2003 Part 1
1. Generally, if an unmarried dependent child, John,
earns $4,200 wages during the summer, has no tips,
has $200 in interest/dividends, and no income tax
withheld, he would not be required to file a tax return
for 2002.

2003 Part 1
2. Mary’s husband died in 1999. Her son Bob is her
dependent and has lived in her house since his birth
in 1992. In 2002, Mary may file as qualifying widow
because she has not remarried.

2003 Part 1
3. Peter’s unmarried daughter lived with him in his
house for the entire year 2002. Peter owns the
home and pays all the costs of upkeep for that
home. His ex-wife did not live in the home at any
time during the year. Peter can file as head of
household in the year 2002.

2003 Part 1
4. If a taxpayer files his 2002 Form 1040 by January
31, 2003 and pays the balance due with the return;
he will not receive an underpayment of estimated
tax penalty for the fourth quarter estimated tax payment
that was due on January 15, 2003.

2003 Part 1
5. Ted is an ordained minister. He owns his own home
and receives a housing allowance that is less than
the fair rental value of the home. Because he owns
his home, the must include the housing allowance
as income for income tax and self-employment tax
purposes.

2003 Part 1
6. A regulated investment company (mutual fund) or
real estate investment trust (REIT) declares a dividend
in November 2002 payable to shareholders of
record on November 15. If the dividends are actually
paid on January 5, 2003, the dividends are taxable
in 2002.

2003 Part 1
7. There is no difference in the tax treatment of short term
capital gains, dividends, and long-term capital
gains on your federal return.

2003 Part 1
8. Rosemary’s home is used exclusively as her residence
all year except for 10 days. During this time,
Rosemary rents out her home to alumni while the
local college has its homecoming celebration. The
rent does not need to be included in income.

2003 Part 1
9. Cory owns an apartment building. In addition to
providing the utilities for his tenants, he also cleans
the halls and utility room and picks up the trash.
Because of these added services, Cory must report
the rentals on Schedule C, Profit or Loss from Business
instead of reporting them on the Schedule E.
(He is not a real estate professional.)

2003 Part 1
10. A property received as a gift has a basis greater
than its fair market value. Generally, if it is sold at
a loss, the fair market value becomes the basis for
computing the loss.

2003 Part 1
11. Fred bought ten shares of stock on October 1, 2001.
He sold them for a $20 loss on October 1, 2002.
This is a short term capital loss.

2003 Part 1
12. Derek is a self-employed carpenter and is also an
employee of Krispy, Inc. His self-employment net
income is $35,000, and he received a W-2 for salaries
and wages of $25,000. He is covered by his
employer’s pension plan. Derek is not eligible to take
a deduction for an IRA but he can deduct 50% of his
self-employment tax and 70% of his health insurance
premiums for 2002.

2003 Part 1
13. Jim files his tax return as married filing separately.
He has not lived with his wife for two years. In tax
year 2002, by court order, he paid her $500 per
month as separate maintenance. He will be able to
deduct $6,000 as alimony.

14. Carleen paid $1,000 U. S. dollar equivalent in
Deutsche Marks to Germany on income earned
while working there. She qualified for the income
earned abroad exclusion on the $40,000 wages she
earned. She can take a credit or a deduction for the
foreign tax paid to Germany.

2003 Part 1
15. Generally, those claiming earned income credit cannot
have investment income greater than $2,550 for
tax year 2002.

2003 Part 1
16. George and Jean, a married couple living together,
have no income other than their wages. George
earned $12,000 and Jean earned $9,000. They have
two minor children and have decided to file married
filing separate tax returns, each claiming one child
as a dependent. This way they will both qualify for
the earned income credit.

2003 Part 1
17. To qualify for the earned income credit, the taxpayer
must have a dependent child.

2003 Part 1
18. Anthony, filing single, has one household employee,
and attaches Schedule H to his individual tax return
for reporting. He may use his W-2 withholdings to
offset the Schedule H tax liabilities.

2003 Part 1
19. Two years ago, Mark sold property (basis of
$250,000) for $500,000. He received a down payment
of $50,000 plus regular monthly payments of
principal and interest until 10 months ago. The buyer
failed to make further payments resulting in Mark
repossessing the property. Mark may have a tax
consequence as a result of repossessing the property.

20. The President and CEO of Online, Inc., who had no
direct or indirect ownership interest in Online, Inc.,
personally advanced $50,000 to the corporation as a
temporary loan. Online, Inc. declared bankruptcy
and was discharged from bankruptcy without repaying
the $50,000. This should be treated as a nonbusiness
bad debt.

2003 Part 1
21. Form 4868, Application for Automatic Extension of
Time to File U. S. Individual Income Tax Return,
will provide the individual taxpayer with the following:
A. An automatic extension of 2 months for taxpayers
out of the country on April 15th.
B. An automatic extension of 4 months to pay
the taxes due.
C. An automatic extension of 4 months to file
the return.
D. An automatic extension of 6 months to file
the return.

2003 Part 1
22. The following statements about dividends received
from a dividend reinvestment plan are correct
except:
A. Reinvested dividends are not taxable if not
removed from the account.
B. Reinvested dividends are not taxable until
the related stock is sold.
C. Reinvested dividends automatically receive
capital gains treatment when received.
D. Reinvested dividends are treated as normal
dividends on Schedule B.

2003 Part 1
23. An individual taxpayer has capital gain distributions
only, and no other capital gains. Which of the following
satisfies the reporting requirements:
A. All capital gain distributions must be entered
on Schedule B.
B. No Schedule D is required and the amount is
entered directly on Form 1040.
C. Dividends and capital gains distributions are
totaled on Schedule B and carried to the
front page of Form 1040.
D. If there are no other capital gains, capital
gain distributions must be combined with interest
on the Schedule B.

2003 Part 1
24. Tom, a single taxpayer, determines that he has
both a short term capital loss of $2,000 and a nontaxable
distribution of $1,000 from an investment.
The following statements are correct, except:
A. The basis of the investment is reduced by
the non-taxable distribution.
B. Non-taxable distribution is a return of capital.
C. The short term capital loss can be used to
offset capital gains (if any) for the year.
D. Any unused short term capital loss may be
carried back three years.

2003 Part 1
25. During the year 2002, Dan had these expenses for
his rental house:
1. Replaced a screen in the storm door.
2. Replaced the heating system.
3. Sowed grass seed in some bare spots on the
lawn.
4. Built a detached two-car garage.
5. Installed a new dishwasher.
6. Bought a welcome mat for the front stoop.
Which of these items must be depreciated rather
than deducted as an expense on his Schedule E?
A. 1, 3, 4, and 5.
B. 2, 4, 5, and 6.
C. 2, 4, and 5.
D. 3, 4, and 6.

2003 Part 1
26. Jeremy owns a duplex. He lives in one half and
rents out the other half at fair rental value. He wants
to take depreciation on the building, the appliances,
and major remodeling in the bathroom on the rental
side. What depreciation may be taken?
A. 27.5 year MACRS on both sides of the
duplex, 7 year MACRS on the appliances
and remodeling.
B. 27.5 year MACRS on the rental side, 0 on
the personal side, and 7 year MACRS on
the appliances and remodeling.
C. 27.5 year MACRS on both sides of the
duplex, 5 year MACRS on the appliances
and remodeling.
D. 27.5 year MACRS on the rental and remodeling,
5 year MACRS on the appliances, and no
depreciation on the personal side.

2003 Part 1
27. Which of the following is the depreciable basis in
rental property that is placed in service after receiving
it as a gift, if the donor’s basis was more than
the fair market value of the property?
A. The fair market value on the date of the gift.
plus or minus any required adjustments to
basis.
B. The fair market value of the property on the
date you converted it to rental property.
C. The donor’s basis of the property plus or
minus any required adjustments to basis.
D. All of the above.

2003 Part 1
28. Connor purchased Flora stock in 1996 and sold it
in 2002. In 2002, he also traded in a copy machine
that he had been using in his business
since 1998 for a new model. On December 15,
2002, he inherited 35 shares of Fauna Laboratories
stock. What is the holding period for these
properties?
A. All short term.
B. Flora stock long term, copy machine and
Fauna stock short term.
C. Flora and Fauna stock long term; copy machine
short term.
D. All long term.

