Individual Income Tax:

Credits and other tax topics:

1.
Mr. and Mrs. Ryan Bowling have three small children. During the current tax year, they
had to pay cash of $7,000 so that these children would be cared for allowing the parents
to be employed. They had adjusted gross income of $56,000. What is the amount that
they can claim as a child care credit on their joint tax return?
Top of Form

A $1,200

B $1,400

C $2,100

D $2,450
For two or more children, the taxpayers can utilize up to $6,000 of their payments as
long as they were needed for employment. Although the taxpayers here paid $7,000,
the credit is only based on $6,000. The amount of the credit depends on the
taxpayer ’s adjusted gross income. At very low levels, $15,000 or less, the credit is 35
percent. That rate is reduced gradually to 20 percent at over $44,000 in adjusted gross
income. The Bowlings have adjusted gross income above $44,000 and must use 20
percent. The credit that they can take to reduce their income tax is $1,200 ($6,000 times
20 percent).

2. Susan Everhardt is a single taxpayer with one child. Susan worked in maintenance
during the year and reports adjusted gross income of $14,000. She had to pay exactly
$1,000 this year to have her child taken care of so that she could be employed. What is
the amount of child care credit that she is allowed as a reduction to her income taxes for
the period?
Top of Form

A $200

B $350

C $400

D $1,000
For one child, a taxpayer can utilize up to $3,000 of child care payments as long as they
were needed for employment. The credit here is only based on the $1,000. The actual
amount of the credit depends on the taxpayer’s adjusted gross income. At very low
levels, $15,000 or less, the credit is 35 percent. That rate is reduced gradually to 20
percent at over $44,000 in adjusted gross income. Ms. Everhardt is in the low level so
her credit is 35 percent. She is entitled to a child care tax credit to reduce her income
taxes of $350 ($1,000 payment multiplied times 35 percent rate).

3, Many individual tax credits are nonrefundable. That term means that the credit cannot
be larger than the amount of income tax. If a taxpayer has income taxes of $200 but an
American Opportunity Credit (formerly known as the Hope Scholarship credit) of $290,
the extra $90 does not generate a refund to the taxpayer. Which of the following income
tax credits is refundable? In other words, it can generate a refund even if no tax
payments have been made by the taxpayer.
Top of Form

A Lifetime learning credit

B Credit for adoption expenses

C Earned income credit

D Child and dependent care credit

Under normal circumstances, income tax credits are nonrefundable. The taxpayer can
use them to reduce income taxes to zero but cannot use them to create credits. One
major exception to that rule does exist: the earned income credit. This credit is designed
to provide benefit to low-income workers who have wages or salaries (and, in most
cases, a qualifying child). Because the purpose is to benefit workers with low income,
the earned income credit was designed to be refundable; the benefit is available
regardless of the amount of income tax that is owed.

4, Jason and Elena Kordosky have two children, both of whom are dependents for tax
purposes. Their son Robert is a freshman at State University and their daughter
Amanda is a senior at Tech College. The Kordoskys paid $9,000 in tuition and related
educational costs for each of their children. Which of the following statements is true?
Top of Form

A The Kordoskys can take the American Opportunity credit in connection with both
of their children.

B The Kordoskys can take the American Opportunity credit and the lifetime learning
credit for both of their children.

C The Kordoskys can take the lifetime leaning credit for Robert and the American
Opportunity credit for Amanda.
 D The Kordoskys can take American Opportunity credit for Robert and the lifetime
learning credit for Amanda.
This money was paid for the education costs of the taxpayers or their dependents so
the Kordoskys are eligible for these education credits. However, both credits cannot be
taken for any one student. In addition, the American Opportunity credit (formerly the
Hope Scholarship credit) is only available for the first two years of post-secondary
education. Consequently, the money spent for Amanda cannot be used for that credit.
Only the lifetime learning credit is available for her costs. Robert is in his first year at
college. Therefore, in connection with his costs, they may take either the American
Opportunity credit or the lifetime learning credit.

