2018, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding period of the seller.

Gene purchased an SUV for $45,000 which he uses 100% for personal purposes. When the SUV is worth $30,000, he contributes it to his business. The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart’s nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

The tax law requires that capital gains and losses be separated from other types of gains and losses because an alternative tax calculation may be used when taxable income includes net long-term capital gain.

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless. The taxpayer is single and the loss is $30,000.  The loss is treated as an ordinary loss.

An individual taxpayer with 2018 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2019.

Qualified plans have higher startup and administrative costs than nonqualified plans.

A taxpayer who receives a distribution can avoid current taxation by rolling the distribution into another qualified employer retirement plan or into an IRA.

Dana contributes $2,000 too much to a § 401(k) plan which is not returned within 2 1/2 months after the close of the tax year. The employer will have to pay a tax of $200.

Low- and middle-income taxpayers may make nondeductible contributions up to $4,000 per child per year to a Coverdell Education Savings Account (CESA).

Regarding the tax formula and its relationship to Form 1040, which, if any, of the following statements is correct?

Which of the following taxpayers may file as a head of household in 2019?

Ron provides all the support for his mother, Betty, who lives by herself in an apartment in Fort Lauderdale. Ron pays the rent and other expenses for the apartment and properly claims his mother as a dependent.

Tammy provides over one-half the support for her 18-year old brother, Dan. Dan earned $4,200 in 2019 working at a fast food restaurant and is saving his money to attend college in 2019. Dan lives in Tammy’s home.

Joe’s wife left him late in December of 2018. No legal action was taken and Joe has not heard from her in 2019. Joe supported his 6-year-old son, who lived with him throughout 2019.

Nelda is married to Chad, who abandoned her in early June of 2018. She has not seen or communicated with him since then.  She maintains a household in which she and her two dependent children live. Which of the following statements about Nelda’s filing status in 2019 is correct?

Which, if any, of the following is a correct statement relating to the kiddie tax?

Perry is in the 33% tax bracket. During 2018, he had the following capital asset transactions:

Gain from the sale of a stamp collection (held for 10 years)	$30,000
Gain from the sale of an investment in land (held for 4 years)	10,000
Gain from the sale of stock investment (held for 8 months)	4,000

Perry’s tax consequences from these gains are as follows:

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions:

Salary from job	$90,000
Alimony received from ex-wife	10,000
Medical expenses	8,000

Based on this information, Sammy has:

Which of the following is a deduction for AGI (itemized deduction)?

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2018, the following occur associated with bad debts.

Credit sales	$400,000
Collections on credit sales	250,000
Amount added to the reserve	10,000
Beginning balance in the reserve	–0–
Identifiable bad debts during 2013	12,000

The amount of the deduction for bad debt expense for Petal for 2018 is:

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses:

Operating expenses in conducting bingo games	$247,000
Payoff money to state and local police	24,000
Newspaper ads supporting H.R. 9	3,000
Political contributions to legislators who support H.R. 9	8,000

Of these expenditures, Rex may deduct:

Which of the following may be deductible?

Tom operates an illegal drug-running operation and incurred the following expenses:

Salaries	$ 75,000
Illegal kickbacks	20,000
Bribes to border guards	25,000
Cost of goods sold	160,000
Rent	8,000
Interest	10,000
Insurance on furniture and fixtures	6,000
Utilities and telephone	20,000

Which of the above amounts reduces his taxable income?

Which of the following statements is correct in connection with the investigation of a business?

Which of the following is not a related party for constructive ownership purposes under § 267?

Which of the following expenses, if any, qualify as deductible?

Which, if any, of the following expenses are not subject to the 2%-of-AGI floor?

In 2018, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family.  In addition, he contributes $3,400 to a Health Savings Account.  Which of the following statements is true?

In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year). The tax is payable on June 1. On May 1, Reggie sells his house to Dana for $350,000. On June 1, Dana pays the entire real estate tax of $7,950 for the year ending December 31. How much of the property taxes may Reggie deduct?

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2018, he files his state return for 2017, paying an additional $600 in state income taxes. During 2017, his withholdings for state income tax purposes amount to $3,550. On April 13, 2018, he files his state return for 2017 claiming a refund of $800. Brad receives the refund on June 3, 2017. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2017 (filed in April 20148?

Refundable tax credits include the:

Which of the following best describes the treatment applicable to unused business credits?

Which, if any, of the following correctly describes the earned income credit?

