CPA Regulation (REG) : Individual income Tax - Exemptions, Credits, & Deductions

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

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Example Question #1 : Tax Exempt Income Items

CBI Foundation awarded Karen $65,000 in recognition of lifelong scholarly achievement. Karen was not required to render future services as a condition to receive the $65,000. What condition(s) must have been met for the award to be excluded from Karen’s gross income?

I.  Karen was selected for the award by CBI without any action on Karen’s part.
II. Pursuant to Karen’s designation, CBI paid the amount of the award either to a governmental unit or to a charitable organization.

Possible Answers:

I only.

Both I and II.

Neither I or II.

II only.

Correct answer:

Both I and II.

Explanation:

Prizes and awards may be excluded from taxable income, provided (1) the recipient took no action to be selected for the award, and (2) the award is assigned directly to a governmental unit or charitable organization.

Example Question #2 : Tax Exempt Income Items

Kent bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Kent’s dependent child. One of the conditions that must be met for the exemption of accumulated interest on these bonds is that the:

Possible Answers:

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.

Correct answer:

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

Explanation:

Series EE Bonds issued after 1989 are must meet several criteria for interest to be tax-exempt: (a) the interest must be used to pay for tuition of the taxpayer, spouse, or dependents; (b) the taxpayer is over age 24 when the bond is issued; (c) a married taxpayer files a joint return; and (d) the taxpayer meets certain income requirements. The bond must be in the taxpayer’s and/or spouse’s name; a child/dependent may only be a beneficiary, not an owner. 

Example Question #3 : Tax Exempt Income Items

Lois did not itemize deductions on her Year 9 federal income tax return. In July Year 10, Lois received a state income tax refund of $850 plus interest of $15 for overpayment of Year 9 state income tax. What amount of the state tax refund and interest is tax-exempt on Lois’s Year 10 federal income tax return?

Possible Answers:

$15

$865

$850

$0

Correct answer:

$850

Explanation:

If an individual did not deduct state or local tax paid in a prior year, then the receipt of a state or local tax refund is also not taxable. Interest income on the refund, however, is taxable.

Example Question #4 : Tax Exempt Income Items

Of the following exempt organizations must file annual information returns?

Possible Answers:

Churches

Private foundations

Those with gross receipts of less than $45,000 in each taxable year

Internally supported auxiliaries of churches

Correct answer:

Private foundations

Explanation:

Private foundations must file annual information returns. Exempt are churches, religious activities, and certain organizations that normally have annual gross receipts of $50,000 or less.

Example Question #5 : Tax Exempt Income Items

The private foundation status of an exempt organization will terminate if it:

Possible Answers:

Becomes a public charity

Is a foreign corporation

Is governed by a charter that limits the exempt purposes

Does not distribute all of its net assets to one or more public charities

Correct answer:

Becomes a public charity

Explanation:

The private foundation status of an exempt organization will terminate if it becomes a public charity. Not included in exempt status are public safety organizations, supporting organization, broadly publicly supported organizations, and max 60% charitable deduction donees.

Example Question #6 : Tax Exempt Income Items

Of the following items, which would cause a permanent book to tax difference?

Possible Answers:

Deferred tax asset

Different depreciation methods

Deferred tax liability

Municipal bond income

Correct answer:

Municipal bond income

Explanation:

A deferred asset or liability, as well as a different depreciation method from book accounting, would create a temporary difference in book to tax income, whereas municipal bond income is a permanent difference.

Example Question #1 : Individual Adjustments & Deductions

Which of the following amounts represents an adjustment to adjusted gross income (AGI) for the current tax year?

Possible Answers:

Alimony paid to a former spouse pursuant to a divorce agreement executed in 2019.

Alimony paid to a former spouse pursuant to a divorce agreement executed in 2014.

Child support paid to a former spouse pursuant to a divorce agreement executed in 2019.

Child support paid to a former spouse pursuant to a divorce agreement executed in 2019.

Correct answer:

Alimony paid to a former spouse pursuant to a divorce agreement executed in 2014.

Explanation:

For a divorce finalized on or before Dec. 31, 2018, alimony received is included in gross income. For divorces finalized after this date, alimony is not included in gross income. All other items are regularly excluded from AGI.

Example Question #2 : Individual Adjustments & Deductions

The self-employment tax is:

Possible Answers:

Fully deductible as an itemized deduction.

Not deductible.

One-half deductible from gross income in arriving at adjusted gross income.

Fully deductible in determining net income from self-employment.

Correct answer:

One-half deductible from gross income in arriving at adjusted gross income.

Explanation:

Self-employment tax is only partially deductible (50%), and is calculated as part of determining AGI. 

Example Question #3 : Individual Adjustments & Deductions

Which of the following is not a deduction to arrive at adjusted gross income?

Possible Answers:

Mortgage interest.

Trade or business expenses.

Capital losses in excess of capital gains.

Alimony payments pursuant to a divorce settlement finalized on or before 12/31/18.

Correct answer:

Mortgage interest.

Explanation:

Mortgage interest is only included as a deduction, or a “below the line” reduction of a tax liability. All of the others are “above the line” reductions of AGI, prior to the standard or itemized deduction.

Example Question #4 : Individual Adjustments & Deductions

The self employment tax is:

Possible Answers:

Fully deductible from gross income in arriving at adjusted gross income

Not deductible

Fully deductible in determining net income from self-employment

One half deductible from gross income in arriving at adjusted gross income

Correct answer:

One half deductible from gross income in arriving at adjusted gross income

Explanation:

One half of the self-employment tax is deductible to arrive at adjusted gross income. These other options are partially or not deductible.

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