SEE part 1 Qs

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SEE part 1 Qs
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  1. Joey received a $100 cash award from his employer for meeting his 2010 production goals. Does he report the $100 as income?



    A.
    Yes, because it is a taxable bonus added to his W-2.

    B.
    Yes, because it was a cash payment.

    C.
    No, because it is less than $600.

    D.
    No, because it is a non-taxable bonus.
    Bonuses or awards for outstanding work should be included in income and reported on a W-2. In addition, cash or cash equivalent awards, such as gift certificates, are income.Correct Answer: A
  2. Rick Johnson purchased 100 shares of Andy's Practical Solutions stock for $15,000. Andy's practical solutions is a qualifying small business stock under section 1244. The following year he contributes an additional $5,000, making his total investment in Andy's Practical Solutions $20,000. He then sold all of his shares for $12,000. What is the amount and character of loss that Rick can deduct on his return for the year of sale?



    A.
    $8,000 ordinary loss

    B.
    $8,000 capital loss

    C.
    $3,000 capital loss

    D.
    $6,000 ordinary loss and $2,000 capital loss
    If you add additional capital to a qualified section 1244 small business the additional capital is added to the basis of the original stock. However, the additional capital cannot be treated as section 1244 stock. Therefore any gain recognized on the sale from the additional capital will be treated as a capital gain and not as ordinary income.Rick bought 100 shares of section 1244 stock for $15,000. He later made a $5,000 contribution to capital which increased the total basis of the 100 shares to $20,000. Rick then sold the 100 shares for $12,000 and incurred a loss of $8,000. Under these rules he can deduct only $6,000 ($8,000 x $15,000/$20,000) as an ordinary loss. The remaining $2,000 is a capital loss.Correct Answer: D
  3. Jen bought a rundown house in Long Beach with a plan to renovate it. Right after making the improvements, a fire completely destroys the house. She paid $100,000 for the property, which includes $10,000 for the land. The fair market value (FMV) of the property before the fire was $120,000, consisting of $105,000 for the house and $15,000 for the land. After the fire, the FMV was only the $15,000 value of the land. Jen collected $85,000 from her insurance company. What is her casualty loss (before applying the $100 and 10% limits)?



    A.
    $20,000

    B.
    $35,000

    C.
    $0

    D.
    $15,000
    In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. Jen's adjusted basis is $100,000. The FMV before the fire is $120,000 and FMV after the fire is $15,000. The decrease in FMV is $105,000. Her loss is the smaller of her adjusted basis or the decrease in FMV. The loss is therefore $100,000 LESS the insurance reimbursements. The result is a loss of $15,000 ($100,000 - $85,000).Correct Answer: D
  4. Duke purchased 500 shares of IBM stock on January 12, 2010. What is the earliest date on which he can sell the stock in order for the gain or loss to qualify for the long-term holding period?



    A.
    July 12, 2010.

    B.
    January 13, 2011.

    C.
    January 12, 2011.

    D.
    July 13, 2010.
    If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.Correct Answer: B
  5. Nancy bought a house in 1991 and lived in it until selling in 2010 and then marrying Tom. Nancy's gain from the sale of her house was $300,000. In addition, Tom also sold his primary residence in 2010 before he and Nancy were married. He then moved in with her for six months before the sale of her home. He had a gain of $100,000 from the sale of his home of ten years. Can Nancy and Tom exclude the sum of their entire gains from their 2010 taxable income?



    A.
    No, because they were not married when they sold their houses.

    B.
    Yes, because they each met the use and ownership tests independently.

    C.
    Yes, because they were married during 2010 and can exclude $500,000 of gain.

    D.
    No, because they each met the use and ownership tests independently.
    The $500,000 maximum exclusion for certain joint returns does not apply because Nancy and Tom do not jointly meet the use test for the same home. The ownership and use tests are met independently (for their own homes); but Tom did not meet the use test for Nancy's home. They cannot exclude the entire gain as a result, as the exemption for Nancy's home is limited to $250,000.Choice A is an answer that is technically true, as they would need to be married to claim an exemption above $250,000; however, even if married, they cannot claim the entire amount since they do not jointly meet the use test for the same home. Choice D is therefore the best answer.Correct Answer: D
  6. George and Martha Beck are married and file a joint tax return. They own a large estate in Virginia and rent rooms to vacationers. They provide maid service and meals in a common dining room. How do George and Martha report the income and expenses for this activity?



    A.
    Income as Other Income on Form 1040 and expenses as itemized deductions on Schedule A

    B.
    Income and expenses on Schedule E, Supplemental Income and Loss

    C.
    Income and expenses on Schedule C, Profit or Loss from Business

    D.
    The net result of income minus expenses as Other Income on Form 1040
    They will attach Schedule C, Profit or Loss from Business, to their Form 1040 to account for their income and expenses. The reason it is schedule C is because they provide services for the tenant's convenience (maid service). The Becks have self-employment income because they provide substantial services that are primarily for the convenience of the tenants. If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C, instead of Schedule E. Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is subject to SE tax if you provide services for the occupants. Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and are not services normally provided with the rental of rooms for occupancy only. An example of a service that is not normally provided for the convenience of the occupants is maid service. However, providing heat and light, cleaning stairways and lobbies, and collecting trash are services normally provided for the occupants' convenience.Correct Answer: C
  7. On February 28, Allen purchased 240 shares of Guinness Brothers stock for $600. On November 17, Guinness Brothers declared and distributed a stock dividend of one share for every 4 shares held by the shareholder. If this is a non-taxable dividend, what is Allen's basis in his shares?



    A.
    The basis in his new shares is $0, since he did not pay for them.

    B.
    The stock dividends are considered return of capital, so Allen must reduce his basis to $500.

    C.
    The stock dividend is not taxable, so Allen must divide the basis for the old stock between the old and new stock. His new basis is $2 per share.