George and Jill are husband and wife, ages 67 and 65 respectively. During the year, they receive Social Security benefits of $4,000 and have adjusted gross income of $11,000. Assuming they file a joint return, their tax credit for the elderly, before considering any possible limitation due to their tax liability, is:

During the year, Purple Corporation (a U.S. Corporation) has U.S.-source income of $1,800,000 and foreign income of $600,000. The foreign-source income generates foreign income taxes of $150,000. The U.S. income tax before the foreign tax credit is $816,000. Purple Corporation’s foreign tax credit is:

Jermaine and Kesha are married, file a joint tax return, have AGI of $82,500, and have two children. Devona is beginning her freshman year at State University during Fall 2018, and Arethia is beginning her senior year at Northeast University during Fall 2018 after having completed her junior year during the spring of that year. Both Devona and Arethia are claimed as dependents on their parents’ tax return. Devona’s qualifying tuition expenses and fees total $4,000 for the fall semester, while Arethia’s qualifying tuition expenses and fees total $6,200 for each semester during 2018. Full payment is made for the tuition and related expenses for both children during each semester. The American Opportunity credit available to Jermaine and Kesha for 2018 is:

An employer calculates the amount of income tax withheld from salary or wages based on the information an employee provides on the following form:

In terms of the withholding procedures, which statement does not reflect current rules?

The ceiling amounts and percentages for 2018 for the two portions of the self-employment tax are:

Social Security portion      Medicare portion

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker’s commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton’s basis for the land and the improvements?

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary’s recognized gain or loss?  It increased in value due to its excellent mileage, yet safe design.

Mike’s basis in his stock in Tan Corporation is $75,000. He receives nontaxable stock rights (fair market value of $20,000) when the value of the stock is $100,000. What is the basis for the stock rights?

Noelle received dining room furniture as a gift from her friend, Jane.  Jane’s adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000.  Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500.  What is her recognized gain or loss?

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy’s hands of $80,000. No gift tax was paid. What is the niece’s basis for depreciation (cost recovery)?

Taylor inherited 100 acres of land on the death of his father in 2018. A Federal estate tax return was filed and this land was valued therein at $650,000, its fair market value at the date of the father’s death. The father had originally acquired the land in 1967 for $112,000 and prior to his death he had expended $20,000 on permanent improvements. Determine Taylor’s holding period for the land.

Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?

Stanley operates a restaurant as a sole proprietorship. Which of the following items are capital assets in the hands of Stanley?

Michael is in the business of creating posters (display art) for the movie industry. He creates a poster and sells it for a lump sum.  He has:

Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?

Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device, but does not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigns the patent to a computer manufacturing company. Hiram assigned all substantial rights in the patent. Which of the following is correct?

Gold Company signs a 13-year franchise agreement with Silver. Silver retained significant powers, rights, and a continuing interest. Gold Company (the franchisee) makes noncontingent payments of $18,000 per year for the first four years of the franchise. Gold Company also pays a contingent fee of 2% of gross sales every month. Which of the following statements is correct?

A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.  The tenant wanted to get out of its lease so it could move to a different building.  The lessor had held the lease for three years before it was canceled.  The lessor had a zero tax basis for the lease.  The lessor has received:

In 2018, Jenny had a $12,000 net short-term capital loss and deducted $3,000 as a capital loss deduction. In 2018, Jenny has a $18,000 0%/15%/20% long-term capital gain and no other capital gain or loss transactions. Which of the statements below is correct?

Cason is filing as single and has 2018 taxable income of $36,000 which includes $34,000 of 0%/15%/20% net long-term capital gain.  What is his tax on taxable income using the alternative tax method?

Scott, age 68, has accumulated $850,000 in a defined contribution plan, $100,000 of which represents his own after-tax contributions.  If the full amount is distributed in 2018, his early distribution penalty is:

Dana, age 31 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $116,000. What amount, if any, may Dana contribute to a Roth IRA in 2018?

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years. The account is now worth $376,000. How much of these funds can Frank withdraw tax-free?

Pony, Inc., issues restricted stock to employees in July 2018, with a two-year vesting period and an SRF. An employee must remain a full-time employee of Pony for two years after the restricted stock is issued. The stock is trading at $10 per share when the stock is issued. An employee, Sam, decides to make the § 83(b) election with his 1,000 shares. At the end of 2018, the stock is selling for $13 per share. What amount, if any, can Pony take as a compensation deduction?

Which would not be considered an advantage of a nonqualified stock option plan over an incentive stock option (ISO) plan?