2003 Part 1
29. James sells stock that he purchased in 1990, to
his brother John for a $500 loss. He also sells a
truck, purchased in 2000, to ABC Corporation,
his 100% owned C corporation, for a profit of
$800, including $500 of depreciation recapture.
What is the effect of these transactions on
James’s 2002 tax return?
A. A loss of $500 on the stock and no gain on
the truck.
B. A disallowed loss on the stock, $500 ordinary
gain and $300 long-term capital gain on
the truck.
C. A loss of $500 on the stock and $800 ordinary
gain on the truck.
D. A disallowed loss on the stock and $800 ordinary
gain on the truck.

2003 Part 1
30. Generally, if you own stock in a small corporation
that meets the requirements of Section 1244
(small business) stock and you sell that stock at a
loss, the loss is reported as:
A. Short term loss on Schedule D limited to
$3,000.
B. Ordinary loss on Form 4797 limited to
$25,000 for a single individual and limited to
$50,000 for those filing a joint return.
C. Long term loss on Schedule D limited to
$3,000.
D. Ordinary loss on Form 4797 limited to
$50,000 for a single individual and limited to
$100,000 for those filing a joint return.

2003 Part 1
31. David is an interstate truck driver subject to Department
of Transportation hours of service, but is not an
employee. In 2002, he is allowed to deduct what
percent of his meals he had while working as an interstate
truck driver?
A. 0%.
B. 50%.
C. 65%.
D. 80%.

2003 Part 1
32. Generally, which of the following expenses paid by
Kathy, a salesperson, are deductible as entertainment
expenses?
A. Chamber of Commerce dues.
B. Cover charges and cost of meals for taking a
client to a nightclub.
C. Country club dues where she entertains clients.
D. Weekly meals with business associates at
local restaurants (they take turns paying).

2003 Part 1
33. In order to qualify as an accountable plan for reimbursement
of travel expenses, the employer plan
must satisfy all of the following except:
A. The expenses have a business connection.
B. The employee must make an adequate and
timely accounting to the employer.
C. The employer must pay a per diem for meals.
D. The employee must timely return any excess
reimbursements.

2003 Part 1
34. Generally, the taxpayer may deduct the cost of
medical expenses on Schedule A for which of the
following:
A. Doctor prescribed birth control pills.
B. Controlled substances like marijuana that are
in violation of federal law.
C. Trips for general health improvement.
D. Marriage counseling.

2003 Part 1
35. To qualify for a medical expense deduction as your
dependent, a person must be your dependent either
at the time the medical services were provided or at
the time you paid the expenses. A person generally
qualifies as your dependent for purposes of the
medical expense deduction if:
A. The person would qualify as a dependent except
for the amount of gross income.
B. The person was a foreign student staying
briefly at your home.
C. The person is your sibling’s unmarried adult
child.
D. The person is the unrelated caregiver for your
elderly parents.

36. Which of the following costs are deductible on
Form 1040, Schedule A as taxes?
1. Personal property tax on an airplane.
2. Garbage pickup itemized on the real estate
bill.
3. Real estate tax on property owned in Canada.
4. Sales tax paid on the purchase of your personal
car.
A. None of the above.
B.1 and 3.
C. 2 and 4.
D. All of the above.

2003 Part 1
37. Some contributions may be limited to 50% of the
taxpayer’s adjusted gross income. Deductions
to the following organizations are subject to the
50% limitation on deductible contributions:
A. Churches and conventions of organizations
of churches and educational organizations
with regular faculty and curriculum
and regularly enrolled students.
B. Hospitals and certain medical research
organizations associated with these hospitals.
C. Kiwanis, Rotary, and Lions Club who
raise money for public causes.
D. Both A and B.

2003 Part 1
38. Which of the following organizations qualify for
deductible contributions (not dues)?
A. A Public Library in your city.
B. Salvation Army.
C. Churches.
D. All of the above.

2003 Part 1
39. In 2002, the U. S. President declared a federal
disaster due to the flooding in Minnesota. Lisa
lives in that area and lost her home in the flood.
What choice does she have regarding when she
can claim the loss on her tax return?
A. It must be claimed in 2001 if the return
has not been filed by the date of the loss.
B. It must be claimed in 2002 if the loss is
greater than the modified adjusted gross
income.
C. It may be claimed in 2003 if an election is
filed with the 2002 return.
D. It may be claimed in 2001 or 2002.

2003 Part 1
40. Which of the following will qualify for an educational
deduction on Schedule A?
A. The employer reimburses your expenses under
a tuition reimbursement (nontaxable) program.
B. The education maintains or improves skills
needed in your present work.
C. The education is required by your employer or
the law to keep your present salary, status, or
job. The required education must serve a
bona fide business purpose of your employer.
D. Both B and C.

2003 Part 1
41. Which of the following expenses are deductible, but
subject to the 2% limitation on Form 1040, Schedule
A, Job Expenses and Most Other Miscellaneous
Itemized Deductions?
A. License of a self-employed plumber.
B. Appraisal fees on the sale of your personal
residence.
C. Uniforms for a UPS delivery person.
D. The cost of hauling tools to work in the trunk
of your car.

2003 Part 1
42. Carol, an individual taxpayer, received a Form
1099-Div from her global mutual fund that showed
dividend income of $500 and foreign taxes withheld
of $67. This is the only foreign source income
she received for the year. Her income tax before
any credits is $4,320. On which of the following
forms may Carol elect to claim a credit for the foreign
tax paid?
A. Form 1040, Line 68, Other Payments, with a
disclosure statement.
B. Directly on Form 1040, Tax and Credits, Foreign
Tax Credit.
C. Form 1040, Schedule A, Itemized Deductions,
Line 8, “Other Taxes.”
D. Form 1040, Schedule B, by electing to reduce
the dividend income by $134 ($67 x 2).

2003 Part 1
43. Hollie filed as head of household and would like to
take the child tax credit for Amanda in 2002. Which
of the following statements is incorrect regarding
the child tax credit?
A. Amanda must be under 18 at the end of the
tax year.
B. Hollie must claim Amanda as a dependent.
C. All or part of the child tax credit may be refundable.
D. If Hollies' adjusted gross income is above
$75,000, her credit will be reduced or eliminated.

2003 Part 1
44. Elton declared bankruptcy in the current year.
Included in the liabilities discharged in the bankruptcy
was a $15,000 personal loan Elton had
received from his friend, Edward two years ago.
How would Edward treat this for tax purposes?
A. Ordinary loss on Form 4797.
B. Long-term capital loss on Schedule D.
C. Short-term capital loss on Schedule D.
D. Investment expense subject to 2% miscellaneous
itemized deduction limitation.

2003 Part 1
45. Which of the following is earned income for
earned income tax credit purposes?
A. Unemployment compensation.
B. Alimony.
C. The wages of a minister who has an
exemption from self-employment tax.
D. The wages of an inmate working in the
prison laundry.

2003 Part 1
46. Jill and John, married filing jointly, have provided
more than 50% of the support for two minor children
and Jill’s mother. The children each had
interest income of less than $700. Jill’s mother
received a taxable pension of $2,500, dividends
of $1,500 and interest of $1,000. How many exemptions
can the taxpayers claim, including
themselves, on their 2002 tax return?
A. 3.
B. 5.
C. 4.
D. 2.

2003 Part 1
47. In meeting the “Gross Income” test for claiming
his father as a dependent, the taxpayer had to
consider the income received by his father. This
income included gross rents of $4,000 (expenses
were $2,000), mutual fund municipal bond interest
of $1,200, corporate bond interest of $1,000,
dividends of $1,400, wages of $2,000 and Social
Security of $4,000. What is the father’s gross
income for dependency test purposes?
A. $2,000.
B. $8,400.
C. $9,600.
D. $11,600.

