Filing Status & Dependents

There are five filing statuses: Single, Married filing jointly, Married filing separately, Head of household, and Qualifying surviving spouse (QSS) with dependent child. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

In order to claim head of household, the taxpayer must have a qualifying dependent, but it does not have to be a foster child. It can be a child, step-child, or other qualifying dependent. All of the other choices are true. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The Credit for Other Dependents, also called the Other Dependent Credit (ODC) is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each eligible dependent. This credit is nonrefundable. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

There is no disability test. The five tests for determining if somebody is a Qualifying child are: Relationship test Age test Residency test Support test Tie-Breaker test To see more information about the rules for qualifying children, see Publication 501, Dependents, Standard Deduction, and Filing Information. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

The Credit for Other Dependents, also called the Other Dependent Credit (ODC) is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each eligible dependent. This credit is nonrefundable. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

A partner’s tax basis capital account (sometimes referred to simply as “tax capital”) represents the entity's equity as calculated using tax principles (not based on GAAP or other accounting principles). Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

A constructive distribution is treated as a nondeductible by the corporation. The distribution is taxable to the shareholder and treated as a dividend. Therefore, constructive distributions (also called “constructive dividends”) have a very negative impact to the corporation.A constructive distribution may occur when a corporation confers an improper benefit upon a shareholder. A transaction recorded by the corporation as an expense may be recategorized instead as a constructive distribution. Th

To establish and maintain a SIMPLE retirement plan, a business must have had 100 or fewer employees during the preceding year who received $5,000 or more in compensation during the preceding year. If the business has had a SIMPLE plan for more than a year and then exceeds the 100-worker limit, it can have a two-year grace period to establish a different retirement plan. Topic: 26-27 EA PART2 Mock Exam 3

Non-rollover contributions are generally limited to the annual contribution limit, or 100% of qualifying compensation, whichever is less. See more information here on the IRS website regarding: IRA Contribution Limits. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer

Interest received on a municipal bond issued by the state of California to fund school buildings is tax-exempt. Municipal bond funds are one of a few investments in the market that offer exemption from federal tax. Topic: 26-27EA Part 1-Section 2- Income and Assets

Under section 121, she may exclude up to $250,000 of gain on the sale. Certain types of income are excluded from the QBI deduction under Section 199A. Correct Answer Explanation for C: A taxpayer can defer reporting the gain from an involuntary conversion under Section 1033 by reinvesting the proceeds in similar property. Correct Answer Explanation for A: Samuel can exclude all the gain, or $140,000, from tax under Section 121. IRC Section 121 allows the exclusion of a capital gain of up to $250

A bankruptcy estate with a filing requirement must file Form 1041 by the 15th day of the 4th month following the close of the tax year (usually, this date is April 15, for calendar-year bankruptcy estates). A bankruptcy estate that is created when an individual debtor files a bankruptcy petition under either chapter 7 or 11 of title 11 of the U.S. Code. A bankruptcy estate is treated as a separate taxable entity. For more information, see Publication 908, Bankruptcy Tax Guide. Topic: 26-27EA Pa

The Roth IRA has many of the same advantages as a traditional IRA. However, withdrawals from a Roth IRA made during retirement are tax-free. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer

The Refund Statute Expiration Date (RSED) is the end of the time period in which a taxpayer can make a claim with IRS for a credit or refund for a specific tax year(s). Correct Answer Explanation for C: General refund statute: In general, the IRS has a 3-year statute of limitations for issuing refunds. But if the amended return is postmarked after this date, it will fall outside the three-year statute of limitations, and he will not receive a refund. There is a statute of limitations on refunds

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

If a taxpayer (or spouse) elects to be treated as a resident alien for tax purposes, he can be eligible for the Lifetime Learning Credit. The following disqualifies a taxpayer from eligibility for education credits: The taxpayer is claimed as a dependent on someone else’s tax return. The taxpayer files as married filing separately. The taxpayer's income is above the phaseout limits for the taxpayer's filing status. The taxpayer (or spouse) is a nonresident alien for any part of the tax year and

In order to claim head of household, the taxpayer must have a qualifying dependent, but it does not have to be a foster child. It can be a child, step-child, or other qualifying dependent. All of the other choices are true. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

Topic: 26-27EA Part 1-Section 2- Income and Assets Correct Answer Explanation for B: Nonresident aliens who have income that is not subject to U.S. 559 Net Investment Income Tax. To see more information about the 199A QBI deduction, see the IRS page for the Qualified Business Income Deduction. Generally, a taxpayer's Social Security income will only be taxed if the taxpayer has income from other sources and their combined income is more than a certain "base amount". resident aliens are required

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Tax Court, the other procedure is within the IRS Appeals system. 559 Net Investment Income Tax. See the dedicated IRS page for estimated taxes for more information. Within the IRS appeals system, a taxpayer may also file a “Small Case Request” if the total amount of tax, penalties, and interest for each tax period involv

A self-employed individual with net earnings of $400 or more from self-employment is required to pay self-employment tax. Income and expenses from the sole proprietorship are reported on Schedule C, Profit or Loss from Business, of Form 1040. In addition, sole proprietors must also calculate and pay self-employment tax by filing Schedule SE, Self-Employment Tax, with their Form 1040. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

The general rule is that an individual is an independent contractor if the payor has the right to control or direct only the result of the work, but not what will be done and how it will be done. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public. An employee is generally a worker who performs services for their employer, and the business can control what will be done and how it will be done. Topic: 26-27E

Incorrectly classifying workers as independent contractors can have negative consequences for employees. This is because the employer does not pay their portion of the payroll taxes and also does not withhold the employee's portion. Typically, employers are required by law to deduct and remit income taxes, Social Security, Medicare, and unemployment taxes for their workers. A worker who believes they have been misclassified as an independent contractor can file Form SS-8, Determination of Worker

