In 19X4, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth,
and his son, Clay, both of whom are U.S. citizens. During 19X4, Ruth did not live with Smith. She received $9,000 in Social Security benefits. Clay, a 25 year-old full-time graduate student, and his
wife lived with Smith. Clay had no income but filed a joint return for 19X4, owing an additional
$500 in taxes on his wife's income. How many exemptions was Smith entitled to claim on his 19X4
tax return?
A.
4
B.
3
C.
2
D.
1
Correct Answer: C
Explanation:
Choice "c" is correct. Smith is entitled to an exemption for himself. He is also entitled to an
exemption for his mother Ruth (qualifying relative). Ruth has $9,000 in Social Security payments during
19X4, but since that is her only income, the Social Security is not taxable, and nontaxable income does
not count in calculating whether an exemption can be taken for a dependent. Clay cannot be taken as
a dependent because he filed a joint return with his wife. Since the joint return was filed for a purpose
other than simply claiming a refund, the joint return prevents Smith from claiming an exemption for
Clay. An exemption cannot be taken for Clay's wife because she filed a joint return with Clay. Smith is
entitled to two exemptions. Choice "a" is incorrect. Clay cannot be taken as a dependent because he
filed a joint return with his wife. Since the joint return was filed for a purpose other than simply
claiming a refund, the joint return prevents Smith from claiming an exemption for Clay. An exemption
cannot be taken for Clay's wife because she filed a joint return with Clay. Choice "b" is incorrect. Clay
cannot be taken as a dependent because he filed a joint return with his wife. Since the joint return was
filed for a purpose other than simply claiming a refund, the joint return prevents Smith from claiming
an exemption for Clay. An exemption cannot be taken for Clay's wife because she filed a joint return
with Clay. Choice "d" is incorrect. Smith is entitled to an exemption for his mother, Ruth. Ruth has
$9,000 in Social Security payments during 19X4, but because that is her only income, the Social
Security income is not taxable, and nontaxable income does not count in calculating whether an
exemption can be taken for a dependent. Individual Taxation - Gross Income
Question #2 (Topic: demo questions)
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest
authoritative value for tax planning of transactions?
A.
Internal Revenue Code.
B.
IRS regulations.
C.
Tax court decisions.
D.
IRS agents' reports.
Correct Answer: A
Explanation:
This question is addressed in your Appendix D text materials. We are confident that
our students would be able to respond correctly over 85% of the time without any guidance on this
topic. The answer is rather obvious. Just by looking at the answer options, you will immediately notice
that Option A is presented in title case. This would be a quick sign that it may be the correct response.
Further, we suspect that most students would narrow the options down to "a" or "b" by simply using
common sense. While we are confident that our students would fare well on this question if it
appeared on their exams, we present the following detailed explanation of the answer options. Choice
"a" is correct. According to the IRS's website under Tax Code, Regulations and Official Guidance, the
"federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title
26 of the United States Code (26 U.S.C.)." The IRC holds the most authoritative value. Choice "b" is
incorrect. According to the IRS's website under Tax Code, Regulations and Official Guidance, the IRS
regulations or "Treasury regulations (26 C.F.R.)-commonly referred to as Federal tax regulations-pick
up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRS
by the U.S. Department of Treasury." Regulations give directions on how to apply the law outlined in
the Internal Revenue Code. Regulations have the second most force and effect, second only to the IRC.
Choice "c" is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the
authority of the IRC.
Choice "d" is incorrect. The reports of IRS agents are used to report on specific taxpayer situations.
IRS agents' reports apply the Internal Revenue Code, IRS regulations, and other forms of
authoritative literature, but they do not hold the value that the IRC, the IRS regulations, or even tax
court decisions have.
Individual Taxation - Exemptions
Question #3 (Topic: demo questions)
Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for
$2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the
year. Expenses for the cabin were as follows:
Real estate taxes $1,000
Maintenance and utilities $2,000
How much rental income (loss) is included in Barkley's adjusted gross income?
