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Basic Federal Income Tax MCQ

1. Which of the following statements with respect to an S corporation is false?

S corporation losses are deductible by the owners against their ordinary taxable income (assuming the owner has a sufficient tax basis in the investment).

An S corporation can be a shareholder of another corporation.

Tax-exempt income earned by an S corporation is taxable at the shareholder level.

S corporations do not pay income tax on their earned income.

Answer

Correct Answer: Tax-exempt income earned by an S corporation is taxable at the shareholder level.

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2. Using tax information from prior years is referred to as a:

balance forward

rollover

pushover

carry forward

Answer

Correct Answer: rollover

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3. The accounting system used for tax purposes has a:

revenue recognition basis

cash basis

accrual basis

modified-cash basis

Answer

Correct Answer: modified-cash basis

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4. How long after the close of a tax period must a business file its tax return, if it does not file an extension form?

Four and a Half months

Four months

Two and a Half months

Three months

Three and a Half months

Answer

Correct Answer: Two and a Half months

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5. Gain on a 1031 exchange is recognized.

False

True

Answer

Correct Answer: False

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6. What is the penalty for excess contributions made to an IRA account in a single tax year?

10%

There is no penalty for excess contributions.

Answer

Correct Answer: 6%

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7. If a disability pension is reported on a 1099-R and the recipient is under the organization's minimum retirement age, which line of Form 1040 should it appear on?

Report as Pension on line 16b

Report as Other Income on Line 21

Report as Wages on line 7

Disability Income is not reported

Answer

Correct Answer: Report as Wages on line 7

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8. Which of the following is a tax deductible contribution by the donor? Assume all recipients are qualified charities.

Nancy donated $100 to the local fire department. In exchange, she received a coupon book for 10 car washes at the Bubbles car wash. Bubbles normally sell the same coupon books for $150.

Harry owns several rental properties. He lets the local youth group use a suite of offices free of charge. Bob gets $3,000 in rent per month for similar suite.

Bob is a carpenter who works three to four hours each week doing carpentry work at the local homeless shelter. He normally charges $40 per hour for his work.

Zachary made a large donation to a nearby university. In exchange he receives the right to purchase football tickets for the upcoming season.

Answer

Correct Answer: Zachary made a large donation to a nearby university. In exchange he receives the right to purchase football tickets for the upcoming season.

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9. Which of the following tests is NOT to claim a dependency exemption for your child:

Qualifying child or qualifying relative test

Dependent taxpayer test

Joint return test

Citizenship or resident test

Age test

Answer

Correct Answer: Age test

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10. Which of the following related parties can recognize a loss on the sale or exchange of an asset between themselves for tax purposes?

None can recognize a loss

Brother and sister

Grandfather and Granddaughter

Daughter-in-law and Mother-in-law

Corporation and sole shareholder

Answer

Correct Answer: Daughter-in-law and Mother-in-law

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11. The form showing income from gambling winnings is referred to as a:

W2G

IRA-G

1099-WINNINGS

1099-G

Answer

Correct Answer: W2G

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12. Which qualifies as a 1031 exchange?

Barn in Kentucky for Skyscraper in New Yotk

Computer in DC for Car in DC

Skyscraper in New York for Skyscraper in London

Car in New York for Factory in Michigan

Answer

Correct Answer: Barn in Kentucky for Skyscraper in New Yotk

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13. Section 179 Depreciation cannot be deducted in the current year when:

Only real property is purchased in current tax year.

The taxpayer has elected to deduct Bonus Depreciation in current tax year.

Only used equipment is purchased in current tax year.

Only qualified real property is purchased in the current tax year.

Only listed property is purchased in current tax year.

Answer

Correct Answer: Only real property is purchased in current tax year.

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14. Which of the following statements are false?

Mortgage Insurance Premiums paid in the current year is a investment expense and subject to a 2% phaseout.

The deduction is phased out when the adjusted gross income is more than $109,000.

Mortgage Insurance premiums paid on a second home is generally deductible.

Upfront Mortgage Insurance Premiums paid in the current year must be amortized.

Mortgage Insurance Premiums paid is treated as Mortgage Interest.

Answer

Correct Answer: Mortgage Insurance Premiums paid in the current year is a investment expense and subject to a 2% phaseout.

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15. An S corporation is generally required to use the accrual method of accounting.

True

False

Answer

Correct Answer: False

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16. Which of the following is NOT deductible for moving expenses?

Cost of storage for household goods and personal effects

House-hunting trip(s) and temporary living expenses

Payment for a moving company to transport household goods and personal effects to new home

Cost of lodging while traveling to new home

All expenses are deductible toward moving expenses

Answer

Correct Answer: House-hunting trip(s) and temporary living expenses

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17. The documentation provided for real estate sales is referred to as a:

1099-R

1099-MISC

1099-S

1099-G

Answer

Correct Answer: 1099-S

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18. For start-up expenses incurred, taxpayers are allowed to deduct up to what dollar amount for expenditures in the taxable year in which the business begins?

