Author(s): Ephraim P. Smith, Philip J. Harmelink, James R. Hasselback

Question 1
Dr. Yomo, a cash basis taxpayer, received a check for $250 after banking hours on December 30, 2018, from a patient. Since Dr. Yomo could not deposit the check in his business checking account until January 2, 2019, the fee of $250 is not included in his income for 2018.
True
False ✓

Question 2
Compensation for damages to a person’s character or for personal injury or illness is taxable.
True
False ✓

Question 3
If both alimony and child support payments are required by the divorce decree or agreement and less than the required amount is paid, the payments apply first to child support and then to alimony.
True ✓
False

Question 4
Makayla, a cash basis saleswoman, receives commissions in February 2019 based on sales made in the last quarter of 2018. The commissions are includible in 2018 gross income.
True
False ✓

Question 5
Each of the following would be one of the requirements for a payment to be alimony under instruments executed after 1984 except:
You Answered
Payments are required by a divorce or separation instrument.
Payments can be a noncash property settlement. ✓
Payments are not designated in the instrument as not alimony.
Payments are not required after death of the recipient spouse.
The payments must be cash payments received by (or on behalf of) a former spouse.

Question 6
Which one of the following distributions is nontaxable?
Mutual fund distributions from its net realized long-term capital gains in the amount of $1,000. You have an adjusted basis of $10,000 in the mutual fund.
Return of capital distribution from a utility company in the amount of $2,000. You have a zero basis in this stock.
Dividend on insurance policy in the amount of $1,000. As of the date of this dividend your net premiums exceed the total dividends by $3,500. ✓
Your share of an ordinary dividend received by an S corporation in the amount of $25,000.
Inasmuch as the net premiums exceed the total dividends by $3,500, the dividend is not taxable.

Question 7
Which of the following is considered a nonbusiness bad debt?
Tom, a CPA, made personal loans to several friends who were not his clients. Three of the loans became totally worthless. ✓
Mary obtained a court-order for her former husband, Bill, to pay child support. Bill did not pay the child support.
Kirby guaranteed a loan as a gesture of friendship for Sue, one of his suppliers. Sue defaulted and Kirby paid off the loan.
None of these.

Question 1
An annuity is a contract that pays a fixed income at set regular intervals for a specific period of time.
True ✓
False

Question 2
In 2018, Bill, a single individual, earned a salary of $10,000 and received $2,000 in unemployment benefits. The unemployment benefits received by Bill are included in Bill’s 2018 gross income.
True ✓
False

Question 3
On June 3, 2018, Leon Wren, an electrician, was injured in an accident during the course of his employment. As a result of injuries sustained, he received the following payments during 2018:
Damages for personal injuries
$8,000
Worker’s compensation
3,000
Reimbursement from his employer’s accident and health plan for medical expenses paid by Wren
1,200
The amount to be included in Wren’s 2018 gross income should be:
– $0 ✓
– $1,200
– $3,000
– $12,200

Question 4
All of the following would be excluded from income as a qualified scholarship by an individual who is a candidate for a degree at a qualified educational institution, except:
Tuition
Student fees
Course books
Room and board ✓
Scholarships for room and board must be included in gross income.

Question 5
Henry Adams, an unmarried taxpayer, received the following amounts during 2018:
Interest on savings accounts
$1,000
Interest on municipal bonds
500
Dividends on General Steel common stock
750
Dividends on life insurance policies
200
How much taxable income should Henry report for 2018?
Your Answer:
1000 + 750 = 1750
I excluded the interest on municipal bonds and dividends on life insurance policies because in beginning of ch 5 says does are not included
Henry Adams’s taxable income for 2018 is $1,750, computed as follows:
Interest on savings account
$1,000
Dividends on General Steel common stock
750
Taxable income
$1,750