When a business receives a cash payment of more than $10,000 from one transaction or from two or more related transactions, it must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, by the fifteenth day after the date of the cash transaction. By January 31 of the year following the reportable transaction, the business must also provide to each person whose name is required to be included in Form 8300 a written statement that shows the aggregate amount of repor

Distributions from an inherited Roth IRA to a surviving spouse are generally tax-free, just like they would have been for the original owner of the IRA. Surviving spouses can also treat the account as they would their own. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Correct Answer Explanation for A: Rhett’s gross income is calculated as follows: Wages reported on Form W-2 $42,000 Gambling winnings $2,000 Gambling losses NO DEDUCTION Dependent care benefits (spent $3,200 on childcare) n/a The deductible portion of capital loss carryover from the prior year ($3,000) Gross income shown on the return $41,000 The dependent care benefits are not taxable because Rhett’s daycare expenses exceeded t

In order to claim head of household, the taxpayer must have a qualifying dependent, but it does not have to be a foster child. It can be a child, step-child, or other qualifying dependent. All of the other choices are true. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

For incentive stock options, (ISOs) the basis in the stock is the actual price per share paid upon exercise of the options. For more information on how to report taxable stock options, see IRS Topic No. The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates i

The generation-skipping transfer tax (GST) is imposed separately and in addition to the estate and gift taxes. The generation-skipping transfer tax is reported on Form 709. Correct Answer Explanation for C: The generation-skipping tax (GST) can be incurred when grandparents directly transfer money or give property to their grandchildren. For property transfers to qualify as "incident to a divorce," the transfer generally must occur within one year after the date the marriage ends. For more infor

However, the contribution of appreciated property (the stock) is subject to a 30%-of-AGI limit. Stock acquired as a stock dividend has the same holding period as the original stock owned. It is not taxed until the basis in the stock is fully recovered. The value of stock received for services is income to the recipient. For more information, see the IRS detail page on S Corporation stock basis. Correct Answer Explanation for D: The First-In, First-Out, or FIFO method assumes that the first inven

Only real property held in a trade or business or for investment qualifies for like-kind exchange treatment; including land, buildings, and certain unsevered natural products of land (such as natural mineral deposits, mines, and wells). Topic: 26-27EA Part 1-Section 2- Income and Assets

This is because Oliver first realized a gain from the insurance reimbursement during 2026 (even though the actual fire occurred in 2025), so he will have until December 31, 2028, to replace the property under the involuntary conversion rules. Correct Answer Explanation for C: A taxpayer can defer reporting the gain from an involuntary conversion under Section 1033 by reinvesting the proceeds in similar property. To postpone reporting gain from an involuntary conversion, the taxpayer must buy rep

The basis of property received as a gift is generally the donor's adjusted basis just before making the gift. This is known as a "transferred basis." Topic: 26-27EA Part 1-Section 2- Income and Assets

When a business has overstated inventory, this results in the COGS (cost of goods sold) being stated too low, which means that net income before taxes is overstated, resulting in a higher tax. In other words, overstating ending inventory will overstate net income, since this is directly related to the cost of goods sold. "Overstated" inventory records will indicate more inventory stock is held, rather than the true, physical stock numbers. If there is an overstatement of inventory, typically the

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for D: A Form 1040-X based on a loss from a bad debt or worthless security generally must be filed within SEVEN years after the due date of the return for the tax year in which the debt or security became worthless. 559 Net Investment Income Tax. Even though her spouse does not choose to be tre

Therefore, the answer is figured as follows: Asset Value % Included Amount Roth IRA $150,000 100% $150,000 Undeveloped land $15,000 100% $15,000 Life insurance payable to her children $1,750,000 100% $1,750,000 Brokerage account held jointly $1,100,000 50% $550,000 Checking account held in her name only $30,000 100% $30,000 Vacation home held jointly with her spouse $500,000 50% $250,000 Value of Sherry’s Gross Estate $2,745,000 Calculation: $150,000 IRA + $15,000 land + $1,750,000 life insuranc

The advance rent must be included in Kelsey’s 2025 rental income. This is because Kelsey had constructive receipt of the rent, and advance rent is always taxable when it is received, regardless of the taxpayer’s accounting method. Advance rent paid by new tenant: $800. Kelsey must calculate her rental income as follows: $11,700 ($1,300 × 9 months in 2025) $1,800 ($600 × 3 months in 2025) $600 (January rent paid in advance) $14,100 rental income Topic: 26-27EA Part 1 Mock Exam 3 Correct Answer E

Kiyoshi must pay at least 110% of the tax liability on his prior year's tax return in order to meet the safe harbor rule for estimated tax payments. This contrasts with a taxpayer earning less than $150,000, who can rely on a lower safe harbor rule by paying the lesser of: 90% of the tax liability on his current year return or 100% of the tax liability on his prior-year return. The only exception to this rule is the U.S. Since Alani owns 80% of the outstanding stock, she is in control of the cor

Employers are required to withhold payroll taxes and income tax from employees' pay. Employers use Form W-4 to determine how much income tax to withhold from employee pay. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

Under current law, most C corporations must limit NOL deductions to 80% of taxable income in any given year. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

Under current law, most C corporations must limit NOL deductions to 80% of taxable income in any given year. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

A taxpayer whose debt is canceled, forgiven, or discharged will generally receive a Form 1099-C, Cancellation of Debt, from the creditor. The canceled amount must be included in gross income unless it qualifies for an exception to inclusion (such as cancellation of qualified principal residence indebtedness). Cancellation of qualified farm indebtedness. Cancellation of qualified real property business indebtedness. Cancellation of debt on a primary residence up to $750,000 ($375,000 if MFS). Can