5, Ms. Polly Atkini collects $1,000 in dividends from a company located in Italy. A
foreign tax of $93 was withheld on this income by the local authorities. Ms. Atkini is
attempting to determine the impact of this foreign tax when she is filing her United
States income tax return for this year. Which of the following is correct?
Top of Form

A The foreign tax cannot be taken as either an itemized deduction or as a tax

credit.

B The foreign tax must be taken as an itemized deduction.

C The foreign tax must be taken as a tax credit.

D The foreign tax can be taken as a tax credit or as an itemized deduction.

The payment of a foreign income tax is one of the few items in federal income tax rules
that an item can be used at either of two places. Normally, the benefit is larger if a credit
is taken but the taxpayer is also allowed the option of using the amount as an itemized
deduction.

Deduction for Adjusted Gross Income

1. Helen Hayward pays the following amounts. Which of these expenditures will she be
able to use to reduce the amount that she reports as adjusted gross income (AGI)?
Top of Form

A Casualty losses over a specified amount

B Moving expenses if job related and over a specified distance

C The cost of child car that is job related

 D Gambling losses
Moving expenses that relate to employment are deductible in arriving at adjusted gross
income if the taxpayer is forced to move at least fifty miles. Casualty losses and
gambling losses are both included with itemized deductions. The cost of child care is a
tax credit that reduces the amount of income taxes rather than adjusted gross income.

2.. Jim and Wanda had been married for several years but separated on January 1,
Year One. Jim gave Wanda $10,000 to live on at that time. They were granted a legal
decree of separation on March 1, Year One and were divorced on December 1, Year
One. According to the separation decree, Jim was to pay Wanda $3,000 per month with
1/3 of that amount designated to support their daughter Stephanie. According to the
divorce agreement, Jim was to pay Wanda $5,000 per month with half of that to support
Stephanie. The payments for Stephanie will cease when she turns 21 and the payments
to Wanda will cease at her death or remarriage. All payments were made in a timely
fashion. At the time of the divorce, Jim gave Wanda cash of $90,000 and an automobile
valued at $20,000 as a final property settlement. What is the tax effect to Jim of these
payments?
Top of Form

A He can report $20,500 as a deduction to arrive at adjusted gross income.

B He can report $30,500 as a miscellaneous itemized deduction.

C He can report $90,000 as a deduction to arrive at adjusted gross income.

D He can report $32,000 as a miscellaneous itemized deduction.

Alimony is taxable income for the recipient but it is also a deduction to arrive at adjusted
gross income for the party making the payment. To qualify as alimony, cash must be
paid to a spouse (or for the benefit of the spouse) after a legal decree of separate
maintenance or after the couple is divorced. The $10,000 payment made here before
the decree is not considered alimony and is not deductible. The child support is also not
alimony and not deductible. Any money paid as a property settlement is not viewed as
alimony. Here, the deductible alimony for Jim is 9 payments (March 1 to December 1)
where $2,000 (or 2/3) is alimony and one payment (December) where $2,500 (or 1/2) is
alimony. That is a total of $20,500 (nine times $2,000 plus $2,500).

3.
Harland Parker deposits $10,000 in a savings account. He is supposed to leave the
money there for one year and will receive $11,000. He is forced to take the money out
of the account early. The interest on the day of withdrawal was computed as $710.
However, he was charged a penalty of $200 because of the early withdrawal and only
received $10,510. Which of the following is true?
 Top of Form

A He should report interest revenue of $710 and a deduction for adjusted gross
income of $200.

B He should report interest revenue of $510.

C He should report interest revenue of $800.

D He should report interest revenue of $1,000 and a deduction for adjusted gross
income of $200.
Bottom of Form
Bottom of Form

The taxpayer earned $710 by the time of the withdrawal so that amount is properly
shown as income. However, because of the early withdrawal, there was a $200 penalty
assessed. To show that this amount of income was not actually received, the taxpayer
is allowed to reduce the income by taking it as a deduction in arriving at adjusted gross
income.

4, John Small put $1,000 into a Roth individual retirement account (IRA) when he was
48 years old. When he turned 62, he took the entire amount of $1,900 out. The extra
$900 had been earned over the years. Which of the following statements is true
Top of Form

A Small gets a deduction for adjusted gross income of $1,000 when the money was
put into the Roth IRA.