Question 6
Mrs. Norman has the following sources of income:
Social security benefits
$10,000
Interest income
5,000
Dividend income
5,000
Tax-exempt interest income
14,000
Mrs. Norman is 68 years of age. Determine her taxable income.
Mrs. Norman has taxable income of $50. The computations are as follows:
Interest income
$5,000
Dividend income
5,000
Tax-exempt income
14,000
1/2 social security benefits
5,000
Provisional income
$29,000
Base amount
25,000
Excess
$4,000
50% of excess
2,000
AGI ($5,000 + $5,000 + $2,000)
$12,000
Less: Standard deduction ($12,000 + $1,600)
13,600
Taxable income
$0

Business and Personal Deductions
Dear students,
This chapter explains the deductions that are allowed on personal tax returns. The deductions are allowed only if specifically authorized by the Internal Revenue Code. There are four categories of allowable deductions to individual taxpayers on their personal tax return: trade or business expenses, expenses incurred for the production of income, losses, and personal expenses. In addition to discussing the general requirements for deductibility for each of the above types of expenses, this chapter also discusses the tax treatment of many commonly encountered expenses incurred by taxpayers, from trade or business expenses such as rent, insurance, interest, taxes, bad debts, etc. to employee business expenses (travel, transportation, etc.) to expenses that can best be categorized as adjustments to gross income (moving expenses, student loan interest, etc.). The chapter also discusses how capital expenditures are allocated across multiple taxable years in the form of depreciation, amortization, depletion, etc. Since the focus of this course is personal taxes we will not go over the business deductions but rather take a look at the personal ones discussed in this chapter.
As was discussed in the previous chapters the basic tax formula for individuals is as follows:

Gross Income
–
Deductions for Adjusted Gross Income
=
Adjusted Gross Income
–
Greater of Itemized Deductions or Standard Deduction
–
Qualified Business Income Deduction
=
Taxable Income
×
Tax Rate
=
Taxable Liability
–
Tax Credits and Prepayments
=
Net Tax Due or Refund

So, to calculate one’s taxes due (or refund due) the person has to calculate the Gross Income and start making allowable deductions to arrive at the AGI amount (Adjusted Gross Income) to then go on and deduct the standard deductions or itemized deductions, and etc. (the next steps of this formula will be discussed in the following chapters).
Business and investment expenses are deductible “for” adjusted gross income (to calculate the AGI) and will be discussed in more detail in ACCTG 160. In contrast, most personal expenses and losses, if deductible at all, are deductible “from” AGI as itemized deductions. This is an important distinction for several reasons. First, a taxpayer may claim either itemized deductions or the standard deduction, but not both; in contrast, deductions “for” AGI may be claimed in addition to the standard deduction. Moreover, because some itemized deductions are subject to a “floor” on deductibility computed as a percentage of AGI (e.g., medical expenses), deductions “for” AGI often have the added advantage of increasing the amount of deductions allowed “from” AGI. Finally, certain tax benefits (such as the ability to contribute to a Roth IRA) are available only to taxpayers whose AGIs do not exceed specified levels—deductions “for” AGI may help many taxpayers to meet these eligibility requirements.
Among non-business deductions for AGI are:
– contributions to Health Savings Accounts and Medical Savings Accounts
– medical insurance premiums paid by self-employed taxpayers
– payments of qualified student loan interest
– payment of qualified tuition and fees
Please note that personal, living, and family expenses are not deductible on a tax return unless expressly permitted.

Question 1
Itemized deductions only reduce taxable income if the taxpayer’s itemized deductions exceed the standard deduction amount.
True ✓
False

Question 2
Medical expenses recovered after being claimed as a deduction in the previous year must be included in income in the year of recovery to the extent that the deduction decreased taxable income in the year they were deducted.
True ✓
False

Question 3
Fees paid to chiropractors may be a deductible medical expense.
True ✓
False

Question 4
Federal income taxes paid are deductible as an itemized deduction on an individual’s federal income tax return.
True
False ✓
Federal income taxes are not deductible.

Question 5
Points paid on the loan for the purchase of a new home are not deductible on an individual’s tax return.
True
False ✓
These points represent interest and are deductible.