2003 Part 1
48. A taxpayer had adjusted gross income of $98,000
and a total tax liability in 2001 of $20,000. In
2002, the taxpayer has a tax liability of $25,000.
The taxpayer’s withholding was increased to
$23,500. He will file his tax return for 2002 on
April 10, 2003. To avoid the underpayment of
estimated tax penalty, the taxpayer must:
A. Pay the additional $1,500 due by April
15, 2003.
B. Pay an additional $1,500 by January 15,
2003.
C. File an annualized estimated tax computation.
D. Do nothing, as he has satisfied the minimum
tax payment requirements.

2003 Part 1
49. Sandy received the following income in 2002:
Wages (Box 1 of W-2) $50,000
Money won at weekly poker games $1,000
Christmas ham (fair market value) $22
Dependent care benefits (Box 10 of W-2) $2,000
(Spent $3,000 for childcare)
Group term life insurance
($40,000 death benefit) $50
How much gross income must be reported by
Sandy for tax year 2002?
A. $50,022.
B. $53,000.
C. $51,000.
D. $53,072.

2003 Part 1
50. Susan is a waitress and earned $15,000 in wages,
not including any tips she received in 2002. She
received tips of $17 in March, which she did not report
to her employer. Because she became ill in
February and did not return to work until late March,
she also forgot to report the $58 for tips that she received
in February. She did report the $7,000 she
received as tips for the rest of the year. How much
income must she report as wages, tips and other
compensation for tax year 2002?
A. $22,185.
B. $22,075.
C. $15,260.
D. $15,183.

2003 Part 1
51. Scott and Marie, husband and wife, are equal partners
in a law firm. They had gross receipts of
$120,000, less expense of $40,000 resulting in net
income of $80,000 for the law firm. Marie received
an inheritance of $20,000. In addition, they had municipal
bond interest of $3,000 and savings account
interest of $2,000. What is their adjusted gross income
on a married filing joint return?
A. $105,000.
B. $142,000.
C. $ 82,000.
D. $102,000.

2003 Part 1
52. Maria had municipal bond interest of $6,000, certificate
of deposit interest of $4,000, reinvested corporate
bond interest of $2,000, mutual fund municipal
bond interest of $7,000 and savings account interest
of $1,000. What is Maria’s taxable interest?
A. $3,000.
B. $7,000.
C. $20,000.
D. $16,000.

2003 Part 1
53. Paul owns a second home at the lake. During
2002, he spent three weeks (21 days) at the lake
home, rented it to his daughter for three threeday
weekends for a total of $220, and rented it to
friends for ten weeks (70 days) at fair rental value
of $300 per week. His expenses for the year include:
Depreciation $2,000
Insurance $ 100
Mortgage interest $1,000
Real estate taxes $2,000
Utilities $1,000
What amount may he deduct for expenses on his
Schedule E, Rental Income?
A. $2,100.
B. $3,000.
C. $3,220.
D. $4,620.

2003 Part 1
54. Cyril, who is 68 years of age, received Social Security
benefits of $12,000, wages of $5,000, interest
and dividends of $4,000, unemployment compensation
of $3,000 and municipal bond interest of
$1,500. Calculate Cyril’s adjusted gross income.
A. $22,200.
B. $25,500.
C. $19,200.
D. $12,000.

2003 Part 1
55. John and Mary, a married couple, have a wide variety
of investments and are cash basis taxpayers.
Because their self-employment earnings are considerable,
they reinvested the following: $4,000 of
mutual fund dividends and $5,000 of certificate of
deposit interest. They also earned dividends on
corporate stock of $12,000 that they received and
spent. Interest of $2,000 that had accrued on a
loan to a friend was not paid until the following
year. What is the amount of interest and dividends
currently taxable to them?
A. $21,000.
B. $14,000.
C. $16,000.
D. $23,000.

2003 Part 1
56. A taxpayer purchases real estate rental property
for $150,000. She pays $25,000 cash and obtains
a mortgage for $125,000. She pays closing costs
of $8,000, which includes $4,000 in points on the
mortgage and $4,000 for bank fees and title costs.
The basis in the property is:
A. $33,000 depreciation, $125,000
amortization.
B. $158,000, depreciation only.
C. $154,000 depreciation, $4,000
amortization.
D. $150,000 depreciation, $8,000
amortization.

2003 Part 1
57. Sandra joins Sam in forming a partnership. Sandra
invests $50,000 in cash. Sam will work for $70,000
a year as a guaranteed payment to partner. Of the
$70,000 payment, $50,000 will be retained by the
partnership. Assuming the partnership had zero net
income and expenses, Sam’s basis in the partnership
and taxable income at the end of the year are:
A. Sam’s basis in the partnership is $50,000 and
taxable income is $20,000.
B. Sam’s taxable income is $50,000 and his basis
in the partnership is $20,000.
C. Sam’s taxable income is $70,000 and his basis
is $50,000.
D. Sam’s basis in the partnership is $70,000 and
taxable income of $70,000.

2003 Part 1
58. Charles gave his daughter, Jane, a residential house.
He had purchased the house for $250,000 in 1990.
The fair market value on the date of the gift was
$300,000. Charles had added a $25,000 roof the
year before he gave it to Jane. Jane converts the
house to a residential rental property within one year
of the gift. Jane’s basis in the property is:
A. $300,000.
B. $250,000.
C. $225,000.
D. $275,000.

2003 Part 1
59. Sue gave Jennifer a rental house. Sue had purchased
the property in 1993 for $60,000 and has
taken $17,000 in depreciation. Just before the transfer
she also paid $5,000 for a room addition. Gift tax
of $18,200, attributed to the increased value, was
paid. The fair market value of the rental house on the
day of transfer was $90,000. Jennifer’s basis in the
property will be:
A. $90,000.
B. $60,000.
C. $66,200.
D. $42,000.

2003 Part 1
60. Nature Corporation declared and distributed a stock
dividend of 1 share for each 10 shares held by
stockholders. Donna had 100 shares ($5.50 per
share basis) and received 10 additional shares with
a fair market value of $6.00 per share. Which of the
following is most applicable to the stock dividend?
A. 100 shares at $5.50 per share basis and 10
shares at zero basis per share.
B. 110 shares at $5 per share basis and $55 taxable
income.
C. 110 shares at $5 per share.
D. 100 shares at $5 per share basis and 10
shares at $6 per share basis.

2003 Part 1
61. Rose has the following transactions during the
year of 2002:
Sale of ACB stock (basis $400) $800
Commission paid on sale of
ACB stock. $50
Received 200 extra shares of DEF
in stock split (fair market value) $800
Decrease in value of GHI mutual
Fund. $600
JKL stock declared worthless
(basis $700). (no stock value) $ 0
What is the net gain or loss Rose will claim on
her Schedule D?
A. $350 loss.
B. $1,000 gain.
C. $300 gain.
D. $650 loss.

2003 Part 1
62. Clyde, a single person, sold his principal residence
for $700,000. He purchased his home in
1995 for $150,000 and lived there until he sold it.
He paid for capital improvements of $75,000,
paid real estate commissions of $36,000 and
other settlement costs of $4,000. How much taxable
gain must Clyde report?
A. None
B. $185,000
C. $435,000
D. $225,000

2003 Part 1
63. Robert purchased his home for $150,000 in 1992.
He sold it for $350,000 (including $100,000 for
the land) in 2002. This was his primary residence
until it was sold. However, Robert claimed onefifth
of his home as an office for his self-employed
business. He claimed a total of $6,000 depreciation
over the years. The $150,000 purchase was
assessed at $90,000 building and $60,000 land.
Calculate Robert’s taxable income as a result of
the sale of this primary residence.
A. $6,000.
B. $38,000.
C. $200,000.
D. None.

2003 Part 1
64. Emma’s brother purchased 100 shares of Clockwork,
Inc. stock for $10 per share on December
30, 2001. Emma inherited the shares of Clockwork
stock from her brother on September 15,
2002 when it had a fair market value of $15 per
share. On December 20, 2002, she sold the stock
for $20 per share. What is the amount and character
of her gain?
A. The gain of $1,000 is short-term capital
gain.
B. The gain of $1,000 is long-term capital
gain.
C. The gain of $500 is long-term capital gain.
D. The gain of $500 is short-term capital gain.