$15,000

No start-up expenses can be deducted.

$5,000

$10,000

Any amount of expenses, as long as it pertains to a start-up cost.

Answer

Correct Answer: $5,000

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19. Which of the following would be deducted by an individual taxpayer directly on Schedule A of the Form 1040 as an itemized deduction?

Interest paid on a student loan.

Educator expenses

Investment expenses

One-half of the amount of self-employment tax that is paid.

Answer

Correct Answer: Investment expenses

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20. Which of the following statements is NOT true regarding tax benefits for education?

The Hope credit, also known as the American Opportunity Credit, can only be claimed for each of the first 4 years of post-secondary education.

The Hope credit cannot be claimed if the student has been convicted of a federal or state felony offense consisting of the possession or distribution of a controlled substance.

Room and board expenses are eligible for both the Hope and Lifetime Learning credit.

Tuition and tuition-related fees, books, and other required course materials expenses qualify for the Hope credit.

Answer

Correct Answer: Room and board expenses are eligible for both the Hope and Lifetime Learning credit.

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21. Which of the following conditions does NOT prevent you from receiving earned income credit?

Having no earned income

Being a qualifying child of another person

Using the filing status is Married Filing Separately

Not being a U.S. citizen or resident alien all year

Not having a qualifying child as a dependent

Answer

Correct Answer: Not having a qualifying child as a dependent

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22. Which form is a home office reported on?

not eligible to be deducted.

Schedule E

Schedule C

Form 8829

Schedule A

Answer

Correct Answer: Form 8829

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23. The normal distribution code for IRA or pension income is:

Answer

Correct Answer: 7

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24. Which of of the following is allowable itemized deduction?

Tuition Expense

Medical Expense

Student Loan Interest

None of these

All of these

Answer

Correct Answer: Medical Expense

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25. Home Office Deduction on Schedule C is allowed:

None of these

only if it is below 5,000

When there is income prior to the deduction.

only if below $10,000

Under any circumstances

Answer

Correct Answer: When there is income prior to the deduction.

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26. Which expense can be deducted on real estate held as an investment, but not on real estate held as a primary residence?

Interest

Depreciation

Amortization

Loan principal

Property tax

Answer

Correct Answer: Depreciation

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27. Gain on a 1031 exchange is recognized to the extent of boot.

False

True

Answer

Correct Answer: True

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28. Which expenditure will you be able to use to reduce the amount that you reports as adjusted gross income (AGI)?

Casualty losses over a specified amount

The cost of child care that is job related

Moving expenses if job related and over a specified distance

Gambling losses

Answer

Correct Answer: Moving expenses if job related and over a specified distance

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29. Depreciation for tax purposes is:

accelerated

equal to book purposes

decelerated

Answer

Correct Answer: accelerated

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30. Steve wants to claim his son as a dependent on his tax return. His son, Mark, is 21 years old and attends a community college full-time. Can Steve claim his son as a dependent? If so, until what age can Steve continue to claim his son?

Yes. Steve can continue to claim his son until Mark graduates, regardless of his age.

No. His son is over the age of 19, therefore, he does not qualify as a dependent.

Yes. However, Steve can no longer claim his son after the age of 21, regardless of Mark's full-time student status.

Yes. Steve can claim his son until Mark reaches 24 years old.

Yes. However, his son must earn less than the standard deduction of $3,650 to qualify as a dependent, while attending school full time. Steve can continue to claim his son until Mark graduates, regardless of his age.

Answer

Correct Answer: Yes. Steve can claim his son until Mark reaches 24 years old.

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31. What is the purpose of form 7004?

Apply EIN

Accounting method change

extension filing

Amended return

Answer

Correct Answer: extension filing

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32. Which of the following items cannot be itemized?

mortgage insurance

mortgage interest

real estate taxes

homeowner's insurance

Answer

Correct Answer: homeowner's insurance

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33. When contributing to an IRA, what is the maximum amount a person under the age of 50 can contribute per tax year, assuming the individual's income is $45,000?

$45,000

$6,000

$10,000

$2,500

$5,000

Answer

Correct Answer: $5,000

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34. If you are married filing jointly for year 2011 and have itemized deduction of $10,000 would you claim itemized or standard deduction?

Itemized Deduction and Standard Deduction

Neither

Itemized Deduction

Standard Deduction

Answer

Correct Answer: Standard Deduction

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35. Capital Gains are reported under which Schedule

Schedule B

Schedule C

Schedule D

Schedule A

Answer

Correct Answer: Schedule D

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36. Lloyd is a CPA who prepares tax returns. Eddie, an Enrolled Agent, also prepares taxes. If both men submit form 2848 (Power of Attorney) for their clients, and indicate they can receive their client's refund check, who is authorized to cash or endorse the check?