Question 6
Interest on a loan, the proceeds of which are borrowed to purchase tax- exempt securities, is not deductible.
True ✓
False

Question 7
The taxpayer may deduct the fair market value of the time spent in rendering services to a qualified charitable organization.
True
False ✓
Value of services is not deductible as a charitable contribution.

Question 8
A contribution made directly to a homeless person is not a deductible charitable contribution.
True ✓
False

Question 9
Cash contributions to public charities are deductible up to 60% of adjusted gross income.
True ✓
False

Question 10
After 2017 miscellaneous itemized deductions are still generally deductible to the extent they exceed 2% of adjusted gross income.
True
False ✓
They are no longer allowed after 2017.

Question 11
Wagering losses are only allowed to be deducted to the extent of wagering winnings.
True ✓
False

Question 12
Unnecessary cosmetic surgery costs directed solely at improving the patient’s physical appearance:
Qualify as a medical expense deduction
Are listed as itemized deductions
Will not qualify for a medical expense deduction ✓
Are limited to a maximum deduction of $10,000

Question 1
A tax credit produces a tax benefit only to the extent of the effective tax rate in the taxpayer’s top bracket multiplied by the amount of the credit.
True
False ✓
A credit is a direct reduction of the tax due.

Question 2
If a taxpayer is married on the last day of the tax year, a joint return must be filed in order to claim a dependent care credit.
True ✓
False
A joint return must be filed unless the taxpayer qualified as an abandoned spouse.

Question 3
The amount paid to a baby sitter for keeping a six-year-old child on Friday evenings to enable the taxpayer and spouse to attend bridge parties with friends qualifies for the dependent care credit.
True
False ✓
Only employment-related expenses are allowed in the computation.

Question 4
Tuition paid to a private school for a third-grader qualifies for the dependent care credit.
True
False ✓
No school expenses for grades above kindergarten are allowed.

Question 5
Social security or railroad retirement benefits can reduce or eliminate the amount of allowable credit for the elderly.
True ✓
False

Question 6
The earned income credit is refundable.
True ✓
False

Question 7
Certain individuals can get a refundable tax credit of 40 percent of earned income.
True ✓
False

Question 8
All taxpayers must compute their income tax liability under both the regular income tax system and the alternative minimum tax system and pay the higher of the two accounts.
True
False ✓
Smaller corporations and flow-through entities are not subject to AMT.

Question 9
In the AMT system, tax-exempt interest from state and local government (municipal) bonds is not an exclusion.
True
False ✓
In the AMT system, interest from specified private activity bonds does not qualify as an exclusion. All other tax-exempt interest is an exclusion from AMTI.

Question 10
Lorence Lange’s tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct?
Lorence will not have an underpayment penalty.
Lorence will have an underpayment penalty on $2,600.
Lorence will have an underpayment penalty on $1,900. ✓
Lorence will have an underpayment penalty on $2,200.
None of these
The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present year’s tax liability or the previous year’s tax liability.
Present year’s tax liability
$7,000
x 90%
Amount needed to be paid
$6,300
Less: Amount paid
4,400
Amount underpayment penalty applied to
$1,900

Question 1
Terry Trumbull purchased a tract of land. In order to have city water, he had to pay the water company $5,000 to extend the water line to his property. The $5,000 cost is an addition to the basis of the land.
True ✓
False
Expenditures chargeable to the capital account are additions to the basis.

Question 2
The basis for nonbusiness property changed to business use is the greater of the adjusted basis of the property or its fair market value on the date it is converted to business use.
True
False ✓
When nonbusiness property is converted to business use, the basis for determining gains is the adjusted basis, but the basis for determining loss or depreciation is the lesser of the adjusted basis of the property or its fair market value at the date of conversion.

Question 3
The holding period of property acquired from a decedent is considered to be long term regardless of when the property was acquired or disposed of.
True ✓
False

Question 4
Increases in basis decrease the amount of gain realized or increase the amount of realized loss.
True ✓
False

Question 5
Unless the taxpayer can specifically identify the shares of stock that are sold or transferred, the FIFO rule comes into play (i.e., the stock sold is charged against the earliest of the stock purchases).
True ✓
False
FIFO is used unless the stock is specifically identified.