2003 Part 1
65. Albina purchased 1,000 shares of Global Tech
Growth mutual fund on February 15, 2002 for $15
per share. On January 31, 2003, she sold the
1,000 of Global Tech Growth mutual fund for $4.50
per share. Albina had no other capital transactions
in 2003. Which of the following is correct?
A. Albina has a short-term capital loss of
$10,500 on her 2003 tax return and she will
be allowed to offset $10,500 of her earnings.
B. Albina has a short-term capital loss of $3,000
on her 2003 tax return and no carryover.
C. Albina has a short-term capital loss of
$10,500 in 2003 and will deduct $3,000 on
her tax return. She will carry-forward a short-term
loss of $7,500 to 2004.
D. Albina has a short-term capital loss of
$10,500 in 2003 and will deduct $3,000 on
her tax return. She will carry forward a long-term
loss of $7,500 to 2004.

2003 Part 1
66. During the year 2002, Ted drives his car 5,000
miles to visit clients, 10,000 miles to get to his office,
and 500 miles to attend business-related
seminars. He also spent $300 for airfare to another
business seminar and $200 for parking at his office.
Using 36.5 cents per mile, what is his deductible
transportation expense?
A. $300.
B. $2,308.
C. $2,508.
D. $5,958.

2003 Part 1
67. Bernie is a self-employed accountant in 2002.
He reported net income of $50,000 on his
Schedule C for 2002. During the year Bernie
paid the following: $5,200 child support, $5,000
in alimony, $6,000 in medical insurance premiums,
self-employment tax of $7,065 and $2,000
to his IRA plan. What amounts are deductible in
arriving at adjusted gross income for 2002?
A. $19,933.
B. $40,267.
C. $14,733.
D. $25,265.

2003 Part 1
68. In 2002, Gene is 85 years of age and single. He
received Social Security payments totaling
$14,000 (this includes Medicare premium of
$600), dividend and interest income of $21,000, a
pension of $30,000 and a taxable IRA benefits of
$16,000. What is Gene’s adjusted gross income
for 2002?
A. $80,400.
B. $78,900.
C. $78,390.
D. $67,000.

2003 Part 1
69. A taxpayer is a cash basis taxpayer. During the
year, he paid the following medical expenses for
himself and his daughter, Johanna, whom he
claims as a dependent on his tax return.
•$310 for glasses for Johanna and $290 for
himself;
•$650 for a dental root canal procedure for
him;
•$900 for hospital emergency services; of
which $700 was paid by insurance in the
same year;
•$1,250 for Johanna’s braces which he
charged to his credit card in December and
paid in January of the next year;
•$500 for prescriptions for allergies
•$2,200 cosmetic plastic surgery
The taxpayer’s medical expense deduction before
limitations is:
A. $6,100.
B. $4,150.
C. $3,200.
D. $5,400.

2003 Part 1
70. George had the following income and expenses:
• Interest and dividend income of $8,000.
• Gross wages of $100,000
• Margin interest of $10,000
• Mortgage interest of $6,000
• Interest on a mobile home used as a second
home $3,000
• Credit card interest of $2,000.
How much interest can George deduct on Schedule
A?
A. $21,000.
B. $18,000.
C. $17,000.
D. $19,000.

2003 Part 1
71. Chester and Mary, a married couple, have interest
and dividends (investment income) of $14,000.
They have margin interest of $16,000, home mortgage
interest of $12,000, equity loan interest of
$3,000 on a $50,000 loan, credit card interest of
$4,500 and automobile loan interest of $2,000. They
have no tax-exempt investments. What amount can
they take as interest deductions after limitations?
A. $29,000.
B. $52,500.
C. $31,000.
D. $37,500.

2003 Part 1
72. If the taxpayer makes a contribution by cash, check,
credit card or payroll deduction to a qualified organization,
what record of the contribution is the taxpayer
required to obtain from the organization?
A. If the amount is for some item or service,
like a charity dinner, and over $100, the taxpayer
must have a separate acknowledgement
for each contribution.
B. For annual payroll deductions over $250,
the taxpayer must have a separate acknowledgement
for each contribution.
C. Weekly contributions of $50 to the taxpayer’s
church must have a separate acknowledgement
for each contribution.
D. For contributions under $250, the taxpayer
must keep an account, statement, receipt or
other reliable written record.

2003 Part 1
73. Alona is a student, and her personal car was stolen
in May, 2002. It was found several days later
severely damaged. The decrease in fair market
value (less than her adjusted basis) was $3,500.
In addition, a personal lap top computer in the car
at the time was never recovered (fair market
value $500, also less than her adjusted basis).
What is the amount and treatment of the casualty
loss after considering the $100 minimum floor,
but before the AGI limitation?
A. Schedule A loss of $3,800 for the car and
computer.
B. Schedule D loss of $3,500 for the car and
a Schedule A loss of $500 for the computer.
C. Schedule A loss of $3,900 for the car and
the computer.
D. Schedule D loss of $4,000 for the car and
the computer.

2003 Part 1
74. During the year, Ron paid $85 to have his tax return
prepared. He also paid a lawyer $215 to prepare
his will. At work, he paid union dues of $650,
bought safety boots for $200, and contributed
$75 to collections for sick co-workers. What is
Ron’s miscellaneous deduction on his Schedule
A, before the 2% limitation?
A. $935.
B. $1,010.
C. $1,150.
D. $1,225.

2003 Part 1
75. Paula won $5,000 in the lottery in 2002. She also
won $200 playing bingo at her lodge hall. She is
not a professional gambler. She kept meticulous
records of the $6,550 she spent on gambling expenses.
How much may she deduct on her
Schedule A, as a miscellaneous deduction not
subject to the 2% limitation.
A. $0.
B. $200.
C. $5,200.
D. $6,550.

2003 Part 1
76. Zach and Myra have four children ranging in age
from two to ten. Zach has wages of $80,000 and
Myra $25,000. Two of the children went to Child
Nursery School, Inc. at a total cost of $8,000.
The two older children attended a qualified afterschool
program that costs $2,500. What amount
of childcare expenses can be used to determine
the credit on their 2002 return?
A. $10,500.
B. $2,500.
C. $4,800.
D. $6,000.

2003 Part 1
77. Ruth had wages of $34,000 and her husband
John’s wages were $27,000. They have three
children ages 3, 6 and 9. They paid a total of
$6,000 to Creative Child Care School, Inc. Assuming
a 20% credit rate, what will be their child
care credit?
A. $960.
B. $1,200.
C. $6,000.
D. $4,800.

2003 Part 1
78. Liz has adjusted gross income of $65,000, no foreign
source income and a tax before credits of more
than $3,000. Her dependents include her son Ben,
who turned 17 in September 2002, her daughter,
Sheila, who is 12 and her niece, Abigail, who is 6.
All of the children are U.S. citizens and lived with
her all year. What is the amount of child tax credit
she may claim on her 2002 return filed April 15,
2003?
A. 0.
B. $600.
C. $1,200.
D. $1,800.

2003 Part 1
79. Jerry has two dependent children, Greg and Mandy,
who are attending an accredited college in 2002.
Greg is a senior who spent $7,000 for tuition and
fees. Mandy, a freshman with no prior postsecondary
education, had tuition expenses of
$4,000. Jerry meets all the income and filing status
requirements for the education credits. There is no
tax-free assistance to pay these expenses. Jerry’s
tax liability before credits equals $14,000. What is
the maximum credit that Jerry may claim on his
2002 tax return?
A. $2,200 Lifetime Learning Credit.
B. $3,000 Hope Credit.
C. $1,500 Hope Credit and $1,000 Lifetime
Learning Credit.
D. $1,500 Hope Credit and $1,400 Lifetime
Learning Credit.

2003 Part 1
80. Mildred and John purchased 40 acres of undeveloped
land in 1960 for $120,000. They paid personal
real estate taxes of $50,000, which they elected to
add to the property’s basis. They sold the property
for $600,000, having total settlement costs of
$70,000. The settlement costs are allowable as an
expense of sale. Mildred and John received a down
payment of $100,000 with the balance to be paid
over 15 years. What is their gross profit percentage?
A. 60%
B. 72%
C. 68.33%
D. 82%

2004 Part 1
1. April is age 18 and single. Her only income in 2003 was $600 of
self employment income from selling cosmetics. April is not required
to file a return for 2003.