The 1099-B is a record of proceeds from stock transactions. It is primarily used to determine gain on the sale of securities, as well as basis. A taxpayer needs to know his basis to figure any gain or loss on the sale or other disposition of property. Learn more about the Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Topic: 26-27EA Part 1-Section 2- Income and Assets

The exclusion can be claimed by U.S. In order to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must: Have foreign earned income. Correct Answer Explanation for A: The only action required to elect portability of the deceased spousal unused exclusion (DSUE) is to file a timely and complete Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Amarante had not previously used any of his basic exclusi

For more information about the filing requirements of a bankruptcy estate, see IRS Publication 908, Bankruptcy Tax Guide. Code, a bankruptcy estate is established as a separate taxable entity. Correct Answer Explanation for A: The exclusion can be claimed by U.S. In order to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must: Have foreign earned income. Correct Answer Explanation for A: The only action required to elect p

The exclusion can be claimed by U.S. In order to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must: Have foreign earned income. Correct Answer Explanation for A: The only action required to elect portability of the deceased spousal unused exclusion (DSUE) is to file a timely and complete Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Amarante had not previously used any of his basic exclusi

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer 559 Net Investment Income Tax. They must report the indirect rollover on Form 1040 in order to avoid the tax. Correct Answer Explanation for D: Kiyoshi must pay at least 110% of the tax liability on his prior year's tax return in order to meet the safe harbor rule for estimated tax payments. Correct Answer Explanation fo

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 6 - Speciaized Returns for Individuals Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for D: A Form 1040-X based on a loss from a bad debt or worthless security generally must be filed within SEVEN years after the due date of the return for the tax year in which the debt or security became worthless. They do not have to pay the tax when they file thei

An automatic 2-month extension to June 15 is granted to U.S. Even though a taxpayer files Form 4868, Application of Automatic Extension of Time to File U.S. taxpayer serving in a combat zone is granted an automatic extension, Barnard is given extra time to file his tax return, pay his taxes, and file a claim for refund. Correct Answer Explanation for A: Living in a federally declared disaster area will qualify a taxpayer for an automatic filing extension. Correct Answer Explanation for C: The tr

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for B: If a taxpayer omits more than 25% of the gross income that should have been reported, they must retain their records for at least six years. If the IRS examines a taxpayer's return and disallows all or part of the EITC, the taxpayer: Must pay back the amount in error with interest; May n

Topic: 26-27EA Part 1 -Section 6 - Speciaized Returns for Individuals Governmental agencies and churches are generally not required to file an annual information return (Form 990). If you omitted more than 25% of your gross income from a tax return, the time the IRS can assess additional tax increases from three to six years from the date your tax return was filed. Taxpayers should file amended returns using Form 1040-X to correct any errors or omissions on a return they have already filed. Corr

If a taxpayer requests innocent spouse relief, the IRS cannot enforce collection action while the taxpayer’s request is pending. The request is generally considered pending from the date it is received by the IRS until the date the innocent spouse request is resolved. Correct Answer Explanation for B: There are three types of relief from the joint and several liability of a joint return: Innocent Spouse Relief, Equitable Relief, and Separation of Liability Relief. Equitable relief is one of the

To see more information about FBAR filing requirements, see the IRS FBAR detail page. Correct Answer Explanation for B: The $10,500 in the Canadian bank account is the only asset that will trigger the FBAR filing requirement. Taxpayers must file the FBAR electronically through the Financial Crimes Enforcement Network’s BSA E-Filing System. Correct Answer Explanation for D: Bank accounts held at a foreign financial institution may trigger an FBAR filing, as well as a Form 8938. The Additional Med

To see a table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS detail page. The Form 8938 is filed along with a taxpayer’s individual tax return, while the FBAR is submitted as a separate filing directly on the FinCEN’s website. Correct Answer Explanation for B: A taxpayer's age has no bearing on the filing requirement for the Form 8938. With regards to the filing requirements for the Form 8938, Statement of Specified Foreign Financial Assets, the applicable reporting

The Qualifying Surviving Spouse (QSS) filing status is available to the taxpayer for two years after the year of the spouse’s death. Then, in the two subsequent years, the surviving spouse may use the Qualifying Surviving Spouse (QSS) filing status, provided that they have a qualifying dependent. Her gain is long-term because she purchased the toy two years ago, so she has held it longer than a year. Correct Answer Explanation for A: The Section 199A deduction has two components. There is no QBI

The nonresident alien spouse does not meet the substantial presence test. Correct Answer Explanation for A: A nonresident alien is an alien who has not passed either the (1) green card test or the (2) substantial presence test. Teachers temporarily in the United States under a J or Q Visa are considered to be “exempt individuals” for purposes of the substantial presence test. There is a limit to the number of years that a J-1 Visa holder can be exempt from the substantial presence test. days of

Damages received for emotional distress due to physical injury or sickness are treated the same way as damages for physical injury or sickness, so they are not included in income. If emotional distress is not due to a physical injury (for example, an employment lawsuit in which a taxpayer suffers emotional distress for injury to reputation), the proceeds are taxable, except for any damages received for medical care due to that emotional distress. Emotional distress includes physical symptoms suc

The answer is calculated as follows: ($35,000 cash + $81,000 mortgage assumption + $1,300 legal fees = $117,300). Legal fees, settlement costs, and recording fees. Correct Answer Explanation for D: Dominic cannot deduct his legal fees or the amount of the settlement, either as a business expense or any other type of deduction. The HOA fees are not deductible on a personal residence. Correct Answer Explanation for A: A&M Tax Solutions may choose to either deduct or amortize the amounts for le

Gross income does not include the amount of damages received due to physical injuries or to sickness, regardless of whether the damages are paid as lump sums or as periodic payments. Correct Answer Explanation for D: Only the punitive damages are taxable. Damages received for emotional distress due to physical injury or sickness are treated the same way as damages for physical injury or sickness, so they are not included in income. If emotional distress is not due to a physical injury (for examp