Question 6
The wash sale rules merely postpone the loss until the taxpayer sells the securities in a nonwash sale transaction.
True ✓
False
The loss not recognized in a wash sale is added on to the basis of the new stock so that the loss is merely postponed until the taxpayer sells the stock in a nonwash sale transaction.

Question 7
Stanley Summers purchased a personal residence for $185,000 and spent $5,000 for the cost of obtaining a mortgage. Stanley’s basis in the home is $190,000.
True
False ✓
The cost of obtaining the mortgage is not added to the basis in the home.

Question 8
John Johnson sold his hot dog stand at a loss to his brother. The loss is deductible by John.
True
False ✓
The loss is not deductible since it was sold to his brother, a related party.

Question 9
Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2018, for $4,000. On March 29, 2018, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem’s recognized loss on the sale is:
$1,000
$500 ✓
$1,500
$0
The sale and subsequent purchase of 50 shares is a wash sale since March 8 to March 29 is 21 days. However, the loss on the other 50 shares may be recognized.

Question 10
Losses between related parties are:
always realized, but never recognized. ✓
always recognized, but never realized.
always realized and recognized.
never realized and recognized.

Question 1
A taxpayer is required to own and occupy the residence three out of the last five years in order to qualify for the exclusion.
True
False ✓
A taxpayer is required to own and occupy the residence two, not three, years out of the last five years in order to qualify for the exclusion.

Question 2
If boot is received in a like-kind exchange, realized losses are not recognized but realized gains may be recognized.
True ✓
False
Gain is recognized to the extent of the boot received but not to exceed the gain realized.

Question 3
Losses from involuntary conversions are never recognized.
True
False ✓
Losses are recognized if the property is business or income-producing property. Personal casualty losses are also recognized only if in a federal disaster area but not condemnation losses from personal-use assets.

Question 4
Taxpayers may elect out of the exclusion for sale of residence.
True ✓
False
Taxpayers may elect out of this exclusion provision for any sale or exchange. Thus, for example, taxpayers who plan to sell within two years two properties that met the exclusion eligibility requirements and who first sell the property with the lesser gain may choose to elect out of the exclusion to reserve its use for the second sale where the gain is larger.

Question 5
A three-party exchange is used to remedy a situation in which one party wants a nontaxable exchange while the other party wishes to sell property.
True ✓
False

Question 6
If the taxpayer’s investment in an apartment building is condemned by the local government, the taxpayer can replace it with any other rental property; it does not have to be another apartment building.
True ✓
False
The replacement for a condemnation of real property need only be like-kind; it would in this case not have to be an apartment building.

Question 7
Jake Jacobson sold his personal residence on June 15, 2018, which he had purchased a year earlier, in order to accept a position at a new college 500 miles further away. Jake may not exclude any gain on the sale since he did not live in the residence for at least two years.
True
False ✓
Jake can get a pro-rated exclusion if the move was job related.

Question 8
Arthur Austen’s property having an adjusted basis of $68,000 is condemned by the state government. The authorities replace his property with other qualified property which cost them $100,000. What is Arthur’s basis in the new property?
$32,000
$0
$68,000 ✓
$100,000
The basis of the new property is the same as the basis of the old property.

Question 9
Bonilla Company’s office building was destroyed by a tornado. The insurance company paid Bonilla $600,000 for the destruction of the office building within 30 days after the tornado. At the time of the tornado, Bonilla had an adjusted basis of $240,000 in the office building. Within six months after the tornado, Bonilla bought a new office building for $500,000 by paying $320,000 in cash and signing a mortgage note for $180,000. What is the minimum amount of gain that Bonilla must recognize on the involuntary conversion of its office building?
$0.
$100,000. ✓
$280,000.
$360,000.
The gain recognized is the lesser of the $360,000 gain realized ($600,000 – $240,000) or the $100,000 excess of the amount realized ($600,000) minus the cost of the qualified replacement property ($500,000). The cost of the qualified replacement property includes the $320,000 cash paid and the $180,000 mortgage note.

