CPA Exam — Taxation and Regulation (REG) — All Questions

This year Ada received wages of $70,000, $3,000 of state unemployment compensation, $2,000 of interest on a city's general obligation bonds, a $10,000 cash gift from her aunt, and $100,000 of life insurance proceeds on her father's death. What is her gross income?

• a.$75,000
• b.$83,000
• c.$73,000✓
• d.$70,000

Wages are gross income under IRC 61, and unemployment compensation is included under IRC 85(a). Interest on state or local bonds is excluded by IRC 103(a), gifts by IRC 102(a), and life insurance proceeds paid by reason of death by IRC 101(a)(1). $70,000 + $3,000 = $73,000.

After a car accident, Ben settles his lawsuit for $80,000 of compensatory damages for his physical injuries (including lost wages) and $20,000 of punitive damages. How much must he include in gross income?

• a.$0
• b.$100,000
• c.$80,000
• d.$20,000✓

IRC 104(a)(2) excludes damages, other than punitive damages, received on account of personal physical injuries, so the full $80,000 of compensatory damages, including the part for lost wages, is excluded. Punitive damages are expressly carved out of the exclusion and are taxable. Ben includes $20,000.

Cara's employer provides her with $150,000 of group-term life insurance, and she pays nothing toward it. Under the IRS uniform premium table, the cost for her age of each $50,000 of coverage for the year is $138. How much must she include in income?

• a.$414
• b.$276✓
• c.$0
• d.$138

IRC 79(a) includes in an employee's income the cost of employer-provided group-term life insurance to the extent it exceeds the cost of $50,000 of coverage plus any amount the employee paid. The excess coverage is $100,000, costing 2 x $138 = $276. $414 is the cost of all $150,000, and $138 covers only one additional $50,000.

A travel agency lets its employees buy the trip-planning services it sells to customers for $1,000 at a price of $700. How much must an employee who uses the discount include in gross income?

• a.$0
• b.$100✓
• c.$200
• d.$300

IRC 132(c)(1)(B) excludes a qualified employee discount on services only up to 20 percent of the price at which the employer offers the services to customers. Twenty percent of $1,000 is $200, but the discount is $300, so the $100 excess is included in income.

Under a divorce decree executed in 2021, Omar pays his former spouse $24,000 of alimony in 2025. How are the payments treated?

• a.Omar gets no deduction, and she includes them in income
• b.Omar gets no deduction, and she excludes them✓
• c.Omar deducts them, and she excludes them from income
• d.Omar deducts them, and she includes them in income

Pub. L. 115-97 section 11051 repealed the alimony deduction (former IRC 215) and the inclusion rule (former IRC 71) for divorce or separation instruments executed after December 31, 2018. A 2021 decree is covered, so the payer gets no deduction and the recipient has no income from the payments.

Pia, a general partner, receives a $60,000 guaranteed payment for services, is allocated $25,000 of the partnership's ordinary business income, and receives a $30,000 cash distribution that is less than her outside basis. How much income does she report from the partnership this year?

• a.$60,000
• b.$55,000
• c.$85,000✓
• d.$115,000

A guaranteed payment is included in the partner's income as if paid to a nonpartner (IRC 707(c)), and a partner reports her distributive share of partnership income whether or not it is distributed (IRC 702). A current cash distribution that does not exceed the partner's basis is not income (IRC 731(a)); it just reduces basis. $60,000 + $25,000 = $85,000.

In February 2024, Lee bought two units of a virtual currency for $10,000. In March 2025, when one unit was worth $9,000, he used that unit to pay a contractor for work on his home. How does Lee report the payment?

• a.$4,000 long-term capital gain✓
• b.$9,000 of ordinary income
• c.$4,000 short-term capital gain
• d.Nothing until he sells for dollars

For federal tax purposes digital assets are property, not currency, so using a unit to pay for services is a disposition. The amount realized is the $9,000 value received, less the $5,000 basis of one unit, for a $4,000 gain, and because the currency was a capital asset held more than one year the gain is long-term (IRC 1222(3)). No conversion to dollars is needed for the gain to be recognized.