For purposes of determining self-employment tax for a clergy member, salary, other fees, and housing allowances are included. The housing allowance is exempt from income tax, but subject to self-employment tax. Correct Answer Explanation for C: Father Lucian must pay both income tax and self-employment tax on his salary, but only self-employment tax for the housing allowance. The housing allowance is not subject to income tax. However, housing allowances are not subject to income tax. Correct An

For more information, see Publication 559, Survivors, Executors and Administrators. For more information, see the Instructions for Form 1040-X as well as IRS Topic No. To see a table comparison of FBAR and Form 8938 requirements, reference the dedicated IRS detail page. Taxpayers can claim the Foreign Tax Credit directly on Form 1040 (without filing any additional forms) if, among other conditions, all foreign income is specified passive category income and total foreign taxes paid do not excee

Long-term disability payments from an insurance policy can be excluded from income only if the taxpayer (or the employee) pays the full cost of the premiums for the insurance policy. Correct Answer Explanation for C: Long-term disability payments from an insurance policy are excluded from income if the taxpayer (or the employee) pays the premiums for the policy. Veterans’ disability benefits (also called VA Disability Compensation) are a type of disability benefit paid specifically to a veteran

The value of employer-provided life insurance coverage over $50,000 is taxable to the employee, meaning it will be included in the employee's taxable wages. Group life insurance coverage under $50,000 is not taxable to the employee and can be offered as a tax-free fringe benefit. Topic: 26-27EA Part 1-Section 2- Income and Assets

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer 559 Net Investment Income Tax. A taxpayer can include in medical expenses amounts paid for an inpatient's treatment at a therapeutic center for alcohol addiction. Taxpayers can deduct transportation related to medical care, as well as treatment for drug and alcohol addiction. See the dedicated IRS page for estimated taxe

Medicaid waiver payments are excludable from gross income and do not need to be reported on the taxpayer’s return.[1] However, Medicaid waiver payments can be considered earned income even though they are not taxable income. [1] IRS Notice 2014-7 addresses the income tax treatment of certain payments to an individual care provider under a state Home and Community-Based Services Waiver (Medicaid waiver) program. The notice provides that "qualified Medicaid waiver payments" as difficulty of care p

She received: wages, muni bond interest, child support, workers' compensation, and an inheritance from her deceased grandfather's estate. Correct Answer Explanation for A: Workers' compensation benefits are not taxable income at the state or federal level. Worker's compensation should not be confused with disability insurance, sick pay, or unemployment compensation; it is a type of benefit that pays workers who are injured on the job. The unemployment compensation must be reported as income and

A business cannot deduct qualified transportation fringe benefit amounts. These include mass transit passes, van pools, qualified parking, and other commuter benefits. The benefit can still be offered tax-free to the employee, up to an annual limit ($325 per month for combined commuter and parking in 2025). Employee fringe benefits are covered in IRS Publication 15-B. Topic: 26-27 EA PART2 Mock Exam 2

To see more information about the 199A QBI deduction, see the IRS page for the Qualified Business Income Deduction. The IRS definition of a qualified joint venture: A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file jointly, (2) both spouses participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. Because his employer did not provide a separate acc

To see more information about the 199A QBI deduction, see the IRS page for the Qualified Business Income Deduction. The IRS definition of a qualified joint venture: A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file jointly, (2) both spouses participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. 2025 AGI Limits (Table) Source: https://www.irs.gov

To see more information about the 199A QBI deduction, see the IRS page for the Qualified Business Income Deduction. The IRS definition of a qualified joint venture: A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file jointly, (2) both spouses participate in the trade or business, and (3) both spouses elect not to be treated as a partnership. Correct Answer Explanation for A: Kathleen can make

You should be familiar with the distinctions between FBAR and Form 8938 requirements for the exam (it is on the EA exam test specifications). The head of household status is available to taxpayers who meet all three of the following requirements: The taxpayer must be single, divorced, legally separated, or “considered unmarried” on the last day of the year. Correct Answer Explanation for A: The first three choices are due diligence requirements for the EITC, CTC/ACTC/ODC and the AOTC. She was pa

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Correct Answer Explanation for A: Rhett’s gross income is calculated as follows: Wages reported on Form W-2 $42,000 Gambling winnings $2,000 Gambling losses NO DEDUCTION Dependent care benefits (spent $3,200 on childcare) n/a The deductible portion of capital loss carryover from the prior year ($3,000) Gross income shown on the return $41,000 The dependent care benefits are not taxable because Rhett’s daycare expenses exceeded t

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Correct Answer Explanation for C: All the items of income are taxable with the exception of the veterans’ educational benefits and the portion of the court settlement that was awarded for physical injury ($400 radio contest prize + $80,000 punitive damages + $2,000 strike benefits + $3,500 executor’s fee = $85,900). Court settlements and awards for a physical injury or sickness are generally excluded from taxation, but punitive

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Correct Answer Explanation for B: Her deduction for state and local taxes is 13,650 (8,000 state income taxes + $4,900 real estate taxes + $750 personal property taxes). Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Deductible taxes include: State, local, and foreign income taxes, State and local sales taxes, Real estate taxes (but not for foreign real estate), Pers

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer If property that is subject to nonrecourse debt is abandoned, foreclosed upon, subject of a short sale, or repossessed by the lender, the circumstances are treated as a sale of the property by the taxpayer. Correct Answer Explanation for A: A nonrecourse debt (loan) does not allow the lender to pursue anything other than

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer The cancellation of debt is not taxable as the $10,000 of forgiven debt (the difference between the amount of the recourse loan at the time of the foreclosure and the home’s FMV) was less than the maximum exclusion amount of $750,000 ($375,000 for MFS filers). 559 Net Investment Income Tax. Note: Many taxpayers can avoid