B The $900 is taxable when the money is removed from the Roth IRA but the other
$1,000 is tax free.

C The $1,000 is taxable when the money is removed from the Roth IRA but the
other $900 is tax free.

D The entire $1,900 is tax free when removed from the Roth IRA.
With approved individual retirement accounts, there is usually a tax advantage when the
money is put into the account or when the money is removed from the account but not
at both times. For a Roth IRA, the advantage occurs when the money is removed.
There is no deduction when the money is placed in the account. Later, as long as the
person is 59 1/2 or uses the money for a first-time home purchase, all money received
from the Roth IRA is tax free. Thus, the entire $1,900 is not subject to any income tax.

5. Eleanor Donohue put $1,000 into a traditional individual retirement account (IRA)
when she was 47 years old. When she turned 63, she took the entire amount of $2,600
out. The extra $1,600 had been earned over the years. Which of the following
statements is true?
Top of Form

A Donohue gets a deduction for adjusted gross income of $1,000 when the money
was put into the traditional IRA.

B The $1,600 is taxable when the money is removed from the traditional IRA but
the other $1,000 is tax free.

C The $1,000 is taxable when the money is removed from the traditional IRA but
the other $1,600 is tax free.

D The entire $2,600 is tax free when removed from the traditional IRA.
Bottom of Form
Bottom of Form
Bottom of Form

With approved individual retirement accounts, there is usually a tax advantage when the
money is put into the account or when the money is removed from the account but not
at both times. For a traditional IRA, the advantage occurs when the money is placed
into the account. Up to a maximum limit, there is a deduction in arriving at the
taxpayer’s adjusted gross income when the money is placed in the account. When the
money is removed, the entire amount must then be included in the taxpayer’s taxable
income. There is also a penalty charged for tax purposes if the money is removed
before the taxpayer is 59 1/2 (except for specific cases such as qualified costs paid for
higher education and a first-time home purchase).

6. Mary Sue Weatherburn filed her tax return for Year One and took the standardized
deduction. Within the required monetary limits, which of the following cannot be used to
reduce her taxable income?
Top of Form

A Qualified expenses paid as an educator

B Costs paid for child care so that taxpayer could be employed.

C Interest incurred on a student loan

D Qualified moving costs from Texas to Idaho that related to her job
Taxpayers are allowed to take a number of costs as deductions in arriving at adjusted
gross income. These deductions are allowed regardless of whether the taxpayer uses
the standard deduction or takes itemized deductions. They include (within various
monetary limits) qualified educator expenses, interest on student loans, qualified
 moving expenses that are job related, alimony paid, contributions to traditional IRA
plans, and any penalty paid on the early withdrawal of money from a savings account.
Money paid for child care so that the taxpayer can be employed is a tax credit that
reduces the taxpayer’s income tax rather than a deduction in arriving at adjusted
gross income.

7. Mr. and Mrs. Alan Gonzales filed a joint tax return for Year One. Within the required
monetary limits, which of the following cannot be taken as a deduction in arriving at that
their adjusted gross income?
Top of Form

A One-half of the amount paid as self-employment tax.

B Payment made to a traditional IRA plan

C Alimony payment made to ex-spouse

D Casualty loss on flooding of garage

Bottom of Form
Bottom of Form

Taxpayers are allowed to take a number of costs as deductions in arriving at adjusted

gross income. They include (within various monetary limits) one-half of any amount paid
as self-employment tax, qualified educator expenses, interest on student loans,
qualified moving expenses that are job related, alimony paid, contributions to traditional
IRA plans, and any penalty paid on the early withdrawal of money from a savings
account. Casualty losses from disasters such as a flood can be taken but only as an
itemized deduction.

8, Jane Adams and Cecilia Adams are sisters who work at the same company. One is
29 and the other is 31. This year, Jane put $2,200 into a traditional individual retirement
account while Cecilia put the same amount into a Roth individual retirement account.
They are now filing their income tax return for this year? Which of the following
statements is true?
Top of Form

A Cecilia can take out up to $10,000 prior to turning 59 1/2 without incurring a
penalty but Jane does not have this same option.