Uma, a cash-basis taxpayer, died on June 30, 2025. Through her death she was paid $50,000 of salary; her employer paid her final $5,000 paycheck, for work before her death, to her estate in July. How much salary goes on Uma's final Form 1040?

• a.$50,000✓
• b.$0
• c.$55,000
• d.$5,000

A cash-basis decedent's final return includes income received through the date of death. Salary paid after death is income in respect of a decedent, which IRC 691(a)(1) includes in the gross income of the estate (or other recipient) for the year received, not on the decedent's final return. The final Form 1040 reports $50,000.

Ravi's Schedule C shows net profit of $100,000, and his net earnings from self-employment are below the Social Security wage base. What is his above-the-line deduction for self-employment tax, rounded to the nearest dollar?

• a.$7,065✓
• b.$0
• c.$7,650
• d.$14,130

Net earnings from self-employment are $100,000 x 92.35 percent = $92,350 (the IRC 1402(a)(12) deduction), and self-employment tax is 15.3 percent of that, or $14,130. IRC 164(f) allows one-half, $7,065, as a deduction, and IRC 62(a)(1) makes it an adjustment to arrive at AGI. $7,650 skips the 92.35 percent step, and $14,130 is the whole tax.

Sofia, a self-employed consultant with ample net profit, pays $800 a month for her own health insurance all year. Starting September 1 she is eligible for a subsidized plan through her husband's employer, though she does not enroll. What is her self-employed health insurance deduction?

• a.$0
• b.$3,200
• c.$9,600
• d.$6,400✓

IRC 162(l)(1) allows a self-employed individual to deduct health insurance premiums, but 162(l)(2)(B) denies the deduction for any month she is eligible to participate in a subsidized plan maintained by an employer of her spouse, whether or not she enrolls. She was eligible for four months, so only the eight months from January through August count: 8 x $800 = $6,400.

Which of these payments is deducted in arriving at adjusted gross income?

• a.Her own contributions to an HSA tied to a high-deductible plan✓
• b.Interest paid on the mortgage that secures her main home
• c.Her unreimbursed travel costs as an employee of a bank
• d.State income taxes withheld from her wages during the year

IRC 62(a)(19) lists the section 223 health savings account deduction among the adjustments to arrive at AGI. State income taxes and qualified residence interest are itemized deductions from AGI, and unreimbursed employee business expenses are miscellaneous itemized deductions, which IRC 67(g) disallows for taxable years beginning after 2017.

Gail's adjusted gross income is $80,000. She paid $9,500 of unreimbursed medical expenses for herself during the year and itemizes. How much may she deduct as medical expenses?

• a.$5,500
• b.$1,500
• c.$9,500
• d.$3,500✓

IRC 213(a) allows unreimbursed medical expenses only to the extent they exceed 7.5 percent of AGI. The floor is 7.5 percent x $80,000 = $6,000, and $9,500 - $6,000 = $3,500. $1,500 applies a 10 percent floor that the statute no longer uses.

For tax year 2025, IRC section 164(b)(7) sets the state and local tax deduction limit at $40,000, reduced by 30 percent of modified AGI over $500,000 but not below $10,000. A married couple filing jointly has modified AGI of $560,000 and paid $30,000 of state income tax and $18,000 of real property tax on their home. What is their deduction for these taxes?

• a.$22,000✓
• b.$48,000
• c.$10,000
• d.$40,000

The couple's modified AGI exceeds $500,000 by $60,000, so the $40,000 limit is reduced by 30 percent of $60,000, or $18,000, to $22,000, which is above the $10,000 floor (IRC 164(b)(7)(B)). Their $48,000 of taxes is capped at $22,000. $40,000 ignores the phasedown, and $10,000 is only the minimum limit.

In 2023 the Kims borrowed $1,000,000 to buy their main home, secured by the home, and they file jointly. In 2025 they paid $60,000 of interest on the loan. Assuming no other home debt, how much is deductible as qualified residence interest?