Question 1
For purposes of determining the holding period for property, the holding period begins on the day the property is acquired and ends on the day before the sale of the property.
True
False ✓
The general rule for the holding period of property is that the day the property was acquired is excluded and the date of disposition is included.

Question 2
Real property used in a trade or business is a capital asset.
True
False ✓
Real property used in a trade or business is specifically excluded from the capital asset definition.

Question 3
The ordinary loss provisions on small business stock (Code Sec. 1244) are available only to the original owner of the stock.
True ✓
False
To claim the deduction under Section 1244, the individual must have continuously held the stock from the date of issuance. Section 1244(a) provides that an individual is entitled to an ordinary loss deduction on the sale of Section 1244 stock issued to such individual.

Question 4
Regardless of the length of the holding period, nonbusiness bad debts are considered short-term capital losses in the year they become completely worthless.
True ✓
False

Question 5
In a nontaxable exchange involving a capital asset, the holding period of the old asset is added on to the holding period of the newly acquired asset.
True ✓
False
The holding period in a nontaxable exchange is “tacked on.”

Question 6
For the individual taxpayer, all gain recognized is 15/20-percent capital gain if 15-year, 18-year, or 19-year real property under ACRS is depreciated on a straight-line basis.
True
False ✓
Under ACRS, any 15-year, 18-year, or 19-year real property for which an election to depreciate on a straight-line basis is Section 1250 property and there is then no recapture of gain as ordinary income. However, any remaining unrecaptured depreciation is recognized and taxed at a maximum rate of 25 percent.

Question 7
Susan Short had net long-term capital losses that exceeded the $3,000 capital loss limitation. The unused portion may be carried over as a short-term capital loss.
True
False ✓
The excess loss would be carried forward as LTCL.

Question 8
Individuals are entitled to a 50% capital gains deduction.
True
False ✓
Individuals are not eligible for a 50% capital gains deduction.

Question 9
Which of the following is a capital asset?
Property held primarily for sale to customers
Accounts or notes receivable acquired in the ordinary course of business
Machinery and equipment used in a trade or business
Temporary investment of idle business cash in marketable corporate securities ✓
Real property used in a trade or business
The items listed in (a), (b), (c), and (e) are all items that are listed as not being capital assets. Temporary investment of idle business cash in marketable corporate securities, however, is a capital asset.

Question 1
Gross income is a taxpayer’s total income less exclusions.
True ✓
False

Question 2
Abigail deposited $10,000 in a bank to purchase a 6 month money market certificate which matures in 2018. Abigail is required to include this interest as income for tax year 2018.
True ✓
False

Question 3
All of the following are considered “constructive receipt” of income, except:
Lori was informed her check for services rendered was available but she did not pick it up.
Pierre earned income that was received by his agent but was not received by Pierre.
Jacque bought a 9-month certificate of deposit in November 2018. It earned $200 interest in 2018. She can withdraw the principal and interest in 2018 if she pays a penalty of one month’s interest ($100).
A payment on a sale of real property place in escrow pending settlement at which time title would convey. ✓
A payment on a sale of real property placed in escrow pending settlement at which time title would convey.

Question 4
Kevin is a candidate for an undergraduate degree at a local university. During 2018, he was granted a fellowship that provided the following:
Tuition
$18,000
Books and supplies
2,000
Room and board
14,800
What amount can Kevin exclude from gross income in 2018?
$18,000
$20,000 ✓
$25,000
$32,800
$34,800
Scholarships for tuition and books and supplies are excludable from gross income. Amounts received for room and board must be included in gross income.

Question 5
All of the following are included in gross income for federal tax purposes, except:
Interest from School District Bonds ✓
Illegal income
Alimony
Christmas Bonus
Interest from School District Bonds. The federal government does not tax bonds of states and local municipalities.