B When they withdraw the funds after they reach 59 1/2, Cecilia will have to report
taxable income but Jane will not.
 C When they withdraw the funds after they reach 59 1/2, neither sister will have to
report any taxable income.

D Jane will reduce the amount reported as her adjusted gross income this year but
Cecilia will not.
Bottom of Form

With a traditional individual retirement account, the amount contributed up to a specified

maximum limitation serves to reduce adjusted gross income. However, the amounts
taken out after retirement are fully taxable. The tax benefit is at the beginning. In a Roth
individual retirement account, there is no deduction at all received by the owner. When
the money is withdrawn (after the person turns 59 1/2), neither the principal nor the
income is taxable. The tax benefit is at the time of withdrawal. Both plans do allow a
certain amount of money to be withdrawn prior to the age of 59 1/2 without a tax penalty
if it is being used for a first-time home acquisition.

9.
James Wainwright goes to school at New York University in Manhattan. After
graduation, he takes a job as a sales representative in Delaware. He pays $700 to end
his lease prematurely in Manhattan. He pays Instant Moving Corporation $1,100 to
move his furniture from Manhattan to his new apartment in Dover, Delaware. He rents a
mini-van for $300 and drives himself and his spouse to the new location. In filing his
federal income tax return, what amount should Wainwright deduct for moving expenses
in order to compute adjusted gross income?
Top of Form

A Zero

B $300

C $1,000

D $1,400
Moving expenses can be deducted in arriving at adjusted gross income. The move must
be related to employment and must be at least 50 miles. If those requirements are met,
the cost of physically moving possessions ($1,100) and people ($300) can be deducted.
Other costs such as the cost of breaking a lease are not deductible.

10.

Max Snyder teaches science in the fifth grade of his local public school. Because of
budgetary cutbacks, he is forced to buy certain supplies (such as test tubes) himself. In
the current year, he spent several hundred dollars for supplies to be used by his
students. Which of the following statements is true?
Top of Form

A These expenditures were made at the decision of the taxpayer and are not
deductible.

B If Snyder itemizes his deductions, the amount spent can be included within the
miscellaneous deductions that are only deductible if it is more than 2 percent of the
adjusted gross income reported by the taxpayer.

C These expenditures can be deducted in arriving at the taxpayer’s adjusted

gross income but only up to a set limit.

D As a public school teacher, the taxpayer can deduct all of these amounts
regardless of the amount reported as adjusted gross income.
Educators in all of the grades from kindergarten through the twelfth grade are allowed to
deduct their out-of-pocket costs up to a maximum amount ($250 in recent years).
Qualified expenses include ordinary and necessary expenses paid in connection with
books, supplied, equipment, software, and the like.

11. Mr. and Mrs. Jack Stephen Collins have chosen to home school their daughter
Janet. She is currently in the fourth grade. They have been forced to buy certain
supplies (such as books and test tubes). In the current year, they spent several hundred
dollars for supplies to be used in Janet’s education. They are now trying to determine
the amount that they can deduct as educator’s expenses in arriving at adjusted gross
income. Which of the following statements is true?
Top of Form

A These expenditures are not deductible in arriving at adjusted gross income.

B If Mr. and Mrs. Collins itemize their deductions, the amount spent can be
included within the category ’miscellaneous deductions that are only deductible if
more than 2 percent of adjusted gross income.

C These expenditures can be deducted in arriving at the taxpayer’s adjusted

gross income but only up to a set dollar limit.

D Because they are home schooling their child, these taxpayers can deduct all of
these amounts regardless of the amount reported as adjusted gross income.
Educators in all of the grades from kindergarten through the twelfth grade are allowed to
deduct their out-of-pocket costs up to a maximum amount ($250 in recent years).
Qualified expenses include ordinary and necessary expenses paid in connection with
 books, supplied, equipment, software, and the like. However, expenses for home
schooling are not included as allowable costs for this deduction.

12.
Which of the following moving expenses can an individual taxpayer not take as a
deduction to arrive at adjusted gross income?
Top of Form

A The taxpayer took a job in a city 80 miles away but did not move for the first 15
months so that her eldest son could graduate from his local high school.