• a.$45,000✓
• b.$22,500
• c.$60,000
• d.$0

For debt incurred after December 15, 2017, IRC 163(h)(3)(F)(i)(II) limits acquisition indebtedness to $750,000 ($375,000 married filing separately), a limit that Pub. L. 119-21 extended to years after 2025. Only interest on $750,000 of the $1,000,000 loan qualifies: $60,000 x 750/1,000 = $45,000. $22,500 wrongly applies the $375,000 married-filing-separately limit to a joint return, and the old $1,000,000 limit no longer applies to post-2017 debt.

For tax year 2025, Hugo's AGI (his contribution base) is $100,000. He gives $70,000 in cash to his church, a public charity, and makes no other gifts. How much can he deduct in 2025, and what happens to the rest?

• a.$30,000 now; $40,000 carried forward up to 5 years
• b.$60,000 now; $10,000 carried forward up to 5 years✓
• c.$50,000 now; $20,000 carried forward up to 5 years
• d.$70,000 now; nothing is carried forward to later years

IRC 170(b)(1)(G) allows cash contributions to public charities up to 60 percent of the contribution base for tax years beginning after 2017, which is $60,000 here, and the excess carries over to each of the 5 succeeding tax years. $50,000 applies the general 50 percent limit, and $30,000 applies the 30 percent limit for capital gain property, neither of which governs cash gifts to a public charity.

In 2025, $8,000 of uninsured jewelry was stolen from Iris's home. The theft was not connected with any federally declared disaster, and she had no personal casualty gains. How much may she deduct?

• a.$7,900
• b.$8,000
• c.Nothing✓
• d.$7,900 less 10% of AGI

IRC 165(h)(5) allows an individual's personal casualty or theft loss for taxable years beginning after 2017 only to the extent attributable to a federally declared disaster, except to offset personal casualty gains. (Pub. L. 119-21 also allows losses from state-declared disasters, but only for taxable years beginning after 2025.) The $100 floor and 10 percent-of-AGI rules never come into play here.

For tax year 2025, IRC section 151(d)(5)(C) allows $6,000 for each taxpayer aged 65 or older, reduced by 6 percent of modified AGI over $75,000 ($150,000 on a joint return). Walt is single, 67, has modified AGI of $85,000, and takes the standard deduction. What is his senior deduction?

• a.Nothing, because he takes the standard deduction instead
• b.$5,400, even though he takes the standard deduction✓
• c.$6,000, even though he takes the standard deduction
• d.$5,400, provided that he itemizes his deductions instead

The $6,000 amount is reduced by 6 percent of the $10,000 by which Walt's modified AGI exceeds $75,000, or $600, leaving $5,400. The deduction is part of section 151, and IRC 63(b)(2) subtracts the section 151 deduction from AGI for taxpayers who do not itemize, so it is available with the standard deduction. The provision applies to taxable years beginning after December 31, 2024.

For tax year 2025, Rita, who is single, has taxable income of $90,000 before any qualified business income deduction, including $10,000 of net capital gain. Her qualified business income from a non-service sole proprietorship is $85,000, and her taxable income is below the threshold at which wage and property limits apply. What is her QBI deduction?

• a.$14,000
• b.$18,000
• c.$16,000✓
• d.$17,000

IRC 199A(a) allows the lesser of the combined qualified business income amount or 20 percent of taxable income over net capital gain. Below the threshold, the combined amount is 20 percent of QBI, $17,000 (199A(b)(2), (b)(3)(A)). The taxable-income cap is 20 percent of ($90,000 - $10,000) = $16,000, so the deduction is $16,000. $18,000 applies 20 percent to taxable income without removing the capital gain.

Tom breeds show dogs as a hobby, not for profit. This year the activity brought in $6,000 and he spent $4,500 on supplies and entry fees; none of the costs are taxes or interest. How does he report the activity?

