Let’s see just how much you know about the tax laws related to your personal income tax return. This fun, little quiz is compiled using software designed to help tax professionals pass the very rigorous IRS Special Enrollment Examination, or SEE. Tax professionals who pass this three-part exam earn the Enrolled Agent designation from the IRS and may represent taxpayers before the IRS and most state and local taxing agencies.
Two software companies who have consented to let us use their questions and answers – Gleim Publications and the Fast Forward Academy. They are both based in Florida and also provide software to help CPA candidates pass those intense examinations.
Ten questions have been selected to test your knowledge of routine things that taxpayers with family and investments deal with all the time. Let’s see if you know as much as the pros. Have fun!
Questions: (Answers Below)
1. Scott McTavish made a rollover contribution from his traditional IRA to a newly created Roth IRA on Dec. 1, 2011. Also, on Feb. 1, 2013, he made another rollover contribution from an employer IRA to the same account. Which of the following is correct?
A. He may not withdraw the funds tax-free earlier than Dec. 1, 2016.
B. He may not withdraw funds tax-free earlier than Feb. 1, 2018.
C. He must make the Feb. 1, 2013, rollover contribution into a separate Roth IRA account to properly identify another five-year holding period.
D. He may not withdraw the funds tax-free earlier than Jan. 1, 2016.
2. Tony and Janet are married filing a joint return. In 2012, Tony’s taxable compensation is only $1,500, and Janet’s compensation is $58,500. Tony contributed all $1,500 of his earnings to a Roth IRA. Neither Tony nor Janet is covered by a retirement plan. What is the maximum amount Janet may deduct for traditional IRA contributions for herself and for Tony if they are both under age 50?
A. $8,500
B. $2,250
C. $0
D. $10,000
3. Melanie owns a cupcake business in a Cleveland shopping mall. She is a sole proprietor and therefore reports her income and expenses on a Schedule C of her personal tax return. In 2007, Melanie obtained a bank loan for some equipment that she stopped using in 2011 when it broke down. She did not make any loan payments for 10 months and her bank cancelled the $5,000 loan balance in 2012. What does Melanie have to report as a result of this debt forgiveness?
A. Nothing. There is no taxable event.
B. $5,000 as other income on Form 1040.
C. $5,000 as income on Schedule C.
D. $5,000 of short-term capital gain on Schedule D.
4. All of the following are requirements to claim head-of-household filing status except
A. You paid more than half of the cost of keeping up your house for the entire year.
B. Your spouse did not live in your home during the last 6 months of the tax year.
C. You are unmarried or considered unmarried on the last day of the year.
D. Your parent must live in your home at least 6 months.
5. On Feb. 28, Allen purchased 240 shares of Guinness Brothers stock for $600. On Nov. 17, Guinness Brothers declared and distributed a stock dividend of one share for every 4 shares held by the shareholder. If this is a non-taxable dividend, what is Allen’s basis in his shares?
A. The basis in his new shares is $0, since he did not pay for them.
B. The stock dividends are considered return of capital, so Allen must reduce his basis to $500.
C. The stock dividend is not taxable, so Allen must divide the basis for the old stock between the old and new stock. His new basis is $2.50 per share.
D. The stock dividend is not taxable, so Allen must divide the basis for the old stock between the old and new stock. His new basis is $2 per share.
6. Clarence, a real estate professional, owned 10 rental properties. Clarence’s real estate activities are his sole occupation, which he works at all year. Throughout 2012, he was involved in the operation of all properties on a regular, continuous, and substantial basis. At the end of the year, his real estate operations resulted in a $75,000 net loss. Clarence’s spouse, Carlette, had received $90,000 in wages in 2012. Their only other income during the year was $5,000 interest. Which of the following statements is true?
A. None of the answers are correct.
B. Clarence and Carlette may offset their $95,000 income with $25,000 of their real estate loss on their 2012 joint tax return if Clarence actively participated in the real estate activity.
C. Clarence and Carlette may not offset their $95,000 income with any real estate loss on their 2012 joint tax return.
D. Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2012 joint tax return.
7. Ricky and Lucy moved from New York to California in 2012. All of the following costs are allowed as a moving expense deduction except:
A. Payment to a moving company for transport of their household goods.
B. Storage costs for their household goods during transport from their New York home to their California home.
C. Meal expense incurred while driving from New York to California.
D. Costs to stay at motels while they drove from New York to California.
8. Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, will provide the taxpayer with the following:
A. An automatic extension of 2 months for taxpayers out of the country on April 15.
B. An automatic extension of 6 months to file the return.
C. An automatic extension of 6 months to pay the taxes due.
D. An automatic extension of 8 months to file the return.
9. Jeremy decided to itemize on his 2012 return. He has the following receipts. Compute the amount of tax deductions he can take on his Schedule A, Itemized Deductions. State income tax: $3,000. Federal income tax: $12,000. County real estate tax: $2,000. Fee for his car inspection that he uses only personally: $50. Homeowners’ association fees on his personal home: $500. Self-employment tax: $1,000.