    D.
    The stock dividend is not taxable, so Allen must divide the basis for the old stock between the old and new stock. His new basis is $2.50 per share.
    Non-taxable stock dividends. - If stock dividends are not taxable, the shareholder must divide the basis for the old stock between the old and new stock. Allen's basis in his shares remains at $600, but since he now has 300 shares after the 1:4 split his basis is $2 per share.Correct Answer: C
  8. Danielle expects a large refund this year. She was shocked when her husband informed her that all of her refund will be applied against his delinquent student loans when they file a joint return. Her tax preparer suggested filing an injured spouse claim as a way to prevent this from happening. Which of the following is not a proper method for filing an injured spouse claim?



    A.
    File Form 8379 with a joint return

    B.
    File Form 8379 with a separate return

    C.
    File Form 8379 by itself at a later time

    D.
    File Form 8379 with an amended return
    Choice B is an incorrect statement. The question asks-Which of the following is not a proper method. . .If Danielle files separately, there isn't an issue regarding her refund. The injured spouse files Form 8379 with a jointly filed tax return when the joint overpayment was-or is expected to be-applied to a past-due obligation of the other spouse. By filing Form 8379, the injured spouse may be able to get back his or her share of the joint refund. The taxpayer may file Form 8379 with a joint return, with an amended return, or by itself at a later time. Correct Answer: B
  9. The Feinstein's paid the following amounts for household labor. Which situation requires them to withhold and pay Social Security and Medicare taxes?



    A.
    Paying $5,000 to their 19-year-old daughter for babysitting their 3 year old son.

    B.
    Paying $1,900 to a 17-year-old neighbor for washing their cars every week.

    C.
    Paying $1,800 to a 19-year-old neighbor for cleaning their swimming pool.

    D.
    Paying $3,700 to Mr. Feinstein's mother for supervising their children.
    A household employee is someone who performs household work as an employee. The worker is an employee if the taxpayer controls not only what work is done but how it is done. Paying cash wages of $1,700 or more (for 2010) to any one household employee requires withholding and paying Social Security and Medicare taxes. Individuals are not household employees who are a taxpayer's spouse, child under the age of 21, parent (certain exceptions apply), or anyone under the age of 18 at anytime during the year. If child care services are provided outside of the home, the child care provider is not considered a household employee.Correct Answer: C
  10. Becky is a US citizen who has been offered a job in Belgium. In order to obtain the foreign earned income exclusion, Becky must meet all of the following requirements except:



    A.
    Establish her tax home in Belgium.

    B.
    Have earned income in Belgium.

    C.
    Return to the United States before the end of the tax year.

    D.
    Maintain her US citizenship.
    The foreign earned income exclusion is for U.S. citizens or resident aliens of the United States who live abroad. There is no time-period requirement for them to return to the US.Correct Answer: C
  11. Which of Marsha's expenses below qualify for a medical deduction?



    A.
    Legal abortion

    B.
    Maternity clothing

    C.
    Health club membership advised by her doctor

    D.
    Over-the-counter medication to treat symptoms of the flu
    Legal abortion is specifically allowable and maternity clothes are specifically disallowed. The health club membership and over-the-counter medications are also disallowed.Correct Answer: A
  12. Kirk passed away in 2011. At his death he had a traditional IRA with a basis of 25,000 and a FMV of $50,000. Kirk had taken no distributions and all the contributions he made were non-deductible. As the spousal beneficiary, which of the following applies to his wife Jenny?



    A.
    Kirk's $25,000 basis in the IRA may be treated as basis to Jenny upon Kirk's death

    B.
    When Jenny receives the distribution she must roll it over to her own traditional IRA or pay tax on all income earned in the account

    C.
    Jenny must begin receiving periodic distributions by December 31 of the fifth year following Kirk's death

    D.
    Jenny must pay a 10% penalty on the funds in the IRA if she receives an immediate distribution after Kirk's death
    The basis in a traditional IRA, along with the untaxed income in respect of a decedent (IRD) transfers to the beneficiary. A surviving spouse can treat the IRA as her own, or begin taking distributions from the IRA according to the rules established for beneficiaries. The spouse of the decedent is the only beneficiary that can roll an inherited IRA into their own traditional IRA. Distributions due to death are not subject to a 10% penalty.Correct Answer: A
  13. Donald gave to his son in 2011 a collection of fifteen $20 gold coins minted in the late 19th century. A coin dealer had recently appraised a fair market value of the coins at $30,000. Donald purchased the coin collection in 1970 for $10,000. What amount should Donald record on Form 709 as the amount of his gift?
    The value of a gift on Form 709 is the fair market value on the date of the gift. The cost or other basis is not considered. Donald gave a $30,000 coin collection to his son. He reports a $30,000 gift. The taxable part of the gift is $17,000 after deducting the $13,000 annual gift exclusion (assuming Donald made no other gifts to his son in 2011).Correct Answer: C
  14. Rachel is filing a 2010 tax return. Her husband, Jackie, died June 30, 2010. How does Rachel determine the personal exemption to use for Jackie on the tax return?



    A.
    She gets one-half an exemption because Jackie lived only half of last year.

    B.
    There is no personal exemption for Jackie on the tax return for the year of his death.

    C.
    The exemption is the same as if Jackie continued to live.

    D.
    Jackie as an exemption on the return if he had no income for the year.
    The amount of the personal exemption and standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed.Correct Answer: C
  15. Bennett and Alexis, husband and wife, own 100% of an architectural firm. They had gross receipts of $120,000, less expense of $40,000 resulting in net income of $80,000 for the architectural firm. Bennett received an inheritance of 20,000 of bonds, which earned $1,200 in interest. In addition, they had municipal bond interest of $3,000 and savings account interest of $2,000. Without considering the deduction for 1/2 self-employment tax, what is their adjusted gross income on a married filing joint return?



    A.
    $105,000.

    B.
    $142,000.

    C.
    $ 83,200.

    D.
    $102,000.
    The $20,000 in inherited bonds and the municipal bond interest are not taxable and not included in AGI. However, the income earned by inherited bonds would be taxable. The correct answer is $ 83,200. Architectural firm income of $80,000 + savings account interest $2,000+ bond interest $1,200 = AGI of $ 83,200.Correct Answer: C
  16. Warren paid $85 in 2010 for the preparation of his 2009 tax return. He also paid an attorney $215 to prepare his will. In addition, for his job he paid union dues of $650, bought safety boots for $200, and contributed $75 to collections for birthday presents of his co-workers. What is Warren's total miscellaneous itemized deduction on his Schedule A (before the 2% limitation)?