• a.Report nothing, since hobby activity is not taxed at all
• b.Include the $1,500 of net income from the activity
• c.Include $6,000 and deduct $4,500 as an itemized deduction
• d.Include all $6,000; none of the $4,500 is deductible✓

Gross income from a hobby is taxable under IRC 61. IRC 183(b)(2) would allow hobby expenses only as deductions that are not above-the-line, and they are miscellaneous itemized deductions, which IRC 67(g) disallows for all taxable years beginning after 2017. So Tom reports $6,000 of income and deducts none of the expenses; hobby income cannot be netted against hobby costs.

Vera sells the car she used only for personal driving, which she bought for $30,000, for $18,000. She also sells a piece of art she held for personal enjoyment for $9,000 more than she paid. What is the tax result?

• a.No gain or loss, because both assets were held for personal use
• b.$9,000 capital gain and a $3,000 capital loss deduction
• c.$3,000 net loss after the $12,000 car loss offsets the gain
• d.$9,000 capital gain; the $12,000 car loss is not deductible✓

Gains on personal-use property are taxable, but IRC 165(c) allows an individual's losses only if incurred in a trade or business, in a transaction entered into for profit, or from casualty or theft. The loss on a personal car fits none of these, so it cannot offset the gain on the art. The art is a capital asset, so its $9,000 gain is capital gain.

Mona actively participates in managing a rental house that produced a $30,000 loss this year. She has no other passive income, and her modified AGI for this purpose is $120,000. How much of the rental loss may she deduct?

• a.$10,000
• b.$25,000
• c.$15,000✓
• d.$30,000

IRC 469(i) lets an individual who actively participates in rental real estate deduct up to $25,000 of passive rental losses against other income, reduced by 50 percent of modified AGI over $100,000. The reduction is 50 percent of $20,000, or $10,000, leaving $15,000; the other $15,000 is suspended and carried forward. $10,000 is the reduction, not the allowance.

Jin materially participates in an LLC taxed as a partnership. Her share of its ordinary business loss this year is $20,000. Her outside basis at year-end before the loss, including her share of partnership liabilities, is $12,000, and her amount at risk is the same. How much of the loss may she deduct this year?

• a.$0, until her basis is fully restored
• b.$12,000, with $8,000 carried forward✓
• c.$3,000, with $17,000 carried forward
• d.$20,000, reducing her basis below zero

IRC 704(d) allows a partner's share of partnership loss only to the extent of the adjusted basis of her partnership interest at the end of the year, and the excess is allowed in later years as basis increases. Material participation takes the loss out of the passive rules, and at-risk equals basis, so $12,000 is deductible and $8,000 is suspended. Basis cannot go below zero, and the $3,000 figure confuses this with the capital loss limit.

Lars is single. His modified AGI is $260,000, which includes $45,000 of net investment income. What is his net investment income tax?

• a.$9,880
• b.$0
• c.$2,280
• d.$1,710✓

IRC 1411(a)(1) imposes a 3.8 percent tax on the lesser of net investment income or modified AGI over the threshold, which 1411(b) sets at $200,000 for a single filer (the thresholds are not indexed). The excess is $60,000 and net investment income is $45,000, so the tax is 3.8 percent of $45,000, or $1,710. $2,280 taxes the $60,000 excess instead of the lesser amount.

Pedro's wife died in 2024. He has not remarried, and throughout 2025 he pays all the costs of the home where he lives with his 10-year-old son, whom he claims as a dependent. What is Pedro's best filing status for 2025?

• a.Qualifying surviving spouse✓
• b.Married filing jointly
• c.Married filing separately
• d.Head of household

IRC 2(a) treats a taxpayer as a surviving spouse, able to use joint-return rates, for the two taxable years after the year the spouse died, if he maintains a home that is the principal home of a dependent son or daughter. Pedro qualifies for 2025 (and 2026). Head of household is available only to someone who is not a surviving spouse (IRC 2(b)(1)), and he is not married in 2025 (IRC 7703(a)), so neither joint nor separate married status applies; a joint return was available only for 2024, the year of death.

