IRS Enrolled Agent Exam (SEE) — All Questions

A taxpayer's filing status for the year is generally determined as of:

• a.The first day of the tax year
• b.The date the return is filed
• c.The last day of the tax year✓
• d.The date of the taxpayer's most recent pay period

Filing status (single, married, head of household, etc.) is generally determined by the taxpayer's marital and household situation on the last day of the tax year, December 31 for calendar-year taxpayers. A special rule treats a taxpayer whose spouse died during the year as married for that year.

Which requirement must be met to file as head of household?

• a.The taxpayer must be married and filing separately
• b.The taxpayer must be unmarried (or considered unmarried) and pay more than half the cost of keeping up a home for a qualifying person✓
• c.The taxpayer must have no dependents
• d.The taxpayer must earn below the standard deduction amount

Head of household requires the taxpayer to be unmarried or considered unmarried at year-end and to have paid more than half the cost of maintaining a home that was the principal residence of a qualifying person for more than half the year. It provides a larger standard deduction than single status.

Which of the following is generally EXCLUDED from a taxpayer's gross income?

• a.A cash gift received from a relative✓
• b.Wages reported on a Form W-2
• c.Interest earned on a bank savings account
• d.Net profit from a sole proprietorship

Gifts received are excluded from the recipient's gross income (any tax consequence falls on the donor through gift tax rules). Wages, taxable interest, and business profit are all includible in gross income.

A credit differs from a deduction in that a credit:

• a.Reduces gross income before AGI is computed
• b.Is always refundable
• c.Can only be claimed by businesses
• d.Reduces the tax owed dollar for dollar✓

A tax credit reduces the tax liability directly, dollar for dollar, making it more valuable per dollar than a deduction, which only reduces taxable income. Some credits are refundable and some are nonrefundable, so not all credits are refundable.

Property sold for a gain after being held for more than one year generally receives:

• a.Ordinary income treatment at the taxpayer's marginal rate
• b.Long-term capital gain treatment at favorable rates✓
• c.No tax because it was held over a year
• d.Treatment as a nondeductible personal expense

A holding period of more than one year produces long-term capital gain, generally taxed at preferential rates lower than ordinary rates. A holding period of one year or less produces short-term gain taxed as ordinary income.

The gain or loss on the sale of a capital asset is computed as:

• a.Sales price minus original cost only, ignoring improvements
• b.Fair market value minus the standard deduction
• c.Amount realized minus adjusted basis✓
• d.Adjusted basis minus depreciation recapture

Gain or loss equals the amount realized (what the seller receives) minus the adjusted basis. Adjusted basis starts with cost and is increased by improvements and decreased by items such as depreciation, so it is not simply original cost.

When a taxpayer has a net capital loss for the year, the tax law generally allows:

• a.A limited amount of the net loss to offset ordinary income, with the excess carried forward✓
• b.The entire net loss to offset ordinary income with no limit
• c.No deduction for capital losses under any circumstances
• d.The loss to be carried back three years automatically

Capital losses first offset capital gains; a limited amount of any remaining net capital loss may offset ordinary income each year, and the unused excess carries forward to future years. The annual offset against ordinary income is capped.

Adjustments to income (above-the-line deductions) are important because they:

• a.Are only available to itemizers
• b.Reduce gross income to arrive at adjusted gross income (AGI)✓
• c.Directly reduce the tax owed dollar for dollar
• d.Apply only to corporations

Above-the-line adjustments, such as the deductible part of self-employment tax and certain retirement contributions, reduce gross income to compute AGI. Because AGI drives many limits and phaseouts, these adjustments can be valuable and are available whether or not the taxpayer itemizes.