    A.
    $935.

    B.
    $1,010.

    C.
    $1,150.

    D.
    $1,225.
    Preparation of a will is not deductible (only legal fees relevant to generating or collecting taxable income are deductible). Voluntary gifts to co-workers are not deductible. Only the union dues, safety clothes, and tax return preparation fees are deductible.Correct Answer: A
  17. Warren owns several types of bonds. Which of the following is not true about original issue discount (OID)?



    A.
    The OID rules do not apply to U.S. Savings Bonds.

    B.
    OID is included as income over the term of a debt security regardless of whether payments are received from the issuer.

    C.
    The amount of OID is the difference between the stated redemption price at maturity and the par value.

    D.
    OID is treated as zero if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of years from the date of issue to maturity.
    OID is the difference between the stated redemption price at maturity and the issue (purchase) price. Report OID in the year accrued. U.S. savings bonds are issued at a discount; however, only an accrual basis taxpayer must report interest when accrued. Unlike other instruments issued at a discount, a cash basis taxpayer can choose to defer recognition of income until redemption (or sale) of the bonds. The OID in item D is de minimis and not necessary to report.Correct Answer: C
  18. Dwight Howard owned an office building for investment purposes on the east side of Orlando. Dwight's adjusted basis in the building was $725,000 and the fair market value (FMV) was $550,000. He exchanged his investment for other real estate held for investment, near the big lake, with a FMV of $650,000. Dwight assumed a mortgage of $100,000 on the new building. What is Dwight's basis in the new building?



    A.
    $825,000

    B.
    $550,000

    C.
    $650,000

    D.
    $725,000
    Dwight's basis in the new building is $825,000. He can increase his basis in the replacement property by the amount of net liabilities he assumes in the exchange. If a taxpayer acquires property in a like-kind exchange, the basis of that property is generally the same as the basis of the property transferred, with the following adjustments:Increase basis by the total amount of:

    • Additional money paid, including exchange expenses
    • FMV of any non-like kind property transferred to other party
    • Net liabilities assumed by the taxpayer
    • Any gain recognized on the exchangeDecrease basis by the amount of:

    • Boot received (money, FMV of non-like kind property, net liabilities other party assumes)
    • Any loss recognized on the exchangeCorrect Answer: A
  19. John and Rebecca are married, both are employed, and they have three children all under the age of 10. The two youngest children are in preschool and the oldest child is in grade school. They claim their children as dependents and file a joint return. Their adjusted gross income (AGI) is $35,000. John earned $29,000 and Rebecca earned $6,000. During the year, they paid $2,000 each for the two children to attend preschool. They also paid Rebecca's mother $3,000 to watch the oldest child after school. How much of their childcare payments are eligible to calculate the child and dependent care credit on their return?



    A.
    $3,200

    B.
    $4,000

    C.
    $6,000

    D.
    $7,000
    A taxpayer may include up to $6,000 of expenses paid for the care of two or more qualifying persons to figure the child and dependent care credit, provided the amount of expenses claimed does not exceed the gross earnings of the lower earning taxpayer. The expenses paid to Rebecca's mother are acceptable; however, Rebecca must provide her mother's name, SSN, name and address on form 2441. A taxpayer should combine the total qualifying expenses for all qualifying persons. In this case John and Rebecca would combine the amounts paid for the two preschool children of $4,000 and the amount paid for after school care of $3,000. However, the total of $7,000 exceeds the maximum of $6,000 therefore they may only use $6,000 of the child care expenses to calculate the child and dependent care credit. Please note, that if there is only one child the maximum amount of expenses to figure the child and dependent care credit is $3,000.Correct Answer: C
  20. Greg and Marsha are married and file a joint tax return. They have investment income from interest and dividends of $15,000. They did not have any tax-exempt investment income. They paid interest of $16,000 for their margin account, $22,000 for their home mortgage, $3,000 for a $50,000 home equity loan, $4,000 for their credit card balance, and $2,000 for a car loan. How much can Greg and Marsha deduct for interest after limitations?



    A.
    $40,000.

    B.
    $41,000.

    C.
    $38,000.

    D.
    $44,000.
    Interest on their home mortgage and home equity loan interest is fully deductible. In addition, only $15,000 of the $16,000 margin interest is deductible because the investment interest deduction is limited to the amount of investment income. Interest is not deductible when paid for credit cards or a car loan. The total of their interest deduction is:$15,000$22,000$ 3,000$40,000Correct Answer: A
  21. Ben loaned $10,000 to Warren so that he could film a documentary about Yellowstone. Warren signed a note agreeing to repay the loan at a 4 percent interest rate in monthly payments of $100. Warren ran out of money in 2010 before completing the film project and filed for bankruptcy. Ben's loan was discharged by the court as part of Warren's bankruptcy. The balance owed to Ben on the loan is $7,000. Ben's only income for 2010 is from wages. How much of a deduction can Ben claim for 2010 as an adjustment to his gross income?



    A.
    $10,000

    B.
    $7,000

    C.
    $3,000

    D.
    $0
    Ben's basis in this non-business bad debt is $7,000. This amount is reported on Schedule D as a short-term capital loss. (All non-business bad debts are short term capital losses no matter how long the money was loaned.) Since he has no capital gains, he is limited to a deduction of $3,000 for the year.Correct Answer: C
  22. Jen bought a rundown house in Long Beach with a plan to renovate it. Right after making the improvements, a fire completely destroys the house. She paid $100,000 for the property, which includes $10,000 for the land. The fair market value (FMV) of the property before the fire was $120,000, consisting of $105,000 for the house and $15,000 for the land. After the fire, the FMV was only the $15,000 value of the land. Jen collected $85,000 from her insurance company. What is her casualty loss (before applying the $100 and 10% limits)?