Question 6
Unemployment compensation is always included in gross income.
True ✓
False

Question 7
Amounts received under worker’s compensation as compensation for personal injuries are excludable from gross income.
True ✓
False

Question 8
Dividend payments made by an insurance company that are based on a policy and that exceed the total amount of premiums paid by the insured are taxable to the insured.
True ✓
False

Question 9
During 2018, Edward East had wages of $10,000 and received unemployment compensation of $6,200 from the state. Edward is single and 45 years old. What is the amount of unemployment compensation to be included in his gross income?
$0
$2,100
$3,800
$6,200 ✓
Unemployment compensation is not excluded from gross income. Therefore, Mr. East must include $6,200 in gross income.

Question 10
Payments received under an accident insurance policy and designated for hospitalization or medical care will reduce the amount deductible as medical expenses.
True ✓
False

Question 11
Premiums paid for insurance policies providing reimbursement for the accidental loss of life, limb or sight are deductible as medical expenses.
True
False ✓
Medical insurance payments are those payments that are made to provide insurance to cover deductible medical expenses.

Question 12
All state and local taxes are deductible for federal income tax purposes as an itemized deduction.
True
False ✓
Inheritance and gift taxes are not deductible, and state and local taxes in excess of $10,000 are not deductible.

Question 13
After 2017 mortgage interest is only deductible on any mortgage up to the first $750,000 of mortgage balance.
True
False ✓
The $750,000 limit only applies to mortgages taken out after December 14, 2017.

Question 14
If tickets are purchased for an entertainment event sponsored by a church and the taxpayer does not attend the event, the full amount of the ticket price may be deducted as a charitable contribution.
True
False ✓
In order to be allowed the full charitable deduction one must not accept the ticket.

Question 15
The standard mileage rate for miles driven to perform charitable services is:
54.5 cents per mile.
20 cents per mile.
17 cents per mile.
14 cents per mile. ✓

Question 16
Rent and royalty expenses of employees are considered to be deductions:
For AGI ✓
From AGI
For or from AGI depending on the type of expense
None of these
Rent and royalty expenses are deductible for AGI.

Question 17
If a taxpayer is married on the last day of the tax year, a joint return must be filed in order to claim a dependent care credit.
True ✓
False
A joint return must be filed unless the taxpayer qualified as an abandoned spouse.

Question 18
An excess FICA credit may be claimed against the income tax if the taxpayer works for only one employer and more than the maximum social security tax is withheld during the year.
True
False ✓
Excess taxes paid in to one employer must be recovered from that employer.

Question 19
A single taxpayer is required to provide over half the cost of maintaining a household for himself or herself and a dependent child in order to qualify for the earned income credit.
True
False ✓
Single taxpayers can qualify for the earned income credit without having a dependent child.

Question 20
A married taxpayer is required to file a joint return in all circumstances in order to be eligible for the earned income credit.
True
False ✓
An abandoned spouse is not required to file a joint return.

Question 21
A corporation is not subject to the AMT.
True ✓
False

Question 22
When property that is subject to an existing debt is purchased, the basis of the property is the amount of cash paid initially plus the unpaid debt to which the property is subject.
True ✓
False
Cost includes cash paid and any debt to which the property is subject.

Question 23
The basis of property acquired by inheritance is the lower of the decedent’s adjusted basis or the fair market value on the date of the death of the decedent.
True
False ✓
The basis of inherited property is the fair market value at the date of death unless the alternate valuation date was elected.

Question 24
Marcia Marks received as a wedding present from an old friend a gold necklace worth $22,000. The necklace had been purchased by the friend for $25,000. The friend did not pay any gift tax. Marcia ran into some financial difficulty and sold the necklace for $23,000. Marcia must recognize a gain of $1,000.
True
False ✓
Neither gain nor loss would be reported since the selling price was between the basis in the hands of the donor and a lesser fair market value.