B The taxpayer commuted 12 miles to get to his job but took another job that
required a commute of 55 miles so he moved to be closer.

C The taxpayer moved to take a job in a city 100 miles away but retired after only
working for 42 weeks.

D The taxpayer took a job in a city 120 miles away and sold his house to move into
an apartment at the new location.
There are several tests that must be met before moving expenses can be deducted. For
example, the taxpayer must normally move within a year of taking the new job unless
circumstances arose that prevent the move in that time period. The son finishing high
school is one of those circumstances. The taxpayer must also work at least 39 weeks in
the general area of the new location. Moving must be a change in the taxpayer’s main
home, which can be a house, apartment, condominium, houseboat, or the like. Finally,
the new job must be a commute of 50 or more miles farther than the previous commute.
In B, the commute is only 43 miles farther (55 miles minus 12 miles) and does not
qualify.

13.
Miriam Wallesto has come to Wilma Randolph CPA to do her federal income taxes. Ms.
Wallesto has gross income for the year of $40,000. She spent $100 this year and wants
to know if that amount can be used to reduce her adjusted gross income. Under which
of the following will she not be able to use to reduce the amount reported as her
adjusted gross income?
Top of Form

A She is a 4th grade teacher and spent the money for supplies for her class and
was not reimbursed.

B She changed jobs this year and spent the money moving 14 miles to be close to
the new place of business because she rides her bicycle to work.

C She put the money into an Individual Retirement Account.

 D She recently graduated from college and spent the money to pay for interest on
her education loans.
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form

Moving expenses can only be a deduction to arrive at adjusted gross income if the new
job is at least 50 miles further from her previous residence than the old job was. The
other three costs can all be deducted from gross income to arrive at adjusted gross
income.

14.
Which of the following statements is true about an education IRA (also known as a
Coverdell Education Savings Account)?
Top of Form

A Amounts placed in such plans, if properly constructed, provide a reduction in

current year income taxes.

B The beneficiary must be a blood relative.

C Money that is withdrawn and properly used to pay the beneficiary’s educational
expenses is tax-free.

D All taxpayers are allowed to create and fund education IRAs.

For an education IRA, there is no benefit when the money is put into the fund. The
benefit is gained when the money is pulled out and properly used; it is tax-free. The
beneficiary does not have to be related to the taxpayer but does have to be under 18.
Taxpayers with high levels of income lose the right to create such plans.

15.
A taxpayer is studying both a traditional individual retirement account (IRA) and a Roth
IRA. Which of the following is true?
Top of Form

A Contributions to both are tax deductible when made.

 B Contributions to both are tax deductible when made.

C Contributions to a traditional IRA are tax deductible but eventual distributions are
taxable while contributions to a Roth IRA are not tax deductible but eventual
distributions are tax free.

D Contributions to a Roth IRA are tax deductible but eventual distributions are
taxable while contributions to a traditional IRA are not tax deductible but eventual
distributions are tax free.
For a traditional IRA, contributions reduce taxable income in the current year. However,
when the money is eventually received as a distribution, it is taxable income. For a
Roth IRA, there is no reduction in taxable income when the contribution is made. But,
when the money is eventually received as a distribution, it is nontaxable income. (As
with most tax laws, some exceptions do exist in both cases.)

16.
James Miller operates a wine shop as a sole proprietorship. On a Wednesday evening,
he holds a meeting with several of his suppliers. The meeting lasts for several hours
as they discuss various wines that will become available during the following year.
After the meeting, Miller takes the entire group to a local minor league baseball game
and pays for the entire event. How much of this cost can he deduct for income tax
purposes?
Top of Form

A Zero

B Twenty percent

C Fifty percent

D All of it
Fifty percent of entertainment expenses can be deducted for tax purposes as long as it
is directly related or associated with the active conduct of the taxpayer’s trade or
business. This rule is met if the entertainment precedes or follows a substantial
business discussion. That rule is met in this situation.