    A.
    $20,000

    B.
    $35,000

    C.
    $0

    D.
    $15,000
    In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. Jen's adjusted basis is $100,000. The FMV before the fire is $120,000 and FMV after the fire is $15,000. The decrease in FMV is $105,000. Her loss is the smaller of her adjusted basis or the decrease in FMV. The loss is therefore $100,000 LESS the insurance reimbursements. The result is a loss of $15,000 ($100,000 - $85,000).Correct Answer: D
  23. In 2010, Gil sold the house he used as his primary residence. Which of the following is not true about the sale?



    A.
    Gil may exclude at least some of the gain from sale of the house even if he used part of it as an office for his home-based business as long as he meets the ownership and use tests.

    B.
    Gil may take depreciation deductions for the time he used part of the house as an office for home-based business.

    C.
    Gil cannot exclude the part of his gain from sale of the house equal to depreciation deductions Gil had after May 6, 1997, for using part of the house as an office for his home-based business.

    D.
    Gil cannot exclude any gain from sale of the house if it is a mobile home.
    D is an incorrect statement, which is why it is the correct answer. A taxpayer who meets certain qualifications may exclude gains on the sale of a principal residence. This is known as section 121 exclusion. The taxpayer must own and live in the property as his main home for at least 2 years during the 5-year period ending on the date of sale. Usually, the home that is lived in most of the time is the main home. In addition to a house, a main home may also be a condominium, cooperative apartment, houseboat, or mobile home. If a taxpayer uses only part of the property as a main home, these rules apply only to the gain or loss on the sale of that part. If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.Correct Answer: D
  24. Jake bought four shares of common stock for $200. Later the corporation distributed a share of preferred stock for every two shares of common. At the date of distribution the common stock had a FMV of $60 per share and preferred stock had a FMV of $40 per share. What is Jake's basis per share of the common and preferred stock after the nontaxable stock dividend?



    A.
    $60 common; $40 preferred.

    B.
    $37.50 common; $25 preferred.

    C.
    $33.33 common; $33.34 preferred.

    D.
    $50 common; $0 preferred.
    Jake must allocate a portion of his $200 basis in the common stock to the preferred stock, according to the relative value on the date of distribution. On the date of distribution, the four shares of common stock are valued at $240 and the two shares of preferred stock are valued at $80, totaling $320. The common represents 75% of the total value and the preferred represents 25%. 75% of $200 is $150 and 25% is $50.To calculate basis per share, divide the basis for each class of stock by the number of shares of that class owned directly after the split.Common $37.50 ($150/4)Preferred $25 ($50/2)Correct Answer: B
  25. Carol's employer advances her $500 per month -- in addition to her salary -- for her cell phone and business use of her personal vehicle. She does not submit proof to her employer about her actual cell phone expense and business mileage. She keeps records of her actual costs, which sometimes are more than $500 per month. How does Carol report her expenses and the advances on her tax return?



    A.
    She reports the $500 per month as income and her actual costs as expenses on Schedule C

    B.
    She reports the $500 per month as other income on Form 1040, Line 21 and cannot deduct her expenses

    C.
    She deducts her expenses and reports the $500 per month as reimbursements on Form 2106, Employee Business Expenses

    D.
    She deducts her expenses that exceed $500 per month on Form 2106
    Her employer has a non-accountable plan. Therefore, she must report her expenses on Form 2106, along with the amount of her reimbursements. While she is not required to submit proof to her employer, she must maintain adequate records to justify her expense deductions.Correct Answer: C
  26. Ralph and Alice are determining their medical expense deduction for 2010. Which of the following medical expenses is not deductible (before applying any income limitation)?



    A.
    Medical expenses for the daughter they adopted that were paid before the adoption was final but during the time that she qualified as their dependent.

    B.
    Premiums for vision insurance

    C.
    Payment of surgery costs for Alice's niece, who is not their dependent.

    D.
    The cost of driving Ralph to physical therapy ordered by his doctor.
    A taxpayer can generally deduct medical expenses paid for himself, as well as those paid for someone who was a spouse or dependent, either when the services were provided or when the taxpayer paid for them.Correct Answer: C
  27. Form 4137 is used _________?



    A.
    To report tips to an employer.

    B.
    To report tips in excess of $1,000 per month.

    C.
    When tips were received for work covered by the Railroad Retirement Tax Act.

    D.
    To calculate the social security and Medicare tax owed on tips not reported to employer.
    A taxpayer must file Form 4137 if receiving cash and charge tips of $20 or more in a calendar month and he or she did not report all of those tips to the employer. Form 4137 is also used when box 8 of Form W-2 shows allocated tips that the taxpayer must report as income. However, Form 4137 should not be used to report tips received for work covered by the Railroad Retirement Tax Act. In order to get railroad retirement credit, the taxpayer must report these tips to his or her employer. IRS Form 4137.Correct Answer: D
  28. Eugene and Peter owned a building, as joint tenants with the right of survivorship, which they used as a storefront. Eugene provided $25,000 and Peter provided $75,000 when they purchased the building. Peter died in 2011. $20,000 of depreciation was taken before Peter's death. According to local law, both Eugene and Peter had a one half interest in the income from the property. At the time of Peter's death, the fair market value of the property was $80,000, three fourths of which is includable in Peter's estate. What is Eugene's basis in the property at the date of Peter's death?



    A.
    $80,000

    B.
    $60,000

    C.
    $75,000

    D.
    $65,000
    Eugene paid $25,000, and received $60,000 (3/4 of the FMV when Peter died) for a total of $85,000. Subtract 1/2 of the $20,000 claimed in depreciation at time of death and Eugene's adjusted basis in the property as of Peter's death is $75,000.Correct Answer: C
  29. Roberta is in the Army, stationed in Hamburg, Germany on the due date for her return. She is a US citizen and is required to file a US tax return. She reported to duty in Hamburg on March 15, 2009, and has been there ever since. What is latest deadline for Roberta to pay her 2011 taxes?