Question 25
Kurt Kramer purchased stock five years ago for $12,000 which he gave to Jim Jensen when its fair market value was $9,000. Subsequently, Jim sold the stock for $7,500. What is the amount of Jim’s loss on the sale?
$3,000
$1,500 ✓
$4,500
$2,000
The basis for determining a loss for property received through a gift is the lesser of the fair market value or basis at the time of the gift. Therefore, there is a $1,500 loss ($7,500 – $9,000).

Question 26
Recognized gain or loss is the term used to describe:
a taxpayer’s amount of true economic gain or loss when property is disposed.
the amount of realized gain or loss taxpayers report on their tax returns. ✓
an amount that does not affect the taxpayer’s tax liability.
none of these.
Recognized gain or loss is the term used to describe the amount of realized gain or loss that taxpayers report on their tax return.

Question 27
Under the rules of constructive ownership:
if a partnership with two equal partners owns 10 percent of the stock in a corporation, each partner is treated as owning 5 percent of the stock in that corporation.
stock owned by the taxpayer’s spouse, descendants, ancestors, or siblings is treated as owned by the taxpayer.
a taxpayer may be treated as owning stock that is actually owned by another person or entity in which the taxpayer has an ownership interest.
both a and c.
all of these. ✓

Question 28
A liability assumed by a transferee is considered boot received by the transferor.
True ✓
False

Question 29
Nonrecognition of gain is mandatory regardless of whether an involuntary conversion is for money or property.
True
False ✓
If an involuntary conversion is for money, nonrecognition is an election. If the involuntary conversion is for other property, nonrecognition is mandatory.

Question 30
Any excluded gain on the sale of the residence reduces the basis of the new residence.
True
False ✓
The excluded gain is a permanent exclusion and does not reduce the basis of the new residence.

Question 31
Ben Benson, single, sold his home that he had owned for 20 years for $695,000. He purchased it for $140,000 and made $45,000 of capital improvements on the home during his time of ownership. How much gain is recognized?
You Answered
$510,000
$500,000
$260,000 ✓
$250,000
None of these
Ben has a realized gain of $510,000 ($695,000 less $185,000), but as a single individual, he can only exclude $250,000 and he must recognize $260,000.

Question 32
Some examples of capital assets are stocks and bonds held in a personal account, a personal residence, and household furnishings.
True ✓
False
The items listed are not excluded from capital assets.

Question 33
Doug Draper’s capital losses exceeded the $3,000 capital loss limitation. He may elect to carry the unused capital loss back to an earlier year.
True
False ✓
Only corporations may carry back excess capital losses. An individual taxpayer may only carry an unused capital loss forward.

Question 34
For property to be held long-term, it must be held for one year.
True
False ✓
To be taxed at the lowest rate, property must be held greater than 12 months.

Question 35
If a taxpayer’s stock in a corporation becomes worthless as a result of the corporation’s insolvency during the tax year, the taxpayer’s loss is a capital loss as if it occurred on the last day of the year.
True ✓
False

Question 36
Section 1231 property includes inventory, copyrights, and literary compositions.
True
False ✓
Inventory, copyrights, and literary compositions would be excluded from Section 1231 property.

Question 37
Section 1231 gains in one year are used to offset Section 1231 losses in the next year.
True
False ✓
Section 1231 gains do not offset losses in the following year, but are considered by year in the year in which they occur.

Question 38
For individuals, the deduction for capital losses is limited to the capital gains included in gross income plus $3,000; any unused capital losses are carried forward five years.
True
False ✓
For individuals, any unused capital losses are carried forward indefinitely.

Question 39
The disposition of inherited property results in long- or short-term gain or loss, depending on the actual time the taxpayer holds the property or the decedent had held the property.
True
False ✓
The disposition of inherited property results in long-term gain or loss, regardless of the actual time the taxpayer holds the property or the decedent had held the property.

Question 40
Capital gains and losses generally do not result unless there is a sale or exchange. An exception to this rule occurs when an investor holds corporate stock that becomes worthless.
True ✓
False