A.
$0
B.
$500
C.
$(500)
D.
$(1,500)
Correct Answer: A
Explanation:
If a vacation residence is rented for less than 15 days per year, it is treated as a
personal residence. The rental income is excluded from income, and mortgage interest (first or second
home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are
not deductible. Choice "a" is correct. Applying the rule above, if a vacation residence is rented for less
than 15 days per year, it is treated as a personal residence. The rental income ($2,500 in this case) is
excluded from income. A Schedule E is not filed for this property (i.e., no income is reported, the taxes
are reported as itemized deductions, and the maintenance and utilities are not deductible), so the
effect on AGI is zero. Choice "b" is incorrect. This assumes that the property taxes are reported as
itemized deductions but that the rental income ($2,500) less the maintenance and utilities ($2,000) are
reported net on Schedule E. Per the above RULE, the rental income is excluded from income, and the
maintenance and utilities are not deductible. Choice "c" is incorrect. This assumes that all of the items
shown are reported net on the Schedule E- $2,500 - $1,000 - $2,000 = ($500). Per the above RULE, the
rental income is excluded from income,
Question #4 (Topic: demo questions)
In which of the following situations may taxpayers file as married filing jointly?
A.
Taxpayers who were married but lived apart during the year.
B.
Taxpayers who were married but lived under a legal separation agreement at the end of the year.
C.
Taxpayers who were divorced during the year.
D.
Taxpayers who were legally separated but lived together for the entire year.
Correct Answer: A
Explanation:
Choice "a" is correct. Per the above rule, taxpayers who are married but lived apart
during the year are allowed to file a joint return for the year. The fact that they did not live
together during the year has no bearing on the issue. Choice "b" is incorrect. Per the above rule,
taxpayers who are married but lived under a legal separation agreement at the end of the year
may not file a joint return. They will generally file either under the single or head of household
filing status. Choice "c" is incorrect. Per the above rule, taxpayers who were divorced during the
year may not file a joint return together, as they are not married at the end of the year. [Note,
however, that they may become married again in the year and file a joint return with the new
spouse.] Choice "d" is incorrect. Per the above rule, taxpayers who were legally separated but
lived together for the entire year may not file a joint return. They will generally file either under
the single or head of household filing status.
Question #5 (Topic: demo questions)
Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home
for a dependent child. What is Parker's most advantageous filing status?
A.
Single.
B.
Head of household.
C.
Married filing separately.
D.
Qualifying widow(er) with dependent child.
Correct Answer: D
Explanation:
Choice "d" is correct. A qualifying widow (er) is a taxpayer who may use the joint tax
return standard deduction and rates (but not the exemption for the deceased spouse) for each of two
taxable years following the year of death of his or her spouse, unless he or she remarries. The surviving
spouse must maintain a household that, for the whole entire taxable year, was the principal place of
abode of a son, stepson, daughter, or stepdaughter (whether by blood or adoption). The surviving
spouse must also be entitled to a dependency exemption for such individual. Parker may file as a
qualifying widow (er) since her spouse died in the previous tax year, she did not remarry and she
maintained a home for a dependent child. Since, qualifying widow (er) is the most advantageous status
and Parker qualifies, Parker would file as a qualifying widow (er). Choice "a" is incorrect. Even though
Parker would qualify as single, filing single would give Parker a high tax liability than the qualifying
widow (er) status and therefore is not most advantageous. Choice "b" is incorrect. Parker would not
qualify as head of household for the first two years after the death of Parker's spouse because one of
the requirements for Head of Household status is that the taxpayer is NOT a surviving spouse. (Also,
note that the likely reason for this requirement is that filing as Head of Household status would give
the qualifying surviving spouse taxpayer a higher tax liability than the Qualifying Widow(er) status,
which would be less advantageous.) Choice "c" is incorrect. Parker would not qualify to file married
filing separately.