    A.
    Like everyone else, Roberta must file and pay by April 18, 2012, the normal tax filing deadline.

    B.
    She must file within 180 days of leaving the combat zone.

    C.
    She must file within 180 days of leaving, plus an additional 3 1/2 months.

    D.
    She can file and pay by June 15, 2012 under an automatic 2-month extension as she is out of the country on active military duty.
    Germany is not a qualified combat zone. Roberta automatically receives a 2-month extension to file and pay. A taxpayer who is a U.S. citizen (or resident) may receive an automatic 2-month extension to file a return and pay any federal income tax due if, on the due date of the return, they are in the military or naval service on duty outside the US and Puerto Rico, or live and maintain a main place of business outside the United States and Puerto Rico. Interest applies from due date until paid. The taxpayer must attach a statement to their return explaining which situation applies.Correct Answer: D
  30. Tina had wages of $34,000 and her husband Albert's wages were $27,000. They have three children ages 11, 14 and 16. They paid a total of $6,000 to Kinder Care for after school care for the 11 year old. Assuming a 20% credit rate, what is their credit for child and dependent care expenses?



    A.
    $600.

    B.
    $1,200.

    C.
    $6,000.

    D.
    $3,000.
    A child must be under age 13 to qualify for the credit. Consequently, the maximum amount of expenses they can use to calculate the Child and Dependant credit is $3,000 for each qualifying child claimed, limited to a total of $6,000. Taxpayers with AGI above $43,000 receive the minimum percentage of 20%. They have one qualifying child, so their credit is $600 ($3,000 x 20%).Correct Answer: A
  31. Tony purchased 100 shares of the Hot Shot Bonds Mutual Fund on October 28, 2010. On the first day of every month, the Hot Shot paid a dividend that Tony reinvested in the fund. Tony received 5 additional shares each month. On November 10, 2011, Tony sold his entire interest (165 total shares) in the Hot Shot Mutual Fund. How many of the shares sold by Tony qualify for the long-term holding period?



    A.
    100

    B.
    105

    C.
    110

    D.
    165
    If you hold investment property more than 1 year, any capital gain or loss is long-term. If you hold the property 1 year or less, any capital gain or loss is short-term. To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period. Only the shares acquired before November 10, 2010 are long-term holdings. The others were held less than 1 year. 100 shares on October 28, 2010 + 5 shares on Nov 1, 2010 = 105Correct Answer: B
  32. Bill is 72 and single. His 2010 income was $14,000 of Social Security payments, $21,000 of dividend and interest income, $30,000 of pension plan payments, and $16,000 of taxable distributions from his IRA. What is Bill's 2010 adjusted gross income?



    A.
    $74,000

    B.
    $78,900

    C.
    $67,000

    D.
    $80,400
    Only part of Bill's Social Security is taxable. To determine the amount of benefits to include in income, compare his provisional income of $74,000 (one-half of the benefits of $7,000 + all other income sources totaling $67,000) to the upper base amount for single taxpayers of $34,000. A taxpayer must add 85% of excess provisional income (above the upper base amount) to income. However, the amount to include is limited to a maximum of 85% of the social security amount. The excess provisional income of $40,000 is more than his $14,000 in benefits. Therefore, he adds only $11,900 (85% of $14,000 in social security benefits) to his other income to arrive at AGI. The resulting AGI is $78,900.Correct Answer: B
  33. Melissa is a responsible, single adult. She rents a home for which she pays all the expenses. An unrelated 9-year-old child, Ella, has been living with Melissa since April. Melissa is raising Ella as her own and receives no financial assistance. Ella was not placed by an authorized adoption agency, but Melissa has filed for adoption although it is not yet final. Melissa has no other dependents. Which of the following statements is true?



    A.
    Melissa can claim Ella as her dependent on her return.

    B.
    Melissa can file as head of household.

    C.
    Melissa can claim qualified adoption expenses the following year, even if the adoption is not final.

    D.
    Melissa can claim a credit for qualified adoption expenses in the current year, even if the adoption is not final.
    A dependent must be a qualifying child or a qualifying relative. Ella is not a qualifying child, as the adoption is not final. Ella did not live with Melissa the entire year, and therefore is also not a qualifying relative. Melissa cannot file as head of household without a dependent. For expenses paid prior to the year the adoption becomes final, the credit generally is allowed for the year following the year of payment. A taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit for the expenses on the current year return, in addition to credit for expenses paid in a prior year.Correct Answer: C
  34. Bruce contributed $75,000 in 2011 to the Iowa 529 qualified tuition plan for his daughter, Scout. He elects to treat this initial contribution ratably over a five-year period. Bruce makes no other transfers to the qualified plan for Scout in 2011. What is the amount treated as a taxable gift for the 2011 tax year?



    A.
    $65,000

    B.
    $42,000

    C.
    $10,000

    D.
    $0
    Bruce contributes $75,000 to the qualified tuition plan, and his election to treat the contribution ratably over a 5-year period (a special provision with 529 plans) allows him to offset $65,000 of the gift with 5-years worth of his annual exclusion ($13,000 x 5). The $10,000 balance of the amount over $65,000 is a taxable gift in the year of his contribution.Correct Answer: C
  35. Peter is single and provides more than half of the support for his father, who lived with Peter for all of 2010. His father's income in 2010 consisted of $2,000 in wages, $4,000 in Social Security benefits, $1,200 of municipal bond interest, $1,000 of corporate bond interest, $1,400 of dividends, $4,000 of rent income, and $2,000 of rent expenses. How much 2010 gross income does Peter's father have for determining the dependency exemption?



    A.
    $10,400.

    B.
    $8,400.

    C.
    $12,400.

    D.
    $11,600.
    Gross income is all income in the form of money, property, and services that is not exempt from tax. Social Security benefits (in this example) and municipal bond interest are not taxable and not included in gross income for this test. The question asks about gross income for purposes of a dependency exemption, which includes rental income (before deductions). Do not deduct taxes, repairs, etc., to determine the gross income from rental property. .Correct Answer: B
  36. Donovan established a Roth IRA in 2006 at age 57 and has contributed $3,000 each year up through 2009. In 2009, at age 61, Donovan received a distribution of his entire account balance from the Roth IRA. Is any of Donovan's distribution included in his gross income for 2009?