Under this mandate, in addition to withholding Medicare tax at 1.45%, employers must withhold a 0.9% Additional Medicare Tax from an employee’s wages once their earnings reach $200,000 in a calendar year. IRD can come from various sources, including:Unpaid salary, wages, or bonuses.Distributions from traditional IRAs and employer-provided retirement plans. Vacation pay and sick pay are examples of supplemental wages that are taxable just like any other wage income, even though the employee has n

To be an "eligible child" for the $1,000 Trump Account Contribution Pilot Program, the child must be a U.S. Correct Answer Explanation for B: During a Trump Account's "growth period" (which lasts until the first day of the calendar year the child turns 18), the account is subject to strict statutory restrictions. Correct Answer Explanation for A: An annual aggregate limit of up to $5,000 may be contributed to a child’s Trump Account up until the child turns 18 years of age. The Retirement Saving

The Roth IRA has many of the same advantages as a traditional IRA. However, withdrawals from a Roth IRA made during retirement are tax-free. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer

A business cannot deduct qualified transportation fringe benefit amounts. These include mass transit passes, van pools, qualified parking, and other commuter benefits. The benefit can still be offered tax-free to the employee, up to an annual limit ($325 per month for combined commuter and parking in 2025). Employee fringe benefits are covered in IRS Publication 15-B. Topic: 26-27 EA PART2 Mock Exam 2

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for C: Nathaniel’s deductions from his gross estate are first figured as follows: Funeral and burial costs $23,000 Attorney’s fees $37,950 Debts owed at the time of death $86,500 Unpaid mortgage on the decedent’s primary residence $723,700 Property taxes accrued after death Not Allowable Amount

The student loan interest would be deductible, but not on Schedule A. That specific portion of the loan does not qualify as an SPVL, and the interest attributable to it cannot be deducted as QPVLI. Student loan interest is deducted as an adjustment to Income on Form 1040. Under the American Rescue Plan Act, the broad exclusion for most student loan forgiveness remains active for discharges occurring through 2025 While the ARPA provision sunsets at the end of 2025, the One Big Beautiful Bill Act

A constructive distribution is treated as a nondeductible by the corporation. The distribution is taxable to the shareholder and treated as a dividend. Therefore, constructive distributions (also called “constructive dividends”) have a very negative impact to the corporation.A constructive distribution may occur when a corporation confers an improper benefit upon a shareholder. A transaction recorded by the corporation as an expense may be recategorized instead as a constructive distribution. Th

The student loan interest would be deductible, but not on Schedule A. Student loan interest is deducted as an adjustment to Income on Form 1040. Under the American Rescue Plan Act, the broad exclusion for most student loan forgiveness remains active for discharges occurring through 2025 While the ARPA provision sunsets at the end of 2025, the One Big Beautiful Bill Act (OBBBA) makes the exclusion for student loans discharged on account of death or permanent disability permanent for discharges oc

The canceled amount must be included in gross income unless it qualifies for an exception to inclusion (such as cancellation of qualified principal residence indebtedness). Correct Answer Explanation for D: A Form 1040-X based on a loss from a bad debt or worthless security generally must be filed within SEVEN years after the due date of the return for the tax year in which the debt or security became worthless. The head of household status is available to taxpayers who meet all three of the fol

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Taxpayers can choose to deduct either sales/use taxes or state and local income taxes, but not both. In order to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must: Have foreign earned income. Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These ten rights are known collectively as the "Taxpayer Bill of R

The normal filing deadline applies for deceased taxpayers. The 2026 return will be her final return (the final return would be the year of death, and it would have the same filing deadline as any 1040 tax return). Correct Answer Explanation for D: The deadline to file Form 5500, Annual Return/Report of Employee Benefit Plan, is the last day of the seventh month after the end of the plan year.

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation For more details on restricted stock, see IRS Publication 525, Taxable and Nontaxable Income. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer A wash sale occurs when a taxpayer sells stock or other securities at a loss and, within 30 days before or after the sale or disposition, the taxpayer buys or acquires substantially identical stock or securities. Correct Answer

However, the contribution of appreciated property (the stock) is subject to a 30%-of-AGI limit. Stock acquired as a stock dividend has the same holding period as the original stock owned. Child support and worker's compensation is also not taxable, and inheritances are not taxable to the recipient. It is not taxed until the basis in the stock is fully recovered. The value of stock received for services is income to the recipient. For more information, see the IRS detail page on S Corporation sto

A C Corporation may carryback its capital losses to the earliest of the three preceding years, and carryforward for a maximum of five years.Note: A C corporation can only offset its capital losses against capital gains. A C corporation is not allowed to offset capital losses against its other income. A C corporation may carry most unused capital losses back for three years, and forward a maximum of five years. If, after carrying back a net capital loss three years and forward five years, any par

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer 559 Net Investment Income Tax. See the dedicated IRS page for estimated taxes for more information. See Publication 970, Tax Benefits for Education, for information about the AOTC. To learn more about the additional Medicare Tax, see Topic No. See detailed information about the Small Tax Case Procedure in the U.S.

