CPA Regulation (REG) : Individual Tax Issues

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

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Example Questions

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Example Question #1 : Individual Tax Issues

The credit for prior year AMT liability may be carried:

Possible Answers:

Back three years

Back three years or forward a maximum of 15 years

Forward for a maximum of 15 years

Forward indefinitely

Correct answer:

Forward indefinitely

Explanation:

Like capital losses for individuals, AMT credits may be carried forward indefinitely for individual taxpayers. 

Example Question #2 : Alternative Minimum Tax

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?

Possible Answers:

Deductible contributions to individual retirement accounts

Passive activity losses

Individual taxpayer net operating losses

Deductible state and local taxes

Correct answer:

Deductible contributions to individual retirement accounts

Explanation:

Adjustments and preferences to arrive at AMTI include many items, such as passive activity losses, accelerated depreciation, net operating loss of an individual taxpayer, state and local taxes, the standard deduction, and private activity bond interest income. Deductible contributions to IRAs are treated the same under AMTI as for taxable income.

Example Question #3 : Alternative Minimum Tax

West is single, has no dependents, and does not itemize. West provides the following information regarding his current-year’s return:

  • Long-term capital gain: $ 15,000
  • Percentage depletion in excess of property’s adjusted basis: 9,000
  • Dividends from publicly held companies: 10,000

What is the amount of West’s AMT tax preference items?

Possible Answers:

$19,000

$34,000

$24,000

$9,000

Correct answer:

$9,000

Explanation:

Among the options provided, only the percentage depletion in excess of a property’s adjusted basis is included as an AMT tax preference item.

Example Question #4 : Alternative Minimum Tax

The credit for prior year AMT liability may be carried:

Possible Answers:

Back to the three preceding years

Forward indefinitely

Back to the three preceding years or carried forward for a maximum of five years

Forward for a maximum of five years

Correct answer:

Forward indefinitely

Explanation:

AMT paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The credit is carried forward indefinitely.

Example Question #5 : Alternative Minimum Tax

Of the following is not an adjustment or preference to arrive at AMTI?

Possible Answers:

Deductible state and local taxes

Individual taxpayer net operating losses

Deductible contributions to individual retirement accounts

Passive activity losses

Correct answer:

Deductible contributions to individual retirement accounts

Explanation:

Deductible contributions to individual retirement accounts are not an adjustment or preference in calculation a taxpayer’s AMTI. They are an adjustment in calculating adjusted gross income for regular tax purposes.

Example Question #6 : Alternative Minimum Tax

Of the following, which are allowable itemized deductions for computing AMT income?

Possible Answers:

Both

Home mortgage interest on a loan to acquire a principal residence

Neither

Deductible real estate property taxes

Correct answer:

Home mortgage interest on a loan to acquire a principal residence

Explanation:

Both of these options are normal itemized deductions (Sch A) however not all itemized deductions are included in AMTI.

Example Question #1 : Sale Of Principal Residence

Under a divorce settlement, Joan transferred her 50% ownership of their personal residence to Jim. The joint basis of the residence was $200,000. At the time of the transfer, the property’s fair market value was $300,000. What was Joan’s recognized gain and Jim’s basis for the residence?

Possible Answers:

Recognized Gain: $0

Basis: $200,000

Recognized Gain: $50,000

Basis: $300,000

Recognized Gain: $0

Basis: $300,000

Recognized Gain: $50,000 

Basis: $250,000

Correct answer:

Recognized Gain: $0

Basis: $200,000

Explanation:

In this instance, there is no gain recognized because no consideration changed hands. Additionally, since Jim was an original owner of the home, upon the settlement Joan’s 50% share transfers to him, but the basis does not change. 

Example Question #2 : Sale Of Principal Residence

Decker, a 62-year-old single individual, sold his principal residence for the net amount of $500,000 after all selling expenses. Decker bought the house 15 years ago and occupied it until it was sold. On the date of sale, the house had a cost basis of $200,000. Within six months, Decker purchased a new house for $600,000. What amount of gain should Decker recognize from the sale of the residence?

Possible Answers:

$175,000

$50,000

$300,000

$0

Correct answer:

$50,000

Explanation:

For individuals, the maximum exclusion of gain for individuals on the sale of their home is $250,000; the amount goes up to $500,000 for married couples who file jointly. Since Decker, a single taxpayer, sold the house at a gain of $300,000 ($500,000 less the original cost of $200,000), he may take the $250,000 exclusion and the remainder, $50,000, is a taxable gain. The cost of the new house does not affect the amount of exclusion or recognized gain.

Example Question #1 : Individual Tax Issues

In December, Year 11, Douglas, a single taxpayer, purchased a new residence for $200,000. Douglas lived in the residence continuously from Year 11 until selling the residence in July, Year 18, for $455,000. What amount of gain is recognized from the sale of the residence on Douglas’ Year 18 tax return?

Possible Answers:

$0

$255,000

$455,000

$5,000

Correct answer:

$5,000

Explanation:

For individuals, the maximum exclusion of gain for individuals on the sale of their home is $250,000; the amount goes up to $500,000 for married couples who file jointly. Since Douglas, a single taxpayer, sold the house at a gain of $255,000 ($455,000 less the original cost of $200,000), he may take the $250,000 exclusion and the remainder, $5,000, is a taxable gain. 

Example Question #4 : Sale Of Principal Residence

A owns a second residence that is used for both personal and rental purposes. During the current year, A used the second residence for 50 days and rented the residence for 200 days.  Which of the following is correct?

Possible Answers:

All mortgage interest and taxes on the property will be deducted to determine the property’s net income or loss

Utilities and maintenance on the property must be divided between personal and rental use

A rental loss may be deducted if rental based expenses exceed rental income

Depreciation may not be deducted on the property under any circumstances

Correct answer:

Utilities and maintenance on the property must be divided between personal and rental use

Explanation:

As the second property was personally used for more than 14 days, any net loss from the rental of the property will be disallowed

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