Multiple Choice Answers

Answers with Reasoning
1. Which of the following items is not excludable from gross income?
An award of $1,000 from an employer for doing an outstanding job on a special project
An inheritance of $1 million from a parent
A gift of $13,000 from an uncle
$100,000 life insurance proceeds from a deceased spouse

Question 2
Donna Edwards inherited stock in X Corporation from her grandfather at the start of 2010, then
worth $100,000. In 2011, she collected $2,000 of dividends. In 2011, Donna is taxed on:
Nothing, because the stock was an inheritance
$2,000 dividends
Both $100,000 stock (in 2010) and $2,000 dividends (in 2011)

Question 3
What is the backup withholding rate on interest and dividends for 2011?

Question 4
Regarding “qualified” dividends, which statement is not correct?
Such dividends are taxed as short-term capital gains.
The top tax rate on qualified dividends is 15%.
Qualified dividends are taxed as long-term capital gains.
Qualified dividends do not include dividends from money market funds.
1040 Preparation and Planning 2: Gross Income (2012 Edition)

Question 5
In 2011, Marlene Maxwell, age 48, receives $100,000 of group-term life insurance from her
employer at no cost to her. She is taxed on:
The premium her employer paid for $50,000 of coverage
The premium her employer paid for the $100,000 coverage

Question 6
Distributions from qualified retirement plans (other than required minimum distributions) are
subject to mandatory withholding at what rate?

Question 7
With respect to loans from qualified retirement plans, which statement is not correct?
Loans must be repaid using a level amortization schedule over no more than five years
(unless the loan is to purchase a principal residence).
The maximum loan amount is the lesser of $50,000 or 50% of the participant’s vested
account balance.
Spousal consent is required if the participant is married.
Loans cannot be made to partners, limited liability company members, more-than-2% S
corporation shareholders, and self-employed individuals.
1040 Preparation and Planning 2: Gross Income (2012 Edition)

Question 8
Which type of health insurance plan has a use-it-or-lose-it feature?
Health savings accounts
Health reimbursement accounts
Flexible spending accounts

Question 9
When funds from a health savings account (HSA) are distributed for qualified medical expenses,
these funds are:
Generally included in the income of the taxpayer
Allocated between contributions made by the employer and the employee, and only the
amount attributed to the employee’s contributions are included in income of the taxpayer
Generally excluded from the income of the taxpayer
Always included in the income of the taxpayer

Question 10
Mike Smith is covered under his employer’s adoption assistance program. Assuming his AGI is
below a set limit, his maximum exclusion for 2011 is:
None of the above

Question 11
Harry Henson, a computer programmer, takes a job-related graduate course for $6,000, which his
employer pays for and which qualifies as a working-condition fringe benefit. He may:
Exclude all of this benefit
Exclude $5,250
Exclude nothing; he is fully taxable on this benefit
1040 Preparation and Planning 2: Gross Income (2012 Edition)

Question 12
There is an annual dollar limit on the exclusion for the clergy’s rental allowance.

Question 13
Scholarships and fellowships awarded to degree candidates are tax free unless they are used for:
Supplies required for the course of study
Room and board

Question 14
Which of the following items might be considered as deductible alimony?
Child support payments
Rent paid for the benefit of the recipient-spouse
Noncash payments
A property settlement

Question 15
A payment by a taxpayer to a former spouse pursuant to an agreement executed in 2011 may
qualify as alimony even though:
The payment is to a third party.
The payment is designated as child support.
The liability to make the payment would survive the recipient spouse’s death.
The payment is made to maintain the taxpayer’s property.
1040 Preparation and Planning 2: Gross Income (2012 Edition)

Question 16
All of the following are requirements for a payment to be considered alimony except:
Payments can be in property.
Payments cannot be a transfer of services.
Payments are required by a divorce or separation instrument.
Payments are not required after death of the recipient spouse.

Question 17
Amy Adams is a single parent with modified AGI of $102,500. In 2011, the maximum contribution
she can make to her child’s Coverdell education savings account is:

Question 18
In 2011, qualified education expenses paid from a Coverdell education savings account include:
Tuition and related fees for grades K through higher education
Room and board for higher education
Computer technology and equipment
All of the above

Question 19
All of the following statements about qualified tuition plans (529s) are correct except:
Private institutions may set up prepaid plans.
Distributions from state tuition plans for qualified expenses are tax-free.
Contributions can be made only by taxpayers with income below set limits.
Contributions can be made to both qualified tuition plans and Coverdell ESAs.
1040 Preparation and Planning 2: Gross Income (2012 Edition)

Question 20
What is the tax advantage to a 529 plan?
Earnings are not taxed while funds remain in the plan.
Withdrawals are tax-free if used to pay qualified higher education costs.
Large contributions can be gift-tax-free under a special election.
All of the above