FAC Tax Planning & Preparation 2 — Questions and Answers
Question 1: A taxpayer converts a traditional IRA to a Roth IRA in 2024. How is the converted amount treated for tax purposes?
- Excluded from income if held for 5 years
- Included in gross income in the year of conversion (Correct answer)
- Taxed at capital gains rates
- Deferred until distributions begin
Correct answer: Included in gross income in the year of conversion
The converted amount is included in gross income in the year of conversion, subject to ordinary income tax rates.
Question 2: Which filing status generally results in the lowest tax liability for a qualifying taxpayer?
- Single
- Married Filing Separately
- Head of Household
- Qualifying Surviving Spouse (Correct answer)
Correct answer: Qualifying Surviving Spouse
Qualifying Surviving Spouse status provides the same tax brackets as Married Filing Jointly, typically yielding the lowest rates.
Question 3: A self-employed individual pays $8,000 in self-employment tax. What amount is deductible on Form 1040?
- $8,000
- $4,000 (Correct answer)
- $6,120
- $2,000
Correct answer: $4,000
Self-employed taxpayers may deduct one-half (50%) of their self-employment tax, which equals $4,000 in this case.
Question 4: Under the passive activity loss rules, which of the following can offset passive losses without limitation?
- Active income from wages
- Portfolio income from dividends
- Passive income from other passive activities (Correct answer)
- Capital gains from stock sales
Correct answer: Passive income from other passive activities
Passive losses may only offset passive income; income from other passive activities qualifies without the AGI phase-out limitations.
Question 5: A taxpayer sells their primary residence for a $300,000 gain. They are single and have lived there 3 of the last 5 years. How much gain is excluded?
- $250,000 (Correct answer)
- $300,000
- $500,000
- $0
Correct answer: $250,000
Single taxpayers may exclude up to $250,000 of gain on a primary residence if the ownership and use tests are met.
Question 6: Which method of inventory valuation typically results in the highest cost of goods sold during a period of rising prices?
- FIFO
- LIFO (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: LIFO
LIFO assigns the most recently purchased (higher-cost) inventory to COGS first, resulting in higher COGS and lower taxable income when prices are rising.
Question 7: A taxpayer receives a $5,000 gift from a relative. What are the federal income tax consequences to the recipient?
- Taxable as ordinary income
- Taxable at capital gains rates
- Excluded from gross income (Correct answer)
- Included only if the donor files a gift tax return
Correct answer: Excluded from gross income
Gifts are excluded from the recipient's gross income under IRC §102; gift tax liability, if any, falls on the donor.
FAC Tax Planning & Preparation 2
A taxpayer converts a traditional IRA to a Roth IRA in 2024.
How is the converted amount treated for tax purposes?