Lloyd because his CPA license enables him to act in his clients best interest, which includes cashing or endorsing refund checks.

Neither. No tax preparer is allowed to cash or endorse refund checks for their clients, regardless of having a power of attorney for the client.

Eddie because he is an Enrolled Agent, and such enrollment allows.

Both can do so because of their certification status and power of attorneys signed by their clients.

Answer

Correct Answer: Neither. No tax preparer is allowed to cash or endorse refund checks for their clients, regardless of having a power of attorney for the client.

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37. Non-cash charitable contributions over $___ require additional details:

100

500

250

Answer

Correct Answer: 500

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38. Which of the following items is not deductible?

safety deposit box fees

tax preparation services

bank account interest

investment management fees

Answer

Correct Answer: bank account interest

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39. How much can you take as a real-estate loss on an individual return?

There is no limit.

$25,000

The lessor of loss or $25,000 if AGI is less than $150,000 (assuming one files a joint return) unless one is a real-estate professional.

$10,000

Answer

Correct Answer: The lessor of loss or $25,000 if AGI is less than $150,000 (assuming one files a joint return) unless one is a real-estate professional.

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40. Municipal bond interest is:

tax-deductible

tax-exempt

taxed at a lower rate

taxed at 15%

Answer

Correct Answer: tax-exempt

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41. The amount of Social Security income that is taxable is dependent on how much other taxable income you have.

True

False

Answer

Correct Answer: True

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42. Contibutions to a traditional IRA are

Tax exempt

tax exempt up to $5,500

partially tax exempt

taxable

Answer

Correct Answer: tax exempt up to $5,500

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43. Joe 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?

He should report interest revenue of $800.

He should report interest revenue of $510.

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

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

Answer

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

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44. True or False: Alimony Received is taxable

True

False

Answer

Correct Answer: True

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45. Which schedule is used to report business income?

Schedule C

Schedule A

Schedule D

Schedule B

Answer

Correct Answer: Schedule C

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46. Which income is non-taxable income?

Alimony

Wages

Child Support

Hobby Income

Dividends

Answer

Correct Answer: Child Support

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47. Which of the following is NOT a filing status?

Married Separately

Head of household

Divorced

Married Jointly

Single

Answer

Correct Answer: Divorced

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48. If itemized deductions exceed the standard deduction

the standard deduction should be used

either deduction can be used

the itemized deductions should be used

the deductions are added together

Answer

Correct Answer: the itemized deductions should be used

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49. Should gambling winnings be reported on the tax return?

No, gambling winnings are non-taxable income.

Yes, gambling winnings are taxable income.

Answer

Correct Answer: Yes, gambling winnings are taxable income.

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50. The following professionals can represent clients before any office of the IRS:

Only Attorneys

Only Attorneys and Enrolled Agents

Only Certified Public Accountants

Enrolled Agents, Attorneys, and Certified Public Accountants

Only Attorneys and Certified Public Accountants

Answer

Correct Answer: Enrolled Agents, Attorneys, and Certified Public Accountants

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51. ______ may be deducted from Gross Income.

Student Loan Principle

Half of Student Loan Payments

Entire Student Loan Payments

Student Loan Interest

Answer

Correct Answer: Student Loan Interest

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52. IRS stands for

interest reference service

integrated revenue service

internal revenue service

itemized revenue service

internal reference service

Answer

Correct Answer: internal revenue service

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53. Kathy is divorced and her unmarried 27-year old son lived with her all of 2011. She paid all the household expenses and provided over half of her son's support. What is Kathy's filing status ?

Single

Married Filing Separately

Head of Household

Married Filling Jointly

Answer

Correct Answer: Head of Household

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54. Deductible work-related educational expenses do NOT include:

Amounts donated to charity.

Amounts spent for tuition, books, supplies, laboratory fees and similar items.

Transportation and travel expenses to attend qualified educational activities.

Answer

Correct Answer: Amounts donated to charity.

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55. In filing a partnership income tax return, what is the purpose of Schedule K?

To determine the amount of capital gains and losses reported by the partnership.

To list out the various charitable contributions made by the partnership during the tax year.

To compute the amount of income taxes owed by the partnership on the income earned for the current year.

To indicate how specified revenues and expenses of the partnership are passed through to the various partners.

Answer

Correct Answer: To indicate how specified revenues and expenses of the partnership are passed through to the various partners.

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56. The statement displaying wages from a job is called a ______?

W-4

I-4

W-2

1099-MISC

I-9

Answer

Correct Answer: W-2

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