IRS Income and Assets 2

Question 1

A taxpayer receives a cash inheritance of $50,000 from a deceased relative. How is this treated for federal income tax purposes?

Accepted Answer

It is excluded from gross income

Answer

Inherited cash is excluded from the beneficiary's gross income under IRC §102; the estate may owe estate tax, but the recipient does not report it as income.

Question 2

Which of the following is considered 'constructive receipt' of income?

Accepted Answer

A bonus check mailed December 31 that the taxpayer could have picked up but did not

Answer

Constructive receipt occurs when funds are available to the taxpayer without restriction, even if not physically received.

Question 3

A taxpayer sells stock for $15,000 that was purchased for $10,000 two years ago. What is the character of the $5,000 gain?

Accepted Answer

Long-term capital gain

Answer

Stock held more than one year generates a long-term capital gain taxed at preferential rates.

Question 4

Under the claim of right doctrine, when must income be reported if received under a claim of right?

Accepted Answer

In the year received, even if it may have to be repaid

Answer

Under the claim of right doctrine, income is taxable in the year received if the taxpayer has unrestricted use of it, even if repayment is later required.

Question 5

What is the tax treatment of municipal bond interest received by a US taxpayer?

Accepted Answer

Exempt from federal income tax but may be subject to state tax

Answer

Interest on most state and local (municipal) bonds is excluded from federal gross income under IRC §103, though it may be taxable by the issuing state.

(IRS) Internal Revenue Service Certified Practice Test

(IRS) Internal Revenue Service Certified Practice Test

IRS Income and Assets 2