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Free Questions › CPA › Taxation and Regulation
Free CPA Taxation and Regulation Practice Questions & Answers
500 exam-style Taxation and Regulation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 331
Child support payments are:
Select an option first.
Correct answer: D — NEITHER deductible by the payor NOR taxable to the recipient — in all years
Explanation: CHILD SUPPORT has always been NEITHER deductible NOR taxable, regardless of the decree date. This contrasts with pre-2019 ALIMONY, which was deductible/taxable. If a payment is reduced upon a contingency relating to the child, it is recharacterised as child support.
Question 332
The standard deduction is NOT available to a taxpayer who:
Select an option first.
Correct answer: C — ITEMISES deductions
Explanation: A taxpayer takes the GREATER of the standard deduction or total itemised deductions — never both. Also note that a married taxpayer filing SEPARATELY may not take the standard deduction if their spouse ITEMISES.
Question 333
Long-term capital gain treatment requires a holding period of:
Select an option first.
Correct answer: B — MORE THAN ONE YEAR
Explanation: LONG-TERM requires holding for MORE THAN ONE YEAR (one year and a day). One year exactly is SHORT-TERM. Long-term gains enjoy preferential rates (0%/15%/20%); short-term gains are taxed at ORDINARY rates.
Question 334
An individual's net capital LOSS deduction against ordinary income is limited to:
Select an option first.
Correct answer: B — $3,000 per year ($1,500 MFS), with the excess carried forward INDEFINITELY
Explanation: An individual may deduct a net capital LOSS against ordinary income up to $3,000 per year ($1,500 if MFS). The excess carries forward INDEFINITELY (no carryback for individuals), retaining its short-term or long-term character. Note CORPORATIONS may NOT deduct capital losses against ordinary income at all.
Question 335
The basis of property received as a GIFT (when FMV at the date of gift EXCEEDS the donor's basis) is:
Select an option first.
Correct answer: B — The DONOR'S adjusted basis (carryover basis), and the holding period TACKS
Explanation: When FMV ≥ the donor's basis, the donee takes a CARRYOVER basis (the donor's adjusted basis, increased by any gift tax attributable to the appreciation), and the donor's HOLDING PERIOD TACKS. The dual-basis rule applies only when FMV is BELOW the donor's basis at the date of gift.
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Question 336
The basis of INHERITED property is generally:
Select an option first.
Correct answer: D — FAIR MARKET VALUE at the date of death (a step-up OR step-down)
Explanation: §1014 gives inherited property a basis equal to FMV at the DATE OF DEATH — a step-UP if the property appreciated, a step-DOWN if it declined. Critically, the holding period is AUTOMATICALLY LONG-TERM, regardless of how long anyone actually held it.
Question 337
The §121 exclusion on the sale of a principal residence is:
Select an option first.
Correct answer: D — $250,000 ($500,000 MFJ) of GAIN
Explanation: §121 excludes up to $250,000 of GAIN ($500,000 for MFJ) on the sale of a PRINCIPAL RESIDENCE. Requirements: OWNED and USED as a principal residence for 2 OF THE LAST 5 YEARS, and no §121 exclusion used in the prior 2 years.
Question 338
A §1031 like-kind exchange, post-TCJA, applies ONLY to:
Select an option first.
Correct answer: D — REAL property held for business or investment
Explanation: Post-TCJA, §1031 applies ONLY to REAL PROPERTY held for productive use in a trade or business or for investment. PERSONAL property (equipment, vehicles, artwork) no longer qualifies. Inventory and property held primarily for sale never qualified.
Question 339
In a §1031 exchange, gain is recognised to the extent of:
Select an option first.
Correct answer: D — BOOT received — recognised gain = the LESSER of realised gain or boot received
Explanation: Recognised gain = the LESSER of (a) realised gain or (b) BOOT received. LOSS is NEVER recognised in a §1031 exchange, even when boot is received — that asymmetry is the most-tested feature of the provision.
Question 340
§1245 recapture applies to:
Select an option first.
Correct answer: D — PERSONAL property — ALL depreciation taken is recaptured as ORDINARY income to the extent of gain
Explanation: §1245 applies to depreciable PERSONAL property. ALL depreciation previously taken is recaptured as ORDINARY income, up to the amount of the gain; any remaining gain is §1231. §1250 applies to REAL property and recaptures only depreciation taken in EXCESS of straight-line.
Question 341
Net §1231 GAINS are treated as:
Select an option first.
Correct answer: B — LONG-TERM CAPITAL GAIN (while net §1231 LOSSES are ORDINARY)
Explanation: §1231 gives the best of both worlds: net GAINS are treated as LONG-TERM CAPITAL GAIN (preferential rates), while net LOSSES are ORDINARY (fully deductible against ordinary income). The §1231 LOOKBACK rule limits this benefit by recharacterising gains as ordinary to the extent of unrecaptured §1231 losses in the prior 5 years.
Question 342
The self-employment tax rate is:
Select an option first.
Correct answer: C — 15.3% (12.4% Social Security up to the wage base, plus 2.9% Medicare on all earnings)
Explanation: SE tax = 15.3%: 12.4% SOCIAL SECURITY (capped at the annual wage base) + 2.9% MEDICARE (UNCAPPED), plus an ADDITIONAL 0.9% Medicare on earnings above the threshold. It is imposed on 92.35% of net SE income, and ONE-HALF of the regular SE tax is deductible above the line.
Question 343
The Net Investment Income Tax (NIIT) rate is:
Select an option first.
Correct answer: A — 3.8%, on the LESSER of net investment income or the excess of MAGI over the threshold
Explanation: NIIT = 3.8% × the LESSER of (a) net investment income or (b) MAGI minus the threshold. NII includes interest, dividends, capital gains, rents, royalties and PASSIVE business income — it EXCLUDES wages and active business income. The thresholds are NOT indexed for inflation.
Question 344
A passive activity loss may generally be deducted only against:
Select an option first.
Correct answer: B — PASSIVE income — the excess is SUSPENDED and carried forward
Explanation: PASSIVE losses offset only PASSIVE income; the excess is SUSPENDED and carried forward indefinitely. On a FULLY TAXABLE DISPOSITION of the entire interest, all suspended losses are RELEASED. Note the special $25,000 allowance for active participation in rental real estate, which phases out over a specified AGI range.
Question 345
The three hurdles a loss must clear to be deductible, in order, are:
Select an option first.
Correct answer: B — Basis, at-risk, passive
Explanation: The ORDER matters: (1) BASIS — you cannot deduct more than your investment; (2) AT-RISK (§465) — you cannot deduct more than you could actually lose; (3) PASSIVE (§469) — passive losses offset only passive income. A loss must clear ALL THREE, and each has its own suspension mechanism.
Question 346
Non-recourse debt generally:
Select an option first.
Correct answer: C — Does NOT increase at-risk basis — except for QUALIFIED NONRECOURSE financing secured by REAL PROPERTY
Explanation: NON-RECOURSE debt does NOT increase the AT-RISK amount, because the taxpayer is not personally on the hook. The key EXCEPTION is QUALIFIED NONRECOURSE FINANCING on REAL PROPERTY (borrowed from a qualified lender), which DOES count as at-risk.
Question 347
The Alternative Minimum Tax is payable when:
Select an option first.
Correct answer: C — TENTATIVE MINIMUM TAX EXCEEDS the regular tax — the AMT payable is the EXCESS
Explanation: AMT = the EXCESS of tentative minimum tax over