    A.
    No, because Donovan reached the statutory age for Roth IRA withdrawals.

    B.
    No, because distributions from Roth IRAs are not included in gross income.

    C.
    Both A and B.

    D.
    Yes, if the distribution exceeded his basis.
    While it is the case that qualified distributions from a Roth IRA are not included in gross income, Donovan's distribution was not qualified because the distribution was made before the end of the five-year time period that commenced with the first taxable year for which a contribution was made.Correct Answer: D
  37. Regarding retirement plans, prohibited transactions are transactions between the plan and a disqualified person. Which of the following is not exempt from the prohibited transaction rules?



    A.
    The account owner receiving any benefit to which he or she is entitled

    B.
    A beneficiary of the account receiving any benefit to which he or she is entitled

    C.
    Both A and B

    D.
    An employer whose employees are covered by the plan
    If someone other than the owner or beneficiary of the plan engages in a prohibited transaction, that person may be liable for certain taxes. Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if a disqualified person receives a benefit to which he or she is entitled as a plan participant or beneficiary.Correct Answer: D
  38. Andrew and Meg file a joint return. Andrew owns qualifying small business stock (Sec. 1244). During the year he incurred a $130,000 loss on the sale of his qualifying small business stock. How much of this loss is deductible on their joint return as an ordinary loss?



    A.
    $130,000

    B.
    $ 3,000

    C.
    $100,000

    D.
    $ 50,000
    Section 1244 relates to losses on the sale of small business stock. The amount a taxpayer may deduct as an ordinary loss is limited to $50,000 each year. On a joint return, the limit is $100,000, even if only one spouse has this type of loss. The remaining $30,000 is eligible for capital loss treatment.Correct Answer: C
  39. Andy has a traditional IRA. His IRA can invest in which of the following as an allowable investment?



    A.
    Stamps that have been issued by the United States Postal Service

    B.
    A drawing by Picasso that is officially certified as authentic

    C.
    One-ounce silver coins minted by the U. S. Treasury Department

    D.
    None of the above.
    If a traditional IRA invests in collectibles, the IRS will consider the amount a distribution in the year invested. The 10% additional tax on early distributions may apply. Collectibles include artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.Exception: An IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Correct Answer: C
  40. Elden is 78 years of age and single. He received Social Security benefits of $15,000, which includes $500 for Medicare premiums. His pension income was $57,000. He also had received $1,500 dollars of interest income, $700 of gross rental income and $1,600 of dividends. How much is Elden's adjusted gross income?



    A.
    $72,850

    B.
    $73,550

    C.
    $68,300

    D.
    $72,050
    Under certain circumstances, social security benefits are not taxable. To determine the amount of benefits to include in income, compare his provisional income of $68,300 (one-half of the benefits of $7,500 + all other income sources $60,800) to the upper base amount for single taxpayers of $34,000. The amount of his social security benefits included in income is limited to a maximum of 85% of his social security amount. The excess provisional income $34,300 is more than his $15,000 in benefits, therefore $12,750 (85% of $15,000 in social security benefits) is added to his other income to arrive at AGI. AGI equals $73,550.Correct Answer: B
  41. Terry has a law practice in Denver and provides several types of fringe benefits to his one employee. Which benefit does he report as wages on Form W-2 for the employee?



    A.
    Health insurance coverage paid by the business.

    B.
    Amounts paid under a qualified plan for child care services.

    C.
    The fair market value of less than $175 per month for a space in the parking garage next to the office.

    D.
    Group-term life insurance premiums for coverage in excess of $50,000.
    All fringe benefits listed are non-taxable fringe benefits, with the exception of Premiums paid for group-term life insurance in excess of $50,000. Premiums for benefits that are less than $50,000 are not included in income.Correct Answer: D
  42. Over how many years does a taxpayer have to repay the first time home buyer's credit if the home was purchased in 2008?



    A.
    5 years

    B.
    10 years

    C.
    15 years

    D.
    20 years
    For homes purchased in 2008, a taxpayer has 15 years to make repayments. The taxpayer must repay at least 1/15 of the credit with every tax return during the repayment period until the year the credit is paid in full. The taxpayer may choose to repay more than the minimum amount with any tax return, thus the final payment may be less than the required minimum amount. IRS Form 5405. To claim the first-time homebuyer credit for 2011, the taxpayer (or spouse if married) must have been a member of the uniformed services or Foreign Service or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after December 31, 2008, and ending before May 1, 2010.Correct Answer: C
  43. Bonnie, is single and age 35. She received income from the following sources in 2010: wages of $2,500, dividends and interest of $600, royalty income of $400 and capital gains of $35,000. What is the maximum amount of money that she can contribute to a traditional IRA?



    A.
    $5,000

    B.
    $2,500

    C.
    $2,900

    D.
    $6,000
    For 2010, the most that can be contributed to a traditional IRA generally is $5,000 ($6,000 if you are age 50 or older), or taxable compensation for the year, whichever is smaller. Her taxable compensation is $2,500, so that is also her maximum allowable contribution to a traditional Individual Retirement Account.Compensation includes: wages, salaries, commissions, self-employment income, alimony and separate maintenance, and non-taxable combat pay.Compensation does not include: earnings and profit from property, interest and dividend income, pension or annuity income, deferred compensation, income from certain partnerships and any amount you exclude from income.Correct Answer: B
  44. While Fred was walking down the street, a piano fell from a moving van and slid into him. His injuries prevented him from working in 2010. He received disability income of $60,000. All premiums on his health and accident policy had been paid by his employer and included as Fred's income. In addition, he received compensatory damages from a law suit against the moving company of $1,000,000. He received no other income in 2010. How much of this income is taxable to Fred on his 2010 tax return?