Alma is unmarried and has no children. She pays more than half the cost of keeping up her mother's separate apartment across town and is entitled to claim her mother as a dependent. What is Alma's filing status?

• a.Single
• b.Qualifying surviving spouse
• c.Head of household✓
• d.Married filing separately

IRC 2(b)(1)(B) treats an unmarried individual as a head of household if she maintains a household that is the principal place of abode of her father or mother and is entitled to a dependency deduction for that parent. Unlike other qualifying persons, the parent does not have to live with the taxpayer. Alma is not a surviving spouse and is not married.

The Parks' daughter, age 20, is a full-time college student who lives with them all year apart from time at school. She earned $9,000 from a part-time job but did not provide more than half of her own support, and she files no joint return. Can the Parks claim her?

• a.Yes, as a qualifying child; her earnings don't matter✓
• b.Yes, as a qualifying relative rather than a child
• c.No; a child over age 18 cannot be a qualifying child
• d.No; her income exceeds the qualifying relative limit

Under IRC 152(c), a qualifying child must be the taxpayer's child (or other listed relative), live with the taxpayer more than half the year, be under 19 or a student under 24 at year-end, not provide over half her own support, and not file a joint return. There is no gross income test for a qualifying child; the gross income limit in IRC 152(d)(1)(B) applies only to qualifying relatives, and a qualifying child cannot also be a qualifying relative (152(d)(1)(D)).

Which of these credits can produce a refund when it exceeds the taxpayer's income tax liability?

• a.The credit for the elderly or disabled
• b.The child and dependent care credit
• c.The earned income credit✓
• d.The lifetime learning credit

IRC 6401(b) treats refundable credits in subpart C of the credits part of the Code, which includes the earned income credit of IRC 32, as an overpayment to the extent they exceed the tax, so they can be refunded. The lifetime learning credit (IRC 25A), the child and dependent care credit (IRC 21) and the credit for the elderly or disabled (IRC 22) are nonrefundable personal credits limited to the tax.

Quinn's prior-year return showed AGI of $180,000 and tax of $30,000. Her current-year tax will be $40,000. To avoid an underpayment penalty, what is her required annual payment through withholding and estimated tax?

• a.$30,000
• b.$40,000
• c.$36,000
• d.$33,000✓

IRC 6654(d)(1)(B) sets the required annual payment at the lesser of 90 percent of current-year tax ($36,000) or 100 percent of the prior year's tax. Because prior-year AGI exceeded $150,000, 6654(d)(1)(C) substitutes 110 percent, or $33,000. The lesser amount is $33,000; $30,000 would be enough only if prior-year AGI were $150,000 or less.

For tax year 2025, IRC section 24 provides a $2,200 credit for each qualifying child and $500 for each other dependent, phasing out above $400,000 of modified AGI on a joint return. A married couple filing jointly with AGI of $180,000 has two qualifying children, ages 8 and 12, and also claims the husband's mother as a dependent. What is their child tax credit, including the credit for other dependents?

• a.$4,400
• b.$6,600
• c.$4,900✓
• d.$4,500

As amended by Pub. L. 119-21 for taxable years beginning after 2024, IRC 24(h)(2) sets the credit at $2,200 per qualifying child, and 24(h)(4) adds $500 for each dependent who is not a qualifying child. Two children give $4,400, plus $500 for the mother, for $4,900; their AGI is far below the $400,000 joint threshold. $6,600 treats the mother as a qualifying child, and $4,500 uses the old $2,000 amount.

Gina and Paul were married for most of the year, but their divorce decree became final on December 30. Neither remarried. For income tax purposes, what is their marital status for the year?

• a.Unmarried for the whole year✓
• b.Married for eleven months
• c.Married for the whole year
• d.Either, at their election

IRC 7703(a)(1) determines marital status as of the close of the taxable year, and 7703(a)(2) provides that an individual legally separated from a spouse under a decree of divorce is not considered married. Because the divorce was final before year-end, each is treated as unmarried for the entire year and cannot file a joint return.