17.
Which of the following is not deductible by an individual taxpayer in arriving at adjusted
gross income?
Top of Form

A Qualifying moving expenses

 B One-half of self-employment taxes

C Alimony paid

D Union dues
Bottom of Form

If you look at the 1040 form, qualifying moving expenses are deductible on line 26 to
arrive at adjusted gross income, one-half of self-employment tax payment is deductible
on line 27, and alimony payments are deducted on line 31a. They all can be used to
reduce the amount reported by the taxpayer as adjusted gross income. Union dues are
deductible on Schedule A as an itemized deduction. They are reported on line 21 as
“job expenses and certain miscellaneous deductions.” However, no amount can be
deducted except the total amount of these expenses that is in excess of 2 percent of
adjusted gross income

Exchanges

1. What are the two categories of capital assets for individual taxpayers?
Top of Form

A Industrial and personal

B Personal and rental

C Investment and industrial

D Personal and investment

Capital assets for individual taxpayers are personal property such as household
furniture and tools and investment property (such as real estate and securities such as
stocks and bonds).

2. Which of the following statements is true with respect to capital assets for individual
taxpayers?
Top of Form

A Gains and losses for both investment and personal property are reported on
schedule D of the form 1040.

B The taxpayer must report gains and losses on investment property, but only
reports gains on personal property.
 C Losses on personal property are deductible only to the extent of gains on
personal property

D Losses on investment property are deductible only to the extent of gains on

investment property
Taxpayers must report gains and losses on investment property (such as their
investment stocks and bonds) but only gains on personal property are reported. For
example, if a taxpayer sells personal furniture at a gain, that capital gain must be
reported. However, if the same personal property is sold at a loss, no deduction is
allowed

3. Bob Gibson purchased 2,000 shares of IBC Corporation three years ago for $32 per share. The shares are currently at
$11 per share on the stock market. Bob sells all of these stock on February 1 and then repurchases the same number of
shares on February 22 for $11.50. What is the amount of gain/loss to be reported on Bob ’s tax return for this year?
Top of Form

A There is no gain or loss reported on the sale of these securities.

B Wash sale rules require the loss to be reported but it is offset by the difference in the selling and repurchase prices.

C The loss of $.50 per share will be reported in the current year.

D The loss equal to $32 minus $11 per share will be reported as a long-term capital loss
Taxpayers cannot sell capital assets to create losses to offset capital gains if they, in essence, replace the capital asset.
This is referred to as a wash sale and occurs when, substantially identical securities are bought within 30 days either before
or after the date of the sale or disposal. Here, the taxpayer bought the same shares within 30 days of the sale. This is a
wash sale and the taxpayer cannot deduct the loss. The taxpayer does not have a loss because the taxpayer still holds the
same shares. Gains on stocks sold under the same scenario are fully taxable.

4. Maggie Miranda had the following transactions during last year: $36,000 short-term capital loss, $15,000 long-term capital
loss, $25,000 short-term capital gain and $ 22,000 long-term capital gain. What is the impact on taxable income for this
year?
Top of Form

A $ 7,000 taxed as a long-term capital gain

B $ 3,000 short-term capital loss carried forward to future years

C $ 7,000 long-term capital gain taxed at capital gain rates and $3,000 short-term capital loss which is deductible
against ordinary income

D $3,000 short-term capital loss deducible against ordinary income this year.
There is a net $11,000 short term capital loss ($36,000 minus $25,000) and a net $7,000 long term capital gain ($22,000
minus $15,000). The $11,000 loss and the $7,000 gain net to a $4,000 loss which is short-term because $11,000 is larger
than $7,000. A net capital loss of up to $3,000 is deductible against ordinary income each year. Because it is an individual
taxpayer, the remaining $1,000 loss is carried forward indefinitely to impact future capital gain and loss computations.
5. Tom Metty sold property to his son in a transaction that was viewed as a related party transactions for income tax
purposes. Which of the following is true regarding related party transactions?
Top of Form

A Gains from related party transactions are taxed, but losses are not deductible

B Related party transactions are ’suspended ’ until there is a final transaction with an outside party.

C Gains and losses are not recorded on transactions between related parties.

D Related party transactions only apply to corporate ownership of other corporations

Bottom of Form
Bottom of Form

Because of the potential for abuse that would be available on transactions between related parties, gains are taxed but
losses are not deductible. Thus, if Tom has a gain on the transaction with his son, it must be reported. However, if a loss
occurs as a result of this transaction, no deduction is allowed.

