Multiple choice Tax Questions

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Multiple choice Tax Questions

 

Peter and Eileen are married and live in a common law state. Peter wants to make gifts to their five children in 2009. What is the maximum amount of the annual exclusion they will be allowed for these gifts?

 A) $60,000.

 B) $65,000.

 C) $120,000.

 D) $130,000.

 E) None of the above.

2.

Which is a primary source of tax law?

 A) J. W. Yarbo v. Comm., 737 F.2d 479 (CA-5, 1984).

 B) Article by a Federal judge in Harvard Law Review.

 C) Technical Advice Memoranda.

 D) Letter ruling.

 E) All of the above are primary sources.

3.

Jerry purchased a U.S. Series EE savings bond for $279. The bond has a maturity value in 10 years of $500 and yields 6% interest. This is the first Series EE bond that Jerry has ever owned.

 A) Jerry must report the interest income each year using the original issue discount rules.

 B) Jerry can report all of the $221 interest income in the year the bond matures.

 C) The interest on the bonds is exempt from Federal income tax.

 D) Jerry must report ($500 – $279)/10 = $22.10 interest income each year he owns the bond.

 E) None of the above.

4.

Home Office, Inc., leased a copying machine to a new customer on December 27, 2009. The machine was to rent for $500 per month for a period of 36 months beginning January 1, 2010. The customer was required to pay the first and last month’s rent at the time the lease was signed. The customer also was required to pay an $800 damage deposit. Home Office must recognize as income for the lease:

 A) $1,000 in 2009, if Home Office is an accrual basis taxpayer.

 B) $1,000 in 2010, if Home Office is a cash basis taxpayer.

 C) $1,800 in 2009, if Home Office is a cash basis taxpayer.

 D) $0 in 2009, if Home Office is an accrual basis taxpayer.

 E) None of the above.

5.

Kathy operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period.  On July 1, 2009, Kathy sold a one-year membership and a two-year membership.

I.          If Kathy is a cash basis taxpayer, her 2009 gross income from the contracts is $960 ($360 + $600).

II.        If Kathy is an accrual basis taxpayer, her 2009 gross income from the contracts is $330 [(6/12 ï‚´ $360) + (6/24 ï‚´ $600)].

III.       If Kathy is an accrual basis taxpayer, her 2010 gross income from the contracts is $630 [(6/12)($360) + $450].

           

 A) Only I is true.

 B) Only I and II are true.

 C) Only II and III are true.

 D) I, II, and III are true.

 E) None of the above.

6.

Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months.  After he received the doctor’s diagnosis, Ben cashed in his life insurance policy to pay some medical bills.  Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company.

 A) Neither Ben nor Henry is required to recognize gross income.

 B) Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross income.

 C) Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross income.

 D) Ben must recognize $38,000 ($50,000 – $12,000) of gross income, but Henry does not recognize any gross income.

 E) None of the above.

 

Roger, age 19, is a full-time graduate student at State College. During 2009, he received the following payments:

State scholarship for ten months (tuition and books)           $3,600

Loan from college financial aid office            1,500

Cash support from parents    3,000

Cash prize awarded in contest               500

            $8,600

           

 

Roger served as a resident advisor in a dormitory and therefore the university waived the $2,400 charge for the room he occupied.  What is Roger’s adjusted gross income for 2009?

 A) $11,000.

 B) $4,100.

 C) $2,900.

 D) $500.

 E) None of the above.

8.

Early in the year, Mike was in an automobile accident during the course of his employment. As a result of the injuries he sustained, he received the following payments during the year:

Worker’s compensation benefit         $4,000

Reimbursement of medical expenses from the company’s group medical

   insurance plan         6,000

Regular salary under the company’s sick pay plan  5,000

           

 

What is the amount that Mike must include in gross income for the current year?

 A) $15,000.

 B) $11,000.

 C) $9,000.

 D) $5,000.

 E) None of the above.

9.

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

 A) Contribution to a traditional IRA.

 B) Roof repairs to a rental home.

 C) Safe deposit box rental fee in which stock certificates are stored.

 D) Alimony payment.

 E) None of the above.

10.

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2009, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2009, 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:

 A) $247,000.

 B) $250,000.

 C) $258,000.

 D) $282,000.

 E) None of the above.

11.

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:

 A) A deduction for AGI.

 B) A deduction from AGI, subject to the 2 percent floor.

 C) A deduction from AGI, not subject to the 2 percent floor.

 D) Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.

 E) Not deductible.

12.

John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:

Cost basis       $250,000

Value before the fire  400,000

Value after the fire     100,000

Insurance recovery    270,000

           

 

John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

Cost basis       $80,000

Value before the accident      6,000

Value after the accident         20,000

Insurance recovery    –0–

           

 

What is John’s deductible casualty loss?

 A) $0.

 B) $15,800.

 C) $15,900.

 D) $35,900.

 E) None of the above.

13.

Janice, single with one dependent child, had the following items for the year 2009:

Salary  $30,000

Dividend income         10,000

Loss on § 1244 small business stock held for three years   (45,000)

Total itemized deductions      (5,000)

           

 

Determine Janice’s net operating loss for the year 2009.

 A) $0.

 B) $5,000.

 C) $13,350.

 D) $20,000.

 E) None of the above.

14.

