IRS Income and Assets 5

Question 1

A taxpayer receives a scholarship that covers tuition and required fees at a qualified educational institution. How is the scholarship treated?

Accepted Answer

Excluded from gross income to the extent used for tuition and required fees

Answer

Under IRC §117, scholarships used for tuition and required fees at a qualified institution are excluded from gross income for degree candidates.

Question 2

A taxpayer has $10,000 of cancelled credit card debt included in their gross income. However, they were insolvent by $7,000 immediately before the cancellation. How much is excluded from income?

Accepted Answer

$7,000 — limited to the amount of insolvency

Answer

Cancelled debt is excluded from gross income to the extent the taxpayer was insolvent immediately before the cancellation under IRC §108.

Question 3

What is the holding period rule for property inherited from a decedent?

Accepted Answer

The property is always treated as held long-term regardless of when sold

Answer

Inherited property is automatically treated as held long-term for capital gain purposes, regardless of how long either the decedent or heir actually held it.

Question 4

A taxpayer sells depreciable Section 1245 personal property at a gain. How is the gain taxed?

Accepted Answer

As ordinary income to the extent of depreciation taken, with any remaining gain as Section 1231 gain

Answer

Section 1245 recaptures all depreciation as ordinary income; any gain above the original cost is treated as Section 1231 (potentially long-term capital) gain.

Question 5

Which of the following Social Security benefit amounts is generally included in gross income for a taxpayer whose combined income exceeds $44,000 (MFJ)?

Accepted Answer

Up to 85%

Answer

When combined income exceeds $44,000 for MFJ taxpayers, up to 85% of Social Security benefits may be included in gross income.

(IRS) Internal Revenue Service Certified Practice Test

(IRS) Internal Revenue Service Certified Practice Test

IRS Income and Assets 5