A. $5,000
B. $18,550
C. $6,000
D. $5,500
10. If distributions from your traditional IRA are less than the minimum required distribution for the year, you may have to pay an excise tax for that year on the amount not distributed as required. The excise tax is how much?
A. 50%
B. 10%
C. 40%
D. None of the answers are correct.
Answers:
1.
D. He may not withdraw the funds tax-free earlier than Jan. 1, 2016.
A withdrawal from a Roth IRA is considered a qualified (tax-free) withdrawal if it is made after five years from the beginning of the year for which the first contribution was made (and it meets certain other requirements). The plan was set up in 2011; and five years from the Jan. 1, 2011, is Jan. 1, 2016. Conversions are a little different. For example, if a calendar-year taxpayer makes a conversion contribution on Feb. 25, 2012, and makes a regular contribution for 2011 on the same date, the five-year period for the conversion begins Jan. 1, 2012, while the five-year period for the regular contribution begins on Jan. 1, 2011. (Source: FFA question No. 1346)
2.
A. $8,500
Contributions to the Roth IRA are nondeductible, but income can be accumulated tax-free. The contribution amount is the same as the amount for a deductible IRA, and the total contribution to both deductible and nondeductible IRAs cannot exceed $5,000 per taxpayer. If a joint return is filed and a taxpayer makes less than his or her spouse, the taxpayer may still contribute the lesser of (1) the sum of his or her compensation and the taxable compensation of the spouse, reduced by the amount of his or her IRA deduction, or (2) $5,000. Thus, the total combined contributions to an IRA and a spouse’s IRA can be as much as $10,000 for the year. Generally, a deduction is allowed for contributions that are made to an IRA. If neither spouse was covered for any part of the year by an employer retirement plan, the entire contribution may be deducted. (Source: GPI question No. 11.4.80)
3.
C. $5,000 as income on Schedule C.
The conditions for excluding cancelled debt from gross income are the same for individuals and sole proprietors. The question does not indicate that she is bankrupt or insolvent, so we must presume none of these conditions are met. Since this is a cancellation of business debt, it is reported as income on Schedule C line 6 rather than on Form 1040 line 21. (Source: FFA question No. 2529)
4.
D. Your parent must live in your home at least 6 months.
A taxpayer with a dependent parent may qualify for head-of-household status even if the parent does not live with the taxpayer, provided that the taxpayer pays more than half the cost of maintaining the main home for the parent. (See Publication 17.) (Source: GPI question No. 1.2.7)
5.
D. The stock dividend is not taxable, so Allen must divide the basis for the old stock between the old and new stock. His new basis is $2 per share.
If stock dividends are not taxable, the shareholder must divide the basis for the old stock between the old and new stock. Allen’s basis in his shares remains at $600, but since he now has 300 shares after the 1:4 split, his basis is $2 per share. (Source: FFA question No. 2033)
6.
D. Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2012 joint tax return.
Certain real estate professionals may be able to treat rental real estate activities as nonpassive [Code Sec. 469(c)(7)]. To qualify, (1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year must involve real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer must perform more than 750 hours of service during the tax year in real property trades or businesses in which the
taxpayer materially participates. These two requirements must be satisfied by one spouse if a joint return is filed (Publication 925). Assuming that the requirements for the exception are satisfied, the passive activity loss rules are not applied, and Clarence and Carlette may offset their income with the entire $75,000 loss. (Source: GPI question No. 4.9.68)
7.
C. Meal expense incurred while driving from New York to California.
Meals are specifically excluded as a deductible moving expense. (Source: FFA question No. 2370)
8.
B. An automatic extension of 6 months to file the return.
An automatic extension of 6 months is provided for an individual who files Form 4868 or uses a credit card to make the required tax payment on or before the initial due date (Publication 17). (Source: GPI question No. 1.3.32)
9.
A. $5,000
Federal income taxes, car inspection fees, and HOA fees are not deductible. A deduction for self-employment tax is allowed, but not on schedule A. This leaves only the state income tax of $3,000 and the county real estate tax of $2,000. (Source: FFA question No. 790)
10.
A. 50%
Funds may not be kept in a traditional IRA indefinitely. Eventually, they must be distributed. If there are no distributions, or the distributions are less than the minimum required amount, the taxpayer will have to pay a 50% excise tax on the amount not distributed as required. (Source: GPI question No. 11.3.67)
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Your Rating:
9 to 10 correct. A real tax nerd: You’re ready to start studying for the IRS’s Special Enrollment Examination
6 to 8 correct. An average joe taxpayer: You can probably get away with doing your own tax return. You won’t get into too much trouble if you’re audited.
1 to 5 correct. A tax turkey: Step away from the tax return. Run to your nearest qualified tax professional.
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