2004 Part 1
1. April is age 18 and single. Her only income in 2003 was $600 of
self employment income from selling cosmetics. April is not required
to file a return for 2003.

2004 Part 1
3. No estimated tax payments are required if enough tax is paid
through withholding to keep the amount owed with the return
under $2,000.

4. Ms. Winter owns an apartment complex. She received $5,000
in December 2003 to cover the January rents for tenants who
will be on vacation January 15, 2004, when the rent is due. Although
she is a cash basis taxpayer for purposes of filing her
return she uses the accrual method of accounting to maintain
her books on the rental property. Since she uses the accrual
method of accounting, she should report the $5,000 in 2004.

2004 Part 1
5. Ms. Flyer owns a house and rents it to a painter. The painter lost
his job in April and volunteered to paint the outside of the house
in lieu of rent for the months of May and June. Ms. Flyer determines
the $1,000 rent due from her renter is approximately the
amount she would have to pay someone else to paint the
house. She decides to accept his offer. Since she did not receive
any cash rent for the months of May and June, she need
not include the $1,000 in income.

2004 Part 1
6. Interest was credited to Jane’s savings account on
December 31, 2003. As long as Jane leaves the interest in the
account and does not withdraw it, the interest is not taxable to
her.

2004 Part 1
7. Jack, a U.S. citizen, was a resident of England for all of 2003.
He received $100,000 in wages from an English corporation,
and paid taxes to England on this income. The entire $100,000
is exempt from U.S. income tax.

2004 Part 1
8. Mr. Barley, an accountant, accepted a painting for his office
from his client in lieu of payment of his customary fee of $400
for preparation of a tax return. He must include the $400 in
income.

2004 Part 1
9. Basis in property inherited from a decedent is generally the
same as the decedent’s basis at the date of death.

2004 Part 1
10. Upon the death of her mother, Janice inherited a home. At the
time of her mother’s death, the fair market value of the home
was $100,000. Her mother had purchased the home as a primary
residence in 1980 at a cost of $35,000. Janice’s basis in
the property is $100,000.

2004 Part 1
11. Sandy bought investment property on March 1, 2002, and sold
it on March 1, 2003. The character of her gain or loss is longterm.

2004 Part 1
12. Mr. and Mrs. Black purchased their primary residence in 1995
and lived in it until they sold it in 2003. They purchased the
home for $250,000 and sold it for $650,000. Since their home
was sold for more than the maximum exclusion of $500,000,
they are required to report the sale of their home on their 2003
tax return.

2004 Part 1
13. The sale of Section 1244 stock can be deducted as an ordinary
loss.

2004 Part 1
14. Jasmine is paid a flat rate of $5,000 a year to cover any business
expenses. She is not required to give her employer any
accounting of these expenses. Her employer includes the
$5,000 in her W-2. If she wishes to deduct her business expenses,
she must complete Form 2106.

2004 Part 1
15. Jim’s W-2 comprises his entire adjusted gross income of $9,000.
In 2003, he files as single and has no qualifying child. If all
other Earned Income Credit rules are met, Jim can claim the
credit.

16. Franz and Hilda are married and file a joint return. They have
one qualifying child. Franz worked as a gardener and earned
$9,000 in 2003. Hilda is a non-citizen and cannot get a social
security number. They can claim the Earned Income Credit.

2004 Part 1
17. All amounts paid to a person who both cares for a qualifying
child and provides household services, such as cleaning or
cooking, while the parents work, are included in the computation
of the child care credit.

2004 Part 1
18. You may be able to take a credit against your regular tax if you
had unused alternative minimum tax credit that you are carrying
forward from 2002 to 2003.

2004 Part 1
19. If property is repossessed after making an installment sale, a
gain or loss may be realized on the repossession.

2004 Part 1
20. Sam is a used car dealer and sells his cars to the public. He
takes a 20% down payment and receives the remaining amount
in equal monthly payments for the three years following the
sale. Sam can report these sales using the installment method.

2004 Part 1
21. Which of the following is true regarding the filing of Form 4868,
Application for Automatic Extension of Time to File a U.S. Individual
Income Tax Return?
A. Filing Form 4868 provides an automatic 2-month extension
of time to file and pay income tax.
B. Any U.S. citizen who is out of the country on April 15,
2004 is allowed an automatic 4-month extension of time
to file his/her 2003 return and pay any federal income
tax due.
C. Interest is charged on tax not paid by the due date of the
return even if an extension is obtained.
D. Electronic filing cannot be used to get an extension of
time to file.

2004 Part 1
22. Form 4868, Application for Automatic Extension of Time to File
U.S. Individual Income Tax Return, will provide the taxpayer
with the following:
A. An automatic extension of 2 months for taxpayers out of
the country on April 15
B. An automatic extension of 4 months to pay the taxes
due
C. An automatic extension of 4 months to file the return
D. An automatic extension of 6 months to file the return

2004 Part 1
23. Who would not be a qualifying person for purposes of filing as
Head of Household in 2003?
A. Your mother whom you can claim as a dependent.
B. Your adopted child who lives with you, is married, and
can be claimed as your dependent
C. Your foster child who lived with you all year and is your
dependent
D. Your aunt, related to you by blood. She does not live
with you but is your dependent

2004 Part 1
24. Mr. & Mrs. Rose are both over 65. Their adjusted gross income
is $100,000. During the year their 35-year-old single son,
Tom, lived with them while attending college and earned
$4,000. Mr. Rose’s mother, Ivy, lived with them until June 1
when she was placed in a nursing home for an indefinite period
of time to receive medical care. Ivy received no income
and was supported solely by Mr. and Mrs. Rose. Determine
the number of exemptions Mr. and Mrs. Rose can claim on
their 2003 joint return.
A. 2
B. 3
C. 4
D. 6

2004 Part 1
25. Holly and Harp Oaks were divorced in 2002. The divorce decree
was silent regarding the exemption for their 12-year-old
daughter, June in 2003. Holly has legal custody of her daughter
and did not sign a statement releasing the exemption.
Holly earned $8,000 and Frank earned $80,000. June had a
paper route and earned $3,000. June lived with Harp 4
months of the year and with Holly 8 months. Who may claim
the exemption for June in 2003?
A. June may, since she had gross income over $3,000 and
files her own return.
B. Since June lived with both Holly and Harp during the
year, they both may claim her as an exemption.
C. Holly may, since she has legal custody and physical
custody for more than half the year.
D. Harp may, since he earned more than Holly and, therefore,
is presumed to have provided more than 50% of
June’s support.

2004 Part 1
26. Violet made no estimated tax payments for 2003 because she
thought she had enough tax withheld from her wages. In
January 2004, she realized that her withholding was $2,000
less than the amount needed to avoid a penalty for the underpayment
of estimated tax so she made an estimated tax payment
of $2,500 on January 10. Violet filed her 2003 return on
March 1, 2004, showing a refund due her of $100. Which of
the following statements is not true regarding the estimated
tax penalty?
A. Violet will not owe a penalty for the quarter ending December
31,2003, because she made sufficient payment
before January 15,2004.
B. Violet will not owe a penalty for any quarter because her
total payments exceed her tax liability.
C. Violet could owe a penalty for one or all of the first
3 quarters even though she is due a refund for the year.
D. If Violet owes a penalty for any quarter, the underpayment
will be computed from the date the amount was
due to the date the payment is made.