    A.
    $1,060,000

    B.
    $1,000,000

    C.
    $60,000

    D.
    $0
    The employee will recognize income for disability payments received if under the terms of the plan, the employer pays the entire premium for the coverage and does not include the cost of the coverage in the employee's gross income (i.e., the premiums are paid on a pre-tax basis and are not reported on the employee's Form W-2 for that year).Our book says - Generally, employees must report as income any amount received for personal injury or sickness through an accident or health plan when the employer pays plan premiums. The statement begins with generally as this is the most common form of disability insurance arrangement for employees.Disability benefits received by an employee who has irrevocably elected, prior to the beginning of the plan year, to have the coverage paid by the Employer on an after-tax basis for the plan year in which the employee becomes disabled are attributable solely to after-tax employee contributions and are excludable from the employee's gross income under 104(a)(3)An easy way to remember this is that benefits are taxable only when premiums for the policy are not included in the employee's income, which is usually the case.Correct Answer: D
  45. In 2011, Stevie sold land near his home in Oklahoma with a basis of $50,000 for $100,000. He received a $50,000 down payment and the buyer's note for $50,000. In 2012, he is schedule to receive the first of five annual payments of $10,000 each, plus 12% interest. What is the gain to be reported in 2011?



    A.
    None

    B.
    $25,000

    C.
    $50,000

    D.
    $10,000
    The gross profit percentage is 50% (gross profit of $50,000 divided by the contract price $100,000). Reportable gain equals installment payments received times the gross profit percentage. $50,000 received in 2011 x 50% = $25,000.Correct Answer: B
  46. Marilyn's employer has a qualified award program. Each year at the company's holiday party in December, awards are given to a few employees who have reached certain job milestones. At the 2010 party, Marilyn received a television in recognition of her tenth anniversary with the company. The television cost $1,000. This was the only reward she received from her employer that year. Is $1,000 included in Marilyn's income for 2010 due to the award?



    A.
    Yes because the television is really compensation.

    B.
    Yes, because a television isn't an eligible gift for a qualified award plan.

    C.
    No, because the award is not cash.

    D.
    No, because it meets all the conditions of a qualified award.
    If an employee receives tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, its value is generally excluded value from income. But the excludable amount is limited to the employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards the employee receives during the year. The employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.Correct Answer: D
  47. Elroy purchased several houses in 2011. Points he paid for mortgages are fully deductible in 2011 except when:



    A.
    The points are not clearly stated on the settlement statement.

    B.
    Paying points is an established business practice in the area where the loan was made.

    C.
    The mortgage is for the purchase of your primary residence.

    D.
    The points are computed as a percentage of the amount of the mortgage.
    To receive a current deduction for points they must be used to buy or build a main home. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.Correct Answer: A
  48. Troy has income from several sources in 2010.

    He was a shareholder in an S corporation
    He received guaranteed payments for services he provided to business in which he is a limited partner
    He was paid sales commissions, and received fringe benefits from his job as an insurance agentWhich of the income sources is NOT considered earnings from self-employment?



    A.
    Income from the S Corporation

    B.
    Guaranteed payments from the partnership

    C.
    Commissions

    D.
    Fringe Benefits
    Income passed through to S corporation shareholders is not self-employment income for self-employment tax purposes. This is one of the main advantages of S corporations. Payment of commissions, or fringe benefits could be part of income from self-employment if the recipient is self-employed.Correct Answer: A
  49. Carla is paid $1,000 per week by Diane to wash dishes and make her breakfast. Carla requests that Diane withhold $150 of federal income tax from each paycheck. Diane has no other employees. How does Diane report and remit the taxes related to employing Carla?



    A.
    As a household employee, Carla is responsible for her own withholding.

    B.
    Diane sends Carla a 1099-MISC and Carla files Schedule H quarterly to report Social Security, Medicare, and federal withholding.

    C.
    Diane files Schedule H as an attachment to her personal income tax return to report Social Security and Medicare on the wages paid to Carla. Diane then files Form 940 reporting federal income tax withheld.

    D.
    Diane files Schedule H as an attachment to her personal income tax return to report Social Security, Medicare, federal tax withholding and federal unemployment tax related to wages paid to Carla.
    A taxpayer must annually file Schedule H with Form 1040 to report federal taxes related to household employees, including income tax withholding. Diane is not required to withhold federal tax, but may do so Carla's request. Other than providing a W-2 for Carla, Diane is not required to submit any other forms to the IRS related to employing Carla. However, there are state laws that may involve filing requirements.Correct Answer: D
  50. Stacy and Ashley are equal partners in a tax return preparation business. Stacy received a guaranteed payment of $ 5,000 in 2010. The partnership had distributive net income $80,000 (after Stacy's guaranteed payment). The income subject to self employment tax is:



    A.
    $42,000 for each Stacy and Ashley

    B.
    $40,000 for each Stacy and Ashley

    C.
    $40,000 for Stacy and $35,000 for Ashley

    D.
    $45,000 for Stacy and $40,000 for Ashley
    A partner's distributive share of partnership income plus guaranteed payments are income from self-employment. Each partner claims $40,000 of the net income and Stacy additionally claims her guaranteed payment.Correct Answer: D
  51. Michael owes $70,000 on his main home mortgage at the beginning 2011. The lender offers Michael a $5,000 discount if he paid off the entire mortgage. The remaining balance on the loan is all qualified principal residence indebtedness. To take advantage of this offer, Michael borrows $65,000 from his cousin. How should Michael handle this transaction for income tax purposes?



    A.
    He doesn't report any income but reduces the basis in his home by $5,000.

    B.
    He reports $5,000 of income on Form 1040, Line 21, Other Income.

    C.
    He reduces his 2011 itemized deduction for mortgage interest by $5,000.

    D.
    He reports the $5,000 as a capital gain.
    When a financial institution offers a discount for the early payment of a mortgage loan, the amount of the discount is canceled debt. Generally, you must include the canceled amount in your income. This income is reportable on Form 1040 line 21 as other income.An exception applies for qualified principal residence indebtedness. The exclusion applies only to debt discharged after 2006 and before 2013. The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition. The question does not mention a decline in the value of the home, or the taxpayer's financial situation.Correct Answer: B
  52. The amount of tuition and fees paid by the taxpayer for the taxable year is found on _________?