The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they're lower than the AMT tax rates that would otherwise apply. In addition, some tax credits that reduce regular tax liability don't reduce AMT tax liability. Learn more

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation military serve in a combat zone, their military pay is excluded from gross income. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for D: A Form 1040-X based on a loss from a bad debt or worthless security generally must be filed within SEVEN years after the due date of the return for the tax year in which the debt or security became worthle

Up to 85% of Social Security benefits may be taxable. No taxpayer pays taxes on more than 85% of their benefits, regardless of their income. Topic: 26-27EA Part 1-Section 2- Income and Assets

756 Employment Taxes for Household Employees. The “base amount” is associated with filing status: $25,000 for single, head of household, qualifying surviving spouse, and married filing separately and lived apart from your spouse for all the tax year; or $32,000 for married filing jointly; or $0 for married filing separately and lived with your spouse at any time during the tax year. 2025 AGI Limits (Table) Source: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer 756 Employment Taxes for Household Employees. 559 Net Investment Income Tax. Correct Answer Explanation for D: Minnie does not qualify for the Educator Expense Deduction (previously called the “Teacher Credit”), because she has only 440 hours of documented employment as an educator during the tax year. In general, comput

The Credit for Other Dependents, also called the Other Dependent Credit (ODC) is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each eligible dependent. This credit is nonrefundable. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The most common reason for a Net Operating Loss (NOL) is a loss from operating a business. Note: A net operating loss (NOL) occurs when a company’s allowable deductions exceed its taxable income for the year. Under current law, C corporations generally may carry NOLs forward, but the deduction is limited to 80% of taxable income in a given year. NOL carrybacks are generally not allowed, except for certain farming losses and insurance companies other than life insurance companies. Topic: 26-27EA

Capital losses in excess of capital gains would not be allowed when figuring a C corporation's Net Operating Loss. The other choices listed are normal business expenses and would be allowed when figuring a corporation's Net Operating Loss. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

Under current law, most C corporations must limit NOL deductions to 80% of taxable income in any given year. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

A common arrangement is when colleges offer tuition reduction and/or free on-campus housing in lieu of wages to student teachers. However, any portion of a grant or scholarship that is compensation for services is taxable as wages. For example, if a student must serve as a part-time teaching assistant as a condition of their scholarship or grant, then that is payment for work, and would be taxable as wages to the student. Topic: 26-27EA Part 1-Section 2- Income and Assets

A taxpayer’s spouse cannot be claimed as a dependent. Some examples of dependents include a child, stepchild, brother, sister, or parent. Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data

The Kiddie Tax comes into effect when a child has unearned income above $2,700 in 2025. For 2025, the first $1,350 of a child's unearned income qualifies for the standard deduction, the next $1,350 is taxed at the child's income tax rate, and unearned income above $2,700 is taxed at the parent's marginal income tax rate. Topic: 26-27EA Part 1 -Section 4-Taxation

IRS guidance indicates that the most important distinguishing factor between a business and a hobby is the taxpayer's profit intent. A hobby is classified as any activity that a person pursues because they enjoy it and with no intention of making a profit. Other factors, such as businesslike conduct and past profitability can also be considered. See the IRS page on Hobby Activities. Topic: 26-27EA Part 1-Section 2- Income and Assets

The basis of property received from a decedent is generally the fair market value of the property on the date of the decedent’s death. Correct Answer Explanation for A: Active-duty members of the Armed Forces may deduct unreimbursed moving expenses if the move was due to a military order and a permanent change of station. Sometimes, if a taxpayer has more than one employer during the year, his total compensation is over the Social Security base limit for the year, and too much Social Security ta

Topic: 26-27EA Part 1 -Section 3-Deductions and Credits 502 Medical and Dental Expenses. For more information on deductible interest expenses, see Topic 505, Interest Expense. Correct Answer Explanation for B: Because of changes in the Tax Cuts and Jobs Act, unreimbursed employee expenses are no longer deductible for most taxpayers. However, some employees are still permitted to use Form 2106 to deduct their unreimbursed employee expenses on their federal returns. Due to the suspension of miscel

The adoption credit is now partially refundable, any amount of the nonrefundable portion that the taxpayer cannot claim on the current year’s return can be carried over for up to five years. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

Voluntary interest payments are tax-deductible. Individuals may deduct up to $2,500 of interest paid in the current year on student loans. Interest paid to a related party is not deductible as student loan interest. A person who is claimed as a dependent cannot deduct student loan interest on their return, even if they paid the interest themselves. To claim a deduction, the taxpayer must be legally obligated to repay the loan. Topic: 26-27EA Part 1-Section 2- Income and Assets

A designated beneficiary of a Coverdell ESA or a 529 Plan (also called a "QTP" or a "Qualified Tuition Program") can take a distribution at any time. However, in order for the distribution to be tax-free, distributions from the plan must not exceed qualified educational expenses. See IRS Topic 313 for Qualified Tuition Programs (QTPs). For Coverdell accounts, see IRS Topic No. 310 Coverdell Education Savings Accounts. Topic: 26-27EA Part 1-Section 2- Income and Assets

The AOTC is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, up to 40% of the credit (up to $1,000) is refundable. This means you can get a refund even if you owe no tax. Taxpayers will receive a tax credit based on 100 percent of the first $2,000, plus 25 percent of the next $2,000, paid during the taxable year for tuition, fees and course materials. See Publication 970, Tax Benefits for Education, for information about the AOTC.

While the TCJA suspension of miscellaneous itemized deductions was originally scheduled to sunset at the end of 2025, the One Big Beautiful Bill Act (OBBBA) made this elimination permanent for tax years beginning after December 31, 2025. The 2024 income limitations are as follows: 2025 Retirement Savings Contribution Credit Phaseouts Credit Rate MFJ HOH Single, QSS, MFS 50% of the contribution AGI not more than $47,500 AGI not more than $35,626 AGI not more than $23,750 20% of the contribution $

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

A constructive distribution is treated as a nondeductible by the corporation. The distribution is taxable to the shareholder and treated as a dividend. Therefore, constructive distributions (also called “constructive dividends”) have a very negative impact to the corporation.A constructive distribution may occur when a corporation confers an improper benefit upon a shareholder. A transaction recorded by the corporation as an expense may be recategorized instead as a constructive distribution. Th

For more information about the filing requirements of a bankruptcy estate, see IRS Publication 908, Bankruptcy Tax Guide. A bankruptcy estate that is created when an individual debtor files a bankruptcy petition under either chapter 7 or 11 of title 11 of the U.S. Correct Answer Explanation for B: A literary organization may qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. FBARs are required under a Bank Secrecy Act provision of Title 31 and not under any provi