2004 Part 1
27. Sherwood received disability income of $6,000 for 2003. All
premiums on the health and accident policy were paid by his
employer and included in Sherwood’s income. In addition, he
received compensatory damages of $10,000 as a result of
inadvertent poisoning at a local restaurant. He received no
other income this year. How much income must Sherwood
include on his 2003 tax return?
A. $16,000
B. $10,000
C. $6,000
D. $0

2004 Part 1
28. Mr. Bus paid $950,000 for an office building and furnishings on
January 1, 2003. He plans to use the General Depreciation
System (GDS) under MACRS for the depreciation of his property.
What recovery period must he use for the following
items?
·$900,000 for the building
·$50,000 for office desks and file cabinets
A. 27.5 years for the entire asset, building and furniture
B. 39 years for the building and 5 years for the office
furniture.
C. 27.5 years for the building and 7 years for the office
furniture
D. 39 years for the building and 7 years for the office
furniture

2004 Part 1
29. The cost basis of rental property includes:
A. Fees paid to the settlement attorney
B. Recording fees and transfer taxes
C. Real estate taxes paid to the seller without reimbursement
D. All of the above

2004 Part 1
30. Ms. Miller set up a computer system for Mr. Town’s business.
In return, Mr. Town gave Ms. Miller a storage facility. Ms. Miller
plans to use this facility for business purposes and plans to
depreciate it. The fair market value of Ms. Miller’s services and
the storage facility was $50,000. Mr. Town’s basis in the storage
facility was $30,000. How should Ms. Miller treat the
transaction and what is her depreciable basis for the property.
A. Ms. Miller should include the $50,000 in income and use
$30,000 as the depreciable basis for the storage facility
she received.
B. Mr. Town should include the $30,000 in his income and
use the $50,000 as the depreciable basis for the storage
facility.
C. Ms. Miller should include $30,000 in income and
$50,000 as the depreciable basis for the storage
facility.
D. Ms. Miller should include $50,000 in income and use
$50,000 as the basis for the storage facility.

2004 Part 1
31. Jerry received two acres of land valued at $10,000 as a gift.
The donor’s adjusted basis was $12,000. Jerry subsequently
sold the land for $20,000. For purposes of computing his gain,
what is Jerry’s basis in the land?
A. $12,000
B. $10,000
C. $ 8,000
D. $ 2,000

2004 Part 1
32. Harry purchased one share of common stock in a computer
company for $90. Shortly after he purchased it, the corporation
distributed two new shares of common stock for each share
held. What is his basis for each of the three shares of common
stock?
A. $90
B. $180
C. $30
D. $0

2004 Part 1
33. Arthur lived and worked in Florida for 8 months in 2003 and
earned $30,000. He then worked in California at a seasonal job
at a race track the last 4 months of the year and earned
$12,000 before returning to Florida. What is Arthur’s “tax
home?”
A. Since he does not have a regular place of business, he
is considered a transient and his tax home is wherever
he works.
B. Since Arthur was working in California at the end of the
year, it is his tax home for 2003.
C. Since Arthur had significant earnings at two locations, it
is impossible to determine his tax home.
D. Since most of his time and income were from the job in
Florida, it is considered his tax home.

2004 Part 1
34. Sam uses his personal vehicle to make business deliveries. He
submits the number of miles he drives to his employer and is
reimbursed an amount per mile which exceeds the federal rate.
Sam’s actual expenses are more than the federal rate. His employer
includes the amount up to the federal rate in box 12 of
Form W-2 where it is not taxable to Sam. The excess allowance
is included in box 1 of the Form W-2 as wages. How
should Sam report or claim this mileage?
A. File Form 2106 to deduct the excess expenses.
B. Repay the excess to his employer.
C. He cannot claim any of the expenses since his employer
reimbursed him for all expenses.
D. If he files Form 2106 he need not reduce his mileage expense
by his reimbursed amount.

2004 Part 1
35. Which of the following in not a payment deductible as alimony?
A. Payments for life insurance premiums required by the
divorce decree.
B. Payments for medical expenses of your spouse under the
terms of the divorce decree.C. Half of the mortgage payment
on a home jointly owned with your ex-spouse when
required by the divorce decree
D. Payments for child support required by the divorce decree

2004 Part 1
36. Which of the following may not be deducted as medical
expenses? (Disregard any limitations which may apply.)
A. $1,000 long-term care insurance.
B. $600 for eyeglasses.
C. $300 for maternity clothes.
D. $3,000 to a family physician for medical care.

2004 Part 1
37. Which of the following statements is not true regarding documentation
requirements for charitable contributions?
A. If the total deduction for all noncash contributions for the
year is more than $500, Section A of Form 8283, Noncash
Charitable Contributions, must be completed.
B. A noncash contribution of less than $250 must be supported
by a receipt or other written acknowledgement
from the charitable organization.
C. A deduction of more than $1,000 for one property item
generally requires that a written appraisal be obtained and
attached to the return.
D. A contribution charged to a credit card is a noncash contribution
for purposes of documentation requirements.

2004 Part 1
38. In 2003, Jorge’s pleasure boat was destroyed by a flood. He
had purchased the boat in 2001 for $30,000. His insurance policy
had lapsed at the time of the flood. On what form(s) will
Jorge report this loss?
A. Schedule A, Itemized Deductions, and Form 4684, Casualties
and Thefts
B. Schedule D, Capital Gains and Losses, and Form 4684,
Casualties and Theft
C. Schedule D, Capital Gains and Losses, and Form 4797,
Sales of Business Property and Involuntary Conversions
D. On the first page of Form 1040

2004 Part 1
39. Which of the following taxpayers may claim earned income
credit for 2003?
A. Ginger, 50 years of age, who has a qualifying child for
whom she provides sole support. She received $15,000
in Social Security benefits and $500 in interest income
in 2003.
B. Cinnamon, 42 years old, who was divorced the entire
year. She had investment income of $2,500 and had
W-2 wages of $7,000.
C. Woody, age 51, who is single and lived in a homeless
shelter during 2003 and received retirement benefits of
$5,000.
D. Cherrie, age 35, who is single and has one qualifying
child. She had $35,000 in wages and her adjusted gross
income is $37,000.

2004 Part 1
40. Which of the following are miscellaneous itemized deductions
not subject to the 2% adjusted gross income limitation?
A. Federal estate tax on income in respect of a decedent
B. Gambling losses up to the amount of gambling winnings
C. Casualty and theft losses from income-producing
property
D. Burial and funeral expenses

2004 Part 1
41. Mr. and Mrs. Pine both work full time. They have three children
ages 18, 6, and 3. For purposes of claiming the Child Care
Credit, which of the following expenses qualify?
A. Payments to the taxpayer’s 18-year-old daughter to care
for her 3-year-old sister
B. Payments to the taxpayer’s 20-year-old niece who lives
with them and can be claimed as their dependent
C. Payments to the taxpayer’s mother who lives with them
but does not qualify as their dependent
D. Payments to a private school for their 6-year-old to attend
first grade

2004 Part 1
42. For purposes of claiming the Child Tax Credit, which of the following
is not a requirement for a qualifying child:
A. Child must be under age 16 at the end of the year.
B. Child must be a citizen or resident of the United States.
C. Child must be claimed as your dependent.
D. Child must be an eligible foster child.

2004 Part 1
43. Which of the following statement is not true regarding tax benefits
for education?
A. The Hope credit may be claimed for tuition expenses incurred
in the first 2 years of post-secondary education.
B. The dollar limitations for the Hope credit are calculated on
a per student basis.
C. The Lifetime Learning Credit is allowed for tuition paid for
graduate program studies.
D. Room and board are qualifying expenses for the Hope
credit.

2004 Part 1
44. Which of the following is true regarding a nonbusiness bad
debt?
A. It is deductible as a short-term capital loss.
B. It is not deductible.
C. It is deductible only if you itemize.
D. It is deductible as a long-term capital loss.

2004 Part 1
45. Which of the following items are not adjustments or tax preference
items for computing alternative minimum tax?
A. Personal exemptions.
B. Standard deduction.
C. Interest income.
D. Itemized deduction for state and local taxes.