    A.
    Form 1098-T

    B.
    Form 1040

    C.
    Form 1099-A

    D.
    Form 8863
    The college or university should provide the taxpayer with Form 1098-T, Tuition Statement. This form reports either payments received (box 1) or amounts billed (box 2). The amounts paid for qualified expenses should be reported on Form 8917. IRS Form 8917.Correct Answer: A
  53. Mike and Carol have total wages of $74,600 plus interest income of $3,000 and dividends of $2,000. They paid mortgage interest of $7,000, car loan interest of $2,000, mobile home interest of $4,000, personal loan interest of $1,000 and margin interest of $6,000. The amount of interest Mike and Carol deduct on Schedule A is:



    A.
    $16,000

    B.
    $13,000

    C.
    $20,000

    D.
    $12,000
    Interest for the home mortgage and second (mobile) home is deductible. In addition, $5,000 of the $6,000 investment interest is deductible. $4,000 mobile home + $7,000 mortgage + $5,000 investment interest = $16,000. The investment interest deduction is limited to the amount of investment income ($3,000 + $2,000). Interest on personal or car loans is not deductible.Correct Answer: A
  54. Frank and Nancy are married and file a joint tax return. They have four children. Their ages are 21, 14, 12, and 9. Their 21-year-old daughter is a full-time student who earned $7,000 working part-time. Frank and Nancy provided more than half the support for all of their children. How many exemptions are claimed on their tax return?



    A.
    5

    B.
    4

    C.
    6

    D.
    3
    All are entitled to an exemption. The children are dependents as they meet the definition of a Qualifying Child. Relationship Test - The child must be a son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them. Age Test -To meet this test, a child must be under age 19 at the end of the year, or under age 24 at the end of the year and a full-time student, or any age if permanently and totally disabled. Residency Test - The child must have lived with the taxpayer for more than half of the year. A child who was born or died during the year passes this test if the home was the child's home the entire time he or she was alive during the year. Support Test - The child cannot provide more than half of their own support.Correct Answer: C
  55. In computing the gain or loss from a sale or trade of property, which statement below best describes the amount recognized?



    A.
    The fair market value of the property on the transaction date

    B.
    Everything you receive for the property

    C.
    The amount a taxpayer includes in taxable income for the tax year

    D.
    The value of any services you received less cash received
    The amount of income or loss recognized is the amount a taxpayer includes in taxable income for the tax year. Certain transactions such as like-kind exchanges and installment sales may defer recognition of gain.Correct Answer: C
  56. Which of the following individuals is not required to file a tax return?



    A.
    Moe, who is filing single, under age 65, and had gross income of $20,000.

    B.
    Larry, who is married, filing jointly, under age 65 with a spouse over age 65, and has gross income of $23,000.

    C.
    Curly, who is filing single, age 66, and had gross income of $10,000.

    D.
    Shemp, who is single, age 65, and a dependent on his daughters return. He has dividend income of $4,000.
    The gross income threshold determines when filing a return is necessary. It is the sum of the standard deduction and personal exemption amounts for each filing status. It is not necessary to file a return if gross income is less than the allowable deductions. The minimum income amount for filing for a single individual 65 or older in 2011 is $10,950. A dependent taxpayer over age 65 with over $3,850 in unearned income is required to file a return.Correct Answer: C
  57. Jerry received seven acres of land valued at $30,000 as a gift from Dean. Dean's adjusted basis was $32,000. Jerry subsequently sold the land for $20,000, which didn't make Dean happy. For purposes of reporting the transaction, what is Jerry's basis in the land?



    A.
    $30,000

    B.
    $32,000

    C.
    $8,000

    D.
    $ 2,000
    This sale is subject to the dual basis rules as FMV is less than donor's adjusted basis at the time of the gift. Jerry's basis for calculating loss is the FMV on date of gift, or $30,000.Dual basis is one of the harder topics on the exam. Basis for calculating gain is $32,000, while basis for calculating loss is $30,000. Otherwise, a taxpayer could transfer property with built in losses to others for purposes of shifting tax deductions. At the time of the gift, the FMV is less than donor's adjusted basis, the basis for tax reporting purposes will depend on whether a gain or a loss occurs when the property is disposed of. The following dual basis rules prevent taxpayers from shifting unrealized losses to other taxpayers:

    • The basis for figuring gain is the same as the donor's adjusted basis, or
    • The basis for figuring loss is its FMV when the taxpayer received the gift.Correct Answer: A
  58. In 2003, Matt purchased a 1997 truck. He paid $500 cash and took over payments when the principal balance was $15,000. Due to considerable rust, he painted the truck at a cost of $3,000. In 2011 Matt sold the truck for $17,500. Matt applied the entire $17,500 to the $40,000 purchase price of a new truck. What are the tax consequences on the sale of the truck?



    A.
    $1,000 long term loss

    B.
    $500 long term loss

    C.
    $0

    D.
    $1,000 loss is not taxable; basis in new truck is reduced to $18,500
    His basis was $18,500 (the sum of cash paid, balance of debt assumed and improvements). He sold it for $17,500 and incurred a loss of $1.000. If a taxpayer incurs a gain on personal property they must report that gain on schedule D. However, a taxpayer may not report a loss on personal property.Correct Answer: C
  59. A taxpayer may not claim the retirement savings contribution credit if _________?



    A.
    His or her filing status is single

    B.
    They are claimed as a dependent

    C.
    He or she files married filing separately

    D.
    Their filing status is head of household
    A taxpayer cannot take the retirement contribution credit if they were claimed as a dependent on someone else's tax return. IRS Form 8880.Correct Answer: B
  60. When the law requires withholding on a payment of U.S. source income to a nonresident alien, the payor must generally withhold at what rate?



    A.
    15%

    B.
    30%

    C.
    28%

    D.
    10%
    Most types of U.S. source income received by a foreign person are subject to U.S. tax at a rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States.Correct Answer: B

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