Jack, age 30 and married with no dependents, is a self-employed individual. For 2009, his self-employed business sustained a net loss from operations of $10,000. The following additional information was obtained from his personal records for the year:

Nonbusiness long-term capital gain  $  2,000

Interest income          6,000

Itemized deductions—consisting of taxes and interest        (12,000)

           

 

Based on the above information, what is Jack’s net operating loss for the current year if he and his spouse file a joint return?

 A) $2,000.

 B) $8,000.

 C) $10,000.

 D) $11,000.

 E) $16,400.

15.

Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:

            Cost Recovery Allowed          Cost Recovery Allowable

Year 1 $16,000           $  8,000

Year 2     9,600             12,800

Year 3     5,760               7,680

                       

 

If Tara sells the machine after three years for $15,000, how much gain should she recognize?

 A) $3,480.

 B) $6,360.

 C) $9,240.

 D) $11,480.

 E) None of the above.

16.

Alice purchased office furniture on September 20, 2009, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery.  Alice does elect not to take additional first-year depreciation.  Determine the cost recovery deduction for the business assets for 2009.

 A) $6,426.

 B) $14,710.

 C) $25,722.

 D) $30,290.

 E) None of the above.

17.

On January 15, 2009, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2009 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2009.

 A) $150,000.

 B) $175,000.

 C) $176,000.

 D) $200,000.

 E) $250,000.

18.

Corey performs services for Sophie.  Which, if any, of the following factors indicate that Corey is an independent contractor, rather than an employee?

 A) Sophie sets the work schedule.

 B) Corey provides his own tools.

 C) Corey files a Form 2106 with his Form 1040.

 D) Corey is paid by the hour.

 E) None of the above.

19.

A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons:

 A) To avoid the self-employment tax.

 B) To claim unreimbursed work-related expenses as a deduction for AGI.

 C) To avoid the cutback adjustment on unreimbursed business entertainment expenses.

 D) To avoid the 2%-of-AGI floor on unreimbursed work-related expenses.

 E) None of the above.

20.

Amy works as an auditor for a large major CPA firm. During the months of September thru and November of each year, she is permanently assigned to the team auditing Garnet Corporation. As a result, every day she drives from her home to Garnet and returns home after work. Mileage is as follows:

            Miles

Home to office            10

Home to Garnet          30

Office to Garnet          35

           

 

For these three months, Amy’s deductible mileage for each workday is:

 A) 0.

 B) 30.

 C) 35.

 D) 60.

 E) None of the above.

21.

Rosita is employed as a systems analyst.  For calendar year 2009, she had AGI of $120,000 and paid the following medical expenses:

Medical insurance premiums $3,900

Doctor and dentist bills for Jose       

and Carmen (Rosita’s parents)          8,250

Doctor and dentist bills for Rosita     6,750

Prescribed medicines for Rosita        300

Nonprescribed insulin for Rosita       825

           

 

José and Carmen would qualify as Rosita’s dependents except that they file a joint return. Rosita’s medical insurance policy does not cover them.  Rosita filed a claim for $3,150 of her own expenses with her insurance company in December 2009 and received the reimbursement in January 2010.  What is Rosita’s maximum allowable medical expense deduction for 2009?

 A) $2,775.

 B) $11,025.

 C) $17,325.

 D) $17,775.

 E) None of the above.

22.

Sandra is single and does a lot of business entertaining at home.  Because Arthur, Sandra’s 80-year old dependent grandfather who lived with Sandra, needs medical and nursing care, he moved to Twilight Nursing Home.  During the year, Sandra made the following payments on behalf of Arthur:

Room at Twilight        $4,500

Meals for Arthur at Twilight   850

Doctor and nurse fees            700

Cable TV service for Arthur’s room        107

Total    $6,157

           

 

Twilight has medical staff in residence.  Disregarding the 7.5% floor, how much, if any, of these expenses qualify for a medical deduction by Sandra?

 A) $6,157.

 B) $6,050.

 C) $5,200.

 D) $1,550.

 E) None of the above.

23.

Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 in 1989. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest?

 A) $50,000.

 B) $100,000.

 C) $220,000.

 D) $230,000.

 E) None of the above.

24.

Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.

 A) All four businesses can be treated as a single activity if Tara elects to do so.

 B) Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity.

 C) The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity.

 D) All four businesses must be treated as separate activities.

 E) None of the above.

25.

Tess owns a building in which she rents apartments to tenants and operates a restaurant.  Which of the following statements is incorrect?

 A) If 60% of Tess’s gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities.

 B) If 95% of Tess’s gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity.

 C) If 5% of Tess’s gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity.

 D) If 98% of Tess’s gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity.

 E) None of the above.

26.

Tony is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000 and miscellaneous itemized deductions (after adjustment for the 2%-of-AGI floor) amount to $2,800. In addition to the $1,400 of investment expenses included in miscellaneous itemized deductions, Tony paid $3,600 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Tony’s maximum investment interest deduction for the year is:

 A) $95,000.

 B) $18,000.

 C) $17,500.

 D) $13,000.

 E) None of the above.

27.

Prior to the effect of tax credits, Eunice’s regular income tax liability is $200,000 and her tentative AMT is $190,000. Eunice has general business credits available of $12,500. Calculate Eunice’s tax liability after tax credits.

 A) $200,000.

 B) $190,000.

 C) $187,500.

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