2004 Part 1
46. Phil is unmarried in 2003. His dependent daughter, Susan,
lived with him all year. Property taxes of $2,500 and mortgage
interest of $5,000 on the home where he and Susan live are
divided equally with his ex-wife. Phil paid the utilities of $200
per month. What amount may Phil use as the costs of keeping
up a home to qualify for head of household filing status?
A. $6,150
B. $4,950
C. $3,750
D. $9,900

2004 Part 1
47. Thomas and Rebecca are the parents of four children, ages
10, 12, 15, and 22. Their 22-year-old child is a full-time student
with income of $5,600. Thomas and Rebecca provided
more than 50% of the support for all their children. If they file
a joint return, how many exemptions can they claim for the
above family members?
A. 5
B. 4
C. 6
D. 3

2004 Part 1
48. In meeting the gross income test for claiming his father as a
dependent, Doug considered the income received by his father.
This income included gross rents of $4,000 (expenses
were $2,000), municipal bond interest of $1,200, dividends of
$1,400, and Social Security of $4,000. What is Doug’s father’s
gross income for dependency test purposes?
A. $3,400
B. $5,400
C. $9,400
D. $8,600

2004 Part 1
49. Mr. and Mrs. Black received the following income for 2003.
How much income should be reported on their 2003 joint return?
· W-2 income for Mrs. Black for wages of $30,000
· W-2 for Mrs. Black for $2,000, the value of fringe benefits
not included in the above W-2. Mrs. Black did not pay for
the fringe benefits.
· Benefits of $5,000 paid to Mr. Black from a health and accident
plan for which the premiums were paid by his employer
but included in his income.
A. $30,000
B. $32,000
C. $37,000
D. $35,000

2004 Part 1
50. Pastor Green received an annual salary of $20,000 as a fulltime
minister in 2003. The church also paid him $1,000 designated
as a housing allowance to pay for his utilities. His
church owns a parsonage that has a fair rental value of
$6,000 in which he lives rent free. Neither the rental allowance
nor the rental value of the parsonage is included in his
W-2. All amounts are considered provided for services he
renders as a licensed pastor. He is not exempt from self employment
tax. Compute the amount of Pastor Green’s income
that is subject to income tax on his 2003 return.
A. $ 19,000
B. $ 20,000
C. $ 27,000
D. $ 26,000

2004 part 1
51. Mr. and Mrs. Apple received the following income during 2003:
·$200 in interest credited to their bank account but not
withdrawn or used by them during the year
·$2,000 in interest received as a beneficiary in a trust established
by Mr. Apple’s father and included on Schedule
K-1 from the trust
·$100 in interest on a bond issued by the state of Georgia
·$1,000 bond interest, City of Atlanta municipal bond.
How much taxable interest income must Mr. and Mrs. Apple
report on their 2003 tax return?
A. $3,300
B. $0
C. $2,200
D. $1,300

2004 Part 1
52. Mr. and Mrs. Beet own a house which they rent to non-related
parties. They had some major expenses during 2003 as follows:
·$2,000 to replace the cabinets in the kitchen
·$500 to replace the stove
·$600 to replace the built-in dishwasher
·$400 to resurface the tub in the master bathroom
What is the amount and character of their expenses?
A. $2,000 capital improvements and $1,500 repairs
expense.
B. $2,600 capital improvements and $900 repairs
expense.
C. $400 capital improvements and $3,100 repairs
expense.
D. $3,100 capital improvements and $400 repairs
expense.

2004 Part 1
53. Mr. Brown is a college student working on a degree in accounting.
He received the following in 2003:
·A $4,000 scholarship used for tuition at State University
·A $1,000 scholarship used for fees and books
·An $8,000 fellowship used for his room and board
Compute the amount Mr. Brown must include in income for
2003.
A. $8,000
B. $5,000
C. $13,000
D. $9,000

2004 Part 1
54. Mr. and Mrs. Garden filed a joint return for 2003. Mr. Garden
received $8,000 in Social Security benefits and Mrs. Garden
received $4,000. Their income also included $10,000 taxable
pension income and interest income of $2,000. What part of
their Social Security benefits will be taxable for 2003? (The
base amount for married filing jointly is $32,000 for 2003.)
A. $ 0
B. $6,000
C. $24,000
D. $12,000

2004 Part 1
55. Ms. Red, age 28, is single and received $10,000 in unemployment
benefits from the state for 2003. She also received
$3,000 from the state to reduce the costs of her winter fuel bill.
What amount of income should Ms. Red report for 2003?
A. $10,000
B. $13,000
C. $3,000
D. $0

2004 Part 1
56. John, a cash basis taxpayer, had a $5,000 loan from his local
credit union. He lost his job and was unable to make the payments
on this loan. The credit union determined that the legal
fees to collect might be higher than the amount John owed so
they canceled the $3,000 remaining amount due on the loan.
John did not file bankruptcy nor was he insolvent. How much
must John include in his income as a result of this occurrence?
A. $5,000
B. $3,000
C. $0
D. $8,000

2004 Part 1
57. A taxpayer purchases rental property for $160,000. She uses
$25,000 cash and obtains a mortgage for $135,000. She pays
closing costs of $10,000, which includes $5,000 in points on
the mortgage and $5,000 for bank fees and title costs. Her
initial basis in the property is:
A. $35,000
B. $170,000
C. $165,000
D. $160,000

2004 Part 1
58. Mr. Rabbitt purchased a home for $200,000. He incurred the
following additional expenses:
·$200 fire insurance premiums
·$500 mortgage insurance premiums
·$400 recording fees
·$250 owner’s title insurance
Compute his basis in the property.
A. $201,350
B. $200,000
C. $200,650
D. $201,150

2004 Part 1
59. Tom gave Fred a rental house. Tom had purchased the property
in 1993 for $80,000 and has taken $9,000 in depreciation.
Tom’s adjusted basis was $71,000. The fair market value of
the rental house on the day of transfer was $90,000. If Fred
sells the house at a gain, his basis in the property will be:
A. $90,000
B. $80,000
C. $71,000
D. $81,000

2004 Part 1
60. Maggie trades stock in ABC Company with an adjusted basis
of $7,000 for DEF Company stock with a fair market value of
$10,000. She had no other transactions during the year. What
is the amount realized and what is her gain or loss on this
transaction?
A. The amount realized is $10,000 and the amount of gain
is $3,000.
B. The amount realized is $10,000 and the amount of loss
is $3,000.
C. The amount realized is $7,000 and the amount of gain is
$4,000.
D. The amount realized is $17,000 and the amount of gain
is $3,000.

2004 Part 1
61. A married couple, who are both self-employed, and work out of
their home, purchased a new home in July 2000 for $420,000.
In September 2000, they converted two bedrooms into office
space where they meet clients in their home. In April 2002,
they sold their home, on which they had taken $40,000 depreciation.
Their home sold for $600,000. What amount of the
gain is includable in their income on their joint return?
A. $0
B. $40,000
C. $180,000
D. $220,000

2004 Part 1
62. Karen, who is single, paid $150,000 for her residence in January
1998 and lived in it until January 2002. She then moved
away and rented her home from February 2002 until she sold it
August of 2003 for $240,000. While it was rental property, she
deducted $20,000 of depreciation. What amount of gain on the
sale of her residence is excludable from income?
A. $250,000
B. $90,000
C. $110,000
D. $240,000

2004 Part 1
13
63. Anne, who is single, owned and used her house as her main
home from January 1998 until January 2002. She then moved
away and rented her home from February 2002 until she sold it
in August 2003. Her home sold for $240,000, which included
$20,000 of depreciation and $12,000 of selling expenses. Using
a zero basis, compute the amount that is excludable from
income.
A. $208,000
B. $220,000
C. $228,000
D. $240,000

2004 Part 1
64. Herb files single and had the following capital gains and losses
in 2003:
·$500 loss on the sale of stock he purchased on
January 14, 2003 and sold on August 10, 2003.
·$5,000 loss on the sale of stock purchased
October 1, 2002 and sold November 1, 2003.
·$1,000 gain on the sale of a vacant lot held for 5 years.
How should Herb’s capital gains and losses be initially reported
on Schedule D?
A. $4,500 long term loss.
B. $4,000 long term loss and $500 short term loss.
C. $4,500 long term loss and $1,000 short term loss.
D. $5,500 long term loss and $1,000 short term gain.

