CTC Federal Taxation Principles & Compliance 2 — Questions and Answers
Question 1: A taxpayer sells their primary residence in which they lived for 18 of the past 60 months due to a qualifying unforeseen circumstance. What is the maximum capital gain exclusion available?
- $250,000 for single filers
- $125,000 prorated based on time lived in the home (Correct answer)
- The full $500,000 if married filing jointly
- No exclusion applies because the 2-year requirement was not met
Correct answer: $125,000 prorated based on time lived in the home
When the primary residence exclusion requirement is not fully met due to a qualifying event, a prorated exclusion equal to the fraction of the 2-year requirement satisfied is allowed.
Question 2: Under the passive activity rules, which of the following taxpayers may deduct up to $25,000 of passive rental real estate losses against non-passive income?
- Any taxpayer who owns rental property
- A taxpayer who is a real estate professional with $150,000 AGI
- A taxpayer with $85,000 AGI who actively participates in rental activity (Correct answer)
- A taxpayer with $130,000 AGI who materially participates in rental activity
Correct answer: A taxpayer with $85,000 AGI who actively participates in rental activity
The $25,000 rental real estate allowance phases out between $100,000 and $150,000 AGI and requires only active participation (not material participation), so the $85,000 AGI taxpayer qualifies.
Question 3: A calendar-year S corporation fails to file its tax return by the extended due date. What is the monthly penalty per shareholder?
- $205 per month per shareholder, up to 12 months (Correct answer)
- $215 per month per shareholder, up to 12 months
- $200 per month for the entity, up to 12 months
- $250 per month per shareholder, up to 5 months
Correct answer: $205 per month per shareholder, up to 12 months
The failure-to-file penalty for S corporations is $205 per month (indexed) per shareholder, for a maximum of 12 months.
Question 4: Which of the following items is included in a taxpayer's alternative minimum taxable income (AMTI) as a preference item?
- State and local income taxes deducted on Schedule A
- Accelerated depreciation on personal property placed in service before 1987 (Correct answer)
- Incentive stock option spread at exercise
- Net operating loss deduction exceeding 90% of AMTI
Correct answer: Accelerated depreciation on personal property placed in service before 1987
Accelerated depreciation on pre-1987 personal property is an AMT tax preference item added back to arrive at AMTI.
Question 5: An employer provides a group-term life insurance policy with a face value of $80,000 to an employee. How much of the coverage cost is includable in the employee's gross income?
- None, because employer-provided life insurance is always excluded
- The cost of coverage on the first $50,000
- The IRS table cost of coverage on $30,000 of insurance (Correct answer)
- The entire employer-paid premium
Correct answer: The IRS table cost of coverage on $30,000 of insurance
The first $50,000 of employer-provided group-term life insurance is excluded; the employee must include the Table I cost of coverage for the excess $30,000.
Question 6: A taxpayer who is self-employed may deduct health insurance premiums paid for themselves and their family. Where is this deduction reported?
- Schedule C as a business expense
- Schedule A as a medical expense subject to the 7.5% floor
- Form 1040, Schedule 1 as an above-the-line deduction (Correct answer)
- It is nondeductible for self-employed individuals
Correct answer: Form 1040, Schedule 1 as an above-the-line deduction
Self-employed individuals deduct 100% of health insurance premiums as an above-the-line adjustment to income on Schedule 1, not as a Schedule C or itemized deduction.
Question 7: Under IRC Section 1231, if a taxpayer has a net Section 1231 gain in the current year but had net Section 1231 losses in any of the prior five years, how are the current gains treated?
- All gains are treated as long-term capital gains
- Gains are recharacterized as ordinary income to the extent of unrecaptured prior losses (Correct answer)
- Gains are entirely ordinary income
- Gains are split 50/50 between ordinary and capital gain treatment
Correct answer: Gains are recharacterized as ordinary income to the extent of unrecaptured prior losses
The Section 1231 lookback rule recharacterizes current net 1231 gains as ordinary income to the extent of non-recaptured net 1231 losses from the prior five years.
CTC Federal Taxation Principles & Compliance 2
A taxpayer sells their primary residence in which they lived for 18 of the past 60 months due to a qualifying unforeseen circumstance.
What is the maximum capital gain exclusion available?