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These ten rights are known collectively as the "Taxpayer Bill of Rights." These rights cover a wide range of topics and issues and lay out what individual taxpayers can expect in the event they need to work with the IRS. An election made after the first 2.5 months of the tax year becomes effective on the first day of the following t

Under the section 121 exclusion, Bowen and Marguerite may exclude $500,000 of the gain on their primary residence. The loss from the Maui vacation home cannot be claimed or netted against the gain from the sale of their primary residence. Correct Answer Explanation for B: Under the section 121 exclusion, Elaine and Chandler can exclude up to $500,000 of the gain on their primary residence, so they must recognize $84,000 of long-term capital gain ($703,000 - $119,000 = $584,000). Correct Answer E

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data In order to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, the taxpayer must: Have foreign earned income. The child must generally have lived with the taxpayer for more than half of the year in order to meet the residency test. Correct Answer Explanation for B: If a taxpayer fails to file an income tax return, the IRS can file a "substitute return." The IRS generally c

For 2025, the maximum exclusion for the foreign earned income exclusion is $130,000. The maximum adoption tax credit is $17,280 per child in 2025; since Jennifer and Colton adopted twins, they would be eligible for an adoption credit for each child. For 2025, the maximum amount of a QCD is $108,000 per taxpayer (the maximum amount applies to each spouse independently if filing jointly). As the annual exclusion amount exceeds the estate’s value ($13,990,000 in 2025), no estate tax is owed and an

The student loan interest would be deductible, but not on Schedule A. Student loan interest is deducted as an adjustment to Income on Form 1040. Under the American Rescue Plan Act, the broad exclusion for most student loan forgiveness remains active for discharges occurring through 2025 While the ARPA provision sunsets at the end of 2025, the One Big Beautiful Bill Act (OBBBA) makes the exclusion for student loans discharged on account of death or permanent disability permanent for discharges oc

To qualify for the $1,000 initial "pilot program" deposit, the eligible child must be born within a specific window of time: after December 31, 2024, and before January 1, 2029. Correct Answer Explanation for C: To qualify for the foreign earned income exclusion, the taxpayer must have a tax home in a foreign country. To qualify for the foreign earned income exclusion, individuals must have a tax home in a foreign country and meet either the Physical Presence Test or the Bona Fide Residence Test

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Taxpayers can choose to deduct either sales/use taxes or state and local income taxes, but not both. Correct Answer Explanation for D: Under the “optional method” of calculating the home office deduction, a taxpayer can deduct $5 per square foot for the space in the home that is used for business, with a maximum allowable square footage of 300 square feet. In order to claim the foreign earned income exclusion, the foreign housin

The election may be ended if Bertrand dies, because the election may be ended due to: revocation of the choice, death, divorce, legal separation, or inadequate records. However, the spouses can elect to file jointly by making an election with their joint tax return. The election to treat a nonresident alien spouse as a resident alien applies to all later years unless suspended or ended. The election may be suspended during a later year if neither spouse is a U.S. Correct Answer Explanation for B

An eligible educator must work at least 900 hours a school year in a school that provides elementary or secondary education (K-12). College instructors do not qualify. For the purposes of this credit, an “educator” may include a teacher, counselor, principal, classroom aide, or a school coach. Topic: 26-27EA Part 1-Section 2- Income and Assets

Topic: 26-27EA Part 1-Section 2- Income and Assets 559 Net Investment Income Tax. For more information on how to report taxable stock options, see IRS Topic No. To see more information about the 199A QBI deduction, see the IRS page for the Qualified Business Income Deduction. Correct Answer Explanation for A: For incentive stock options, (ISOs) the basis in the stock is the actual price per share paid upon exercise of the options. She should not report any taxable income until she receives the s

A C Corporation may carryback its capital losses to the earliest of the three preceding years, and carryforward for a maximum of five years.Note: A C corporation can only offset its capital losses against capital gains. A C corporation is not allowed to offset capital losses against its other income. A C corporation may carry most unused capital losses back for three years, and forward a maximum of five years. If, after carrying back a net capital loss three years and forward five years, any par

Employers of farm employees do not usually file Form 941. Agricultural employers generally file Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, instead. Most employers who have employees are required to file a Form 941 on a quarterly basis to report wages paid and payroll taxes withheld. However, special rules apply to some employers. Seasonal employers do not have to file a Form 941 for quarters in which they have no tax liability because they have paid no wages. Empl

The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The law sets the AMT exemption amounts and AMT tax rates. Taxpayers can use the special capital gain rates in effect for the regular tax if they're lower than the AMT tax rates that would otherwise apply. In addition, some tax credits that reduce regular tax liability don't reduce AMT tax liability. Learn more

military serve in a combat zone, their military pay is excluded from gross income. Correct Answer Explanation for A: Sybil qualifies for the Retirement Savings Contribution Credit (also called the "Saver's Credit") because her AGI is under $79,000, which is the maximum AGI threshold in 2025 for taxpayers who are married filing jointly. Correct Answer Explanation for D: From February through November, Declan was considered to be serving in a combat zone. Any part of a month spent in a combat zone

Up to 85% of Social Security benefits may be taxable. No taxpayer pays taxes on more than 85% of their benefits, regardless of their income. Topic: 26-27EA Part 1-Section 2- Income and Assets

756 Employment Taxes for Household Employees. Correct Answer Explanation for C: Danny paying his 27-year-old niece $2,890 in 2025 to babysit his infant daughter in his home would trigger the filing of the Schedule H, because she is an adult doing work in his home, and she was paid more than $2,800 in 2025, which is the household employee reporting threshold. If she does not receive her Form W-2 by the due date of her return (April 15 for the 2025 tax year), she may file using Form 4852, Substitu