2004 Part 1
65. Bill and Gladys sold securities in 2003. The sale resulted in a
capital loss of $7,000. They had no other capital transactions.
The taxable income on their joint return was $26,000. What
amount of the loss can they carry over to 2004?
A. $7,000
B. $3,000
C. $0
D. $4,000

2004 Part 1
66. Lisa travels to various locations during her work week. Using
the following data, determine the number of miles she may
claim as transportation expenses for this period:
·Monday – 40 miles, round trip, from home to her full-time
job
·Tuesday – 20 miles from home to her full-time job, then 10
miles from her full-time job to her part-time job, then 30
miles to her home
·Wednesday – 60 miles, round trip, from her home to her
part-time job; she did not work at her full-time job
A. 160 miles
B. 40 miles
C. 60 miles
D. 10 miles

2004 Part 1
67. James works in sales and does not receive any reimbursement
for his entertainment expenses from his employer. In May, he
had the following expenses:
·$500 for use of a yacht for a day’s fishing with two clients.
·$50 lunch with a client with whom he discusses a new
product line.
·$200 for dues to the country club where he plays golf with a
client who provides James with 40% of his commissions.
·$50 for a cheese package given to one of his clients on the
client’s birthday.
Before the consideration of any limitations, what is the total of
his deductible expenses for May?
A. $75
B. $100
C. $800
D. $600

2004 Part 1
68. The following items are reported on Mr. and Mrs. Spice’s 2003
joint return:
·Net profit on Mrs. Spice’s Schedule C of $40,000
·Mr. Spice paid court-ordered alimony of $5,000
·Self-Employment Tax of $6,120 on Mrs. Spice’s Schedule
profit
Compute their adjusted gross income for 2003.
A. $31,940
B. $35,000
C. $28,880
D. $40,000

2004 Part 1
69. Mr. Cedar broke his hip and must now use a wheelchair. He
modified his home to accommodate the wheelchair. He had his
home appraised for refinancing just before the improvements
to his home. The value of his home was $200,000. After he
made the modifications and improvements listed below, the
value was $202,000. Mr. Cedar incurred the following expenses
during the year. Without consideration of adjusted
gross income limitations, compute the amount Mr. Cedar may
claim on his 2003 tax return as a medical expense:
·$3,000 to construct a ramp in the entrance of his home to
accommodate his wheelchair
·$4,000 for installation of a lift to transport the wheelchair
from the first to the second floor of his house
·$1,000 for adding handrails around his tub
·$200 to repair his chimney
A. $8,200
B. $6,200
C. $6,000
D. $8,000

2004 Part 1
70. Jill divorced her husband, James, in 2002. Their son, Harry,
lived with Jill for all of 2003 and qualified as her dependent.
However, the divorce decree indicates James can take the exemption.
Jill paid $1,200 in expenses for Harry and James paid
$2,000. Jill entered into a multiple support agreement with her 3
brothers to assist with their mother’s care. Jill provided onefourth
of her mother’s support and paid $1,500 in medical expenses,
which was her quarter share. Without regard to adjusted
gross income limitations, compute Jill’s medical expense
deduction for 2003.
A. $1,200
B. $1,500
C. $2,700
D. $0

2004 Part 1
71. Jeremy decided to itemize on his 2003 return. He has the
following receipts. Compute the amount of taxes deduction he
can take on his Schedule A, Itemized Deductions.
·State income tax $3,000.
·Federal income tax $12,000.
·County real estate tax $2,000.
·Fee for his car inspection that he uses only personally $50.
·Homeowners’ association fees on his personal home $500.
·Self- employment tax of $1,000
A. $18,550
B. $6,000
C. $5,000
D. $5,500

2004 Part 1
72. Matt paid interest in 2003 as follows:
·$100 on his personal credit card
·$200 on funds borrowed in order to purchase $6,000 in taxexempt
securities
·$500 interest on his personal car loan. He does not use his
car for business
·$10,000 on his home mortgage
What is the amount of Matt’s deductible interest in 2003?
A. $17,400
B. $10,600
C. $10,000
D. $10,800

72. Matt paid interest in 2003 as follows:
·$100 on his personal credit card
·$200 on funds borrowed in order to purchase $6,000 in taxexempt
securities
·$500 interest on his personal car loan. He does not use his
car for business
·$10,000 on his home mortgage
What is the amount of Matt’s deductible interest in 2003?
A. $17,400
B. $10,600
C. $10,000
D. $10,800

2004 Part 1
74. Trudy, age 46, is single. Her 2003 wages were $14,600.
Her permanently disabled child, Brandy, age 26, and her 10-
year-old son, Juniper, lived with her the entire year. Use the
following excerpt of the Earned Income Tax Credit table to
compute Trudy’s earned income credit for 2003.
2003 Earned Income Credit Table – (Excerpt, not full table)
Income:
At Least But
Less
Than
For Single, Head of Household, Widower
and you have-----
No
Children
One
Child
Two Children
14,450 14,500 0 2,428 4,047
14,500 14,550 0 2,420 4,037
14,550 14,600 0 2,412 4,026
14,600 14,650 0 2,404 4,016
14,650 14,700 0 2,396 4,005
A. $2,412
B. $4,026
C. $4,016
D. $2,396

2004 Part 1
75. Jack received $3,000 in educational assistance benefits from
his employer during 2003 to reimburse him for the cost of
course tuition and fees for him to earn a degree. The benefits
were paid under an accountable plan and were not included in
Jack’s W-2. He has a modified adjusted gross income of
$20,000 and he files single. A list of Jack’s 2003 expenses
follows. What is Jack’s deductible tuition and fee expense?
·$500 for a bowling class not required for his degree
·$2,000 for accounting courses required for his degree
·$1,000 for room and board
·$500 for textbooks
·$500 for lab fees for courses required for his degree.
A. $0
B. $4,500
C. $4,000
D. $3,000

2004 Part 1
76. Ms. Hazelnut works in sales. None of her expenditures are
reimbursed by her employer. Her adjusted gross income is
$100,000. She has the following expenditures during 2003:
·Cost of computer class needed for her job, $500.
·Business liability insurance ,$250.
·Dues to chamber of commerce where she obtains leads
for her business, $250.
·Airfare to visit her mother, $1,000.
·Cost of two new business suits, $500.
Compute Ms. Hazelnut’s miscellaneous itemized deductions
after limitations.
A. $0
B. $500
C. $1,000
D. $2,500

2004 Part 1
77. Virginia‘s earned income for 2003 was $24,000. She paid
$3,000 to a qualifying child care center for the care of her
2-year-old son while she worked. She received $2,000 from
Social Services to assist with her child care expenses. Compute
Virginia’s child care credit for 2003 from the following excerpt
from the child and dependent care table:
IF your adjusted
gross income is:
THEN the
percentage is:
Over But not over
$ 0 $15,000 35%
$15,000 $17,000 34%
$17,000 $19,000 33%
$19,000 $21,000 32%
$21,000 $23,000 31%
$23,000 $25,000 30%
$25,000 $27,000 29%
A. $300
B. $900
C. $930
D. $310

2004 Part 1
78. Jean is a U.S. citizen living and working in France for all of
2003. She received wages of $150,000, dividends of $10,000
and alimony of $20,000 in 2003. She decides to use the foreign
earned income exclusion available to her and file Form
2555. What is the amount of Jean’s foreign earned income
before any limitations are applied?
A. $0
B. $80,000
C. $150,000
D. $180,000

2004 Part 1
79. Ginger is a United States citizen who paid the following 2003
foreign income taxes:
·$10,000 tax paid to England on consulting fee income
·$5,000 tax paid to Spain on earned income for which she
claimed the foreign earned income exclusion
·$1,000 tax paid to France which she deducted as an itemized
deduction
These were Ginger’s only sources of income during 2003. Her
U.S. tax liability was $23,000. What amount of foreign tax
credit can she claim on her 2003 return?
A. $16,000
B. $0
C. $10,000
D. $7,000

2004 Part 1
80. Jim and Jean purchased a vacation home in 1997 for $100,000.
They sold the property for $500,000 in 2003 and received a
down payment of $200,000. They took a mortgage from the
purchaser for the remaining $300,000. What is Jim and Jean’s
gross profit percentage on this sale?
A. 40%
B. 60%
C. 80%
D. None of the above