6.
Martha Moyes is married, but has separated from her husband. She will appropriately file her income tax return as married,
filing separately. She had the following stock transactions: Capital gain on sale of stock (short-term): $ 23,050, Capital loss
on sale of stock (long-term): $ 27,500. What is the treatment of capital gains on her tax return?
Top of Form

A She can deduct the net $4,450 capital loss against her ordinary income.

B She can deduct $3,000 of the capital loss this year against her ordinary income.

C She can deduct $1,500 of the loss this year against her ordinary income.

D She can deduct the capital loss only to the extent of the capital gain. The remainder will be carried forward and can
be deducted against capital gains that occur in the future.
Martha is filing as married but with a separate return so she would get only one-half of the amount granted on a joint return.
For all filing status except this one, any capital losses are deductible up to $3,000. This amount is deductible against
ordinary income. Unused capital losses are carried forward (indefinitely for an individual taxpayer) and can be used to offset
capital gains and ordinary income in the future. For her filing status, though, the maximum deduction is reduced by half.

7.
Three years ago, Abbey Hoffman loaned $19,000 to her brother-in-law Tom Osborne. Tom signed a note and promised to
make monthly payments including interest at a 6 percent annual rate. Tom never paid her any of this money and she had
recognized no revenue from this loan. During the current year, Tom admitted to Abbey that he is never going to repay her.
What is the tax effect for Abbey?
Top of Form

A Abbey can write off the principle of the loan and all the lost interest income in the year she learns that they will not
be repaid

B Abbey must file an amended return to claim the loss on the principle of the loan in the year it was originally made.

C Abbey can write off the principle of the loan in the year she determines it to be totally worthless.
 D Abbey must obtain a court judgement in her favor before she can deduct the principle of the loan as a capital loss
Non-business bad debts are written-off in the year the loan is deemed worthless and is categorized as short-term
irrespective of the time period involved. The foregone interest is not deductible. Therefore, she will report a $19,000 short-
term capital loss in the current year.

8.
JayJ Conover incurred a non-business bad debt of $9,700 in the current tax year. The loan had been outstanding for 13
months but was now viewed as completely worthless. Which of the following statements are true in connection with the
individual's income tax return/
Top of Form

A All $9,700 is a short-term capital loss.

B All $9,700 is a long-term capital loss.

C It is a short-term capital loss of $3,000 and a long-term capital loss of the remaining $6,700.

D It is a long term capital loss of $3,000 and a short term capital loss of $6,700.
Non-business bad debts are deductible as short term capital losses on Schedule D of the form 1040 in the year the debt
becomes worthless. Such losses are treated as short-term capitales loss no matter how long the debt was outstanding.

9.
Ramona gave Abigail three acres land which she had purchased eight years ago for $23,000. The fair value of the land on
the date of the gift was $42,000. Shortly thereafter, Abigail sells the land for $39,000. What is the tax basis of the land to
determine the gain or loss on this sale?
Top of Form

A $23,000

B $39,000

C $42,000

D Zero
Bottom of Form

The basis of a gift received is the basis in the hands of the gift giver. In this case, that is the original cost of $23,000. There
is a significant exception although it does not apply here. When a gift received is sold for less than the basis in the hands of
the previous owner, the seller will use the lower of that basis or the fair value at the date of the gift as the basis. That limits
the amount of loss that can be deducted by the seller. If the sales price is more than the fair value at the date of the gift but
less the original owner's basis, no gain or loss at all is reported.
10
Susan McKenzie inherited 500 shares of a stock with a market value of $40 per share from her aunt. The aunt’s basis in
the stock was $22 per share. What amount of income should McKenzie report on her income statement as a result of this
conveyance?
Top of Form

A $20,000

B $11,000
 C $9,000

D Zero
The value of assets received through inheritance is not reportable on an income tax return as income for the simple reason
that inheriting assets is not earning income. The property will have a tax basis equal to the fair value of the assets on the
date of death. However, the executor of the estate may choose an alternate valuation date which is 6 months from the date
of death (or the date of conveyance, if earlier).

11

Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form
Bottom of Form