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation 756 Employment Taxes for Household Employees. Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer Correct Answer Explanation for D: Gerry would be required to include the tax-exempt interest in the calculation of his household income. For the purposes of the Premium Tax Credit, “household income” is the taxpayer’s adjusted gross income on the federal income tax return plu

The most common reason for a Net Operating Loss (NOL) is a loss from operating a business. Note: A net operating loss (NOL) occurs when a company’s allowable deductions exceed its taxable income for the year. Under current law, C corporations generally may carry NOLs forward, but the deduction is limited to 80% of taxable income in a given year. NOL carrybacks are generally not allowed, except for certain farming losses and insurance companies other than life insurance companies. Topic: 26-27EA

The most common reason for a Net Operating Loss (NOL) is a loss from operating a business. Note: A net operating loss (NOL) occurs when a company’s allowable deductions exceed its taxable income for the year. Under current law, C corporations generally may carry NOLs forward, but the deduction is limited to 80% of taxable income in a given year. NOL carrybacks are generally not allowed, except for certain farming losses and insurance companies other than life insurance companies. Topic: 26-27EA

Under current law, most C corporations must limit NOL deductions to 80% of taxable income in any given year. Topic: 26-27EA Part 2-Section 1-Business Entities and Considerations

The Kiddie Tax comes into effect when a child has unearned income above $2,700 in 2025. For 2025, the first $1,350 of a child's unearned income qualifies for the standard deduction, the next $1,350 is taxed at the child's income tax rate, and unearned income above $2,700 is taxed at the parent's marginal income tax rate. Topic: 26-27EA Part 1 -Section 4-Taxation

Nontaxable combat pay is an exception to the general rule that income excluded from tax is not considered earned income for the EITC. Taxpayers can choose to include nontaxable combat pay in their earned income if it gives them a better tax result. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

Topic: 26-27EA Part 1 -Section 3-Deductions and Credits 502 Medical and Dental Expenses. For more information on deductible interest expenses, see Topic 505, Interest Expense. Correct Answer Explanation for B: Because of changes in the Tax Cuts and Jobs Act, unreimbursed employee expenses are no longer deductible for most taxpayers. However, some employees are still permitted to use Form 2106 to deduct their unreimbursed employee expenses on their federal returns. Due to the suspension of miscel

The Credit for Other Dependents, also called the Other Dependent Credit (ODC) is a credit that may reduce a taxpayer\'s tax liability by as much as $500 for each eligible dependent. This credit is nonrefundable. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

Scholarships are not taxable when they are used for tuition, required fees, and books. Scholarships for room and board or other living expenses are taxable and must be included in taxable income. Topic: 26-27EA Part 1-Section 2- Income and Assets

A designated beneficiary of a Coverdell ESA or a 529 Plan (also called a "QTP" or a "Qualified Tuition Program") can take a distribution at any time. However, in order for the distribution to be tax-free, distributions from the plan must not exceed qualified educational expenses. See IRS Topic 313 for Qualified Tuition Programs (QTPs). For Coverdell accounts, see IRS Topic No. 310 Coverdell Education Savings Accounts. Topic: 26-27EA Part 1-Section 2- Income and Assets

The Foreign Tax Credit can only be claimed by U.S. citizens or resident aliens. Nonresident aliens are not eligible. The credit applies to any type of foreign income, including investment income, and directly reduces tax liability. A taxpayer cannot claim the Foreign Tax Credit for taxes paid on any income that has already been excluded using the foreign earned income exclusion or the foreign housing exclusion. Learn more about this topic on the IRS page that covers the Foreign Tax Credit. Topi

For 2025, the maximum exclusion for the foreign earned income exclusion is $130,000. Because Xander was born on August 10, 1960, he is legally considered to have reached age 65 on August 9, 2025. To claim this credit in 2025, the taxpayer's modified adjusted gross income (MAGI) must not be more than $39,500 for Single, Married Filing Separately, or Qualifying Surviving Spouse. He must withdraw the excess contribution before the 2025 filing deadline, or he will have to pay an excise tax on any ex

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

Rodney is over the age of 65 and blind, so he would be entitled to a basic standard deduction and an additional standard deduction equal to the sum of the additional amounts for both age and blindness. In 2025, the additional Standard Deduction for Age 65 and Over and/or Blindness is $2,000 for single filers. So his standard deduction would be $15,750 + $2,000 + $2,000 = $19,750. 2025 Standard Deduction Amounts For 2025 federal income tax returns, the standard deduction amounts are as follows: F

The standard deduction is based primarily on filing status. The standard deduction is a specific dollar amount that reduces your taxable income. For the 2025 tax year, the standard deduction is $31,500 for joint filers, $23,625 for heads of household, and $15,750 for single filers and those married filing separately. For more information, see IRS Topic No. 551 Standard Deduction. Topic: 26-27EA Part 1 -Section 3-Deductions and Credits

Topic: 26-27EA Part 1-Section 1- Preliminary Work and Taxpayer Data Topic: 26-27EA Part 1 -Section 4-Taxation Topic: 26-27EA Part 1 -Section 5 - Advising the Individual Taxpayer They must report the indirect rollover on Form 1040 in order to avoid the tax. Correct Answer Explanation for B: Landon must attach Form 1116 to his individual return in order to take a credit for these the foreign taxes, because the amount of foreign tax exceeds $300. If the IRS examines a taxpayer's return and disallow

Under the “optional method” of calculating the home office deduction, a taxpayer can deduct $5 per square foot for the space in the home that is used for business, with a maximum allowable square footage of 300 square feet. In the case of a gift where the donor’s basis is used, the holding period “tacks on” to produce, in this case, a long-term capital gain. The law permits a maximum gain exclusion of $250,000 ($500,000 for MFJ). Correct Answer Explanation for B: Rowan does not have to report th