CPA Regulation (REG) : Taxable Income

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

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Example Questions

Example Question #1 : Taxable Income

The following year-1 annual report was received by Clark from the qualified defined contribution plan provided by Clark's employer:

  • Beginning balance: $12,700
  • Employer contribution: 600
  • Plan earnings: 250
  • Ending balance: $13,550

What income must be included in Clark's gross income for year 1?

Possible Answers:

$850

$0

$250

$600

Correct answer:

$0

Explanation:

Clark did not receive the money in the qualified defined contribution plan, and as such will not have to report the income. Depending on the type of defined contribution plan, Clark may have to report benefits received as income, but only after he is eligible for regular distributions from the retirement plan. 

Example Question #2 : Taxable Income

With regard to the inclusion of Social Security benefits in gross income, for the Year 18 tax year, which of the following statements is correct?

Possible Answers:

The Social Security benefits in excess of one half the modified adjusted gross income are included in gross income.

The Social Security benefits in excess of modified adjusted gross income are included in gross income.

Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

The Social Security benefits in excess of the modified adjusted gross income over a threshold amount are included in gross income.

Correct answer:

Eighty-five percent of the Social Security benefits is the maximum amount of benefits to be included in gross income.

Explanation:

Inclusion of Social Security benefits in gross income is largely dependent on the amount and types of other income a taxpayer receives in the year. The result is that these benefits may not be taxed at all, or that at most 85% of benefits will be included in gross income. 

Example Question #3 : Taxable Income

Parker was employed for part of the year. Parker received $35,000 of wages, $6,400 from a state unemployment compensation plan, and $2,000 from her former employer’s company paid supplemental unemployment benefit plan. What is the amount of Parker’s gross income?

Possible Answers:

$35,000

$43,400

$41,400

$37,000

Correct answer:

$43,400

Explanation:

Each of these items is included in taxable income. Wages are generally taxable, as are any unemployment benefits received, no matter the source.

Example Question #4 : Taxable Income

A cash basis taxpayer should report gross income:

Possible Answers:

For the year in which income is either actually or constructively received in cash only

Only for the year in which income is actually received whether in cash or in property

Only for the year in which income is actually received in cash

For the year in which income is either actually or constructively received whether in cash or in property

Correct answer:

For the year in which income is either actually or constructively received whether in cash or in property

Explanation:

A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

Example Question #5 : Taxable Income

Of the following amounts, which represents an adjustment to AGI for the current tax year?

Possible Answers:

Child support 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

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

Correct answer:

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

Explanation:

Alimony paid to a former spouse based on a divorce agreement executed on or before 12/31/18 is an adjustment to gross income.

Example Question #6 : Taxable Income

Of the following, which is an itemized deduction?

Possible Answers:

Qualified charitable contributions

Expenses related to moving principal residence

Expenses related to house maintenance

Expenses related to educating

Correct answer:

Qualified charitable contributions

Explanation:

Qualified charitable contributions are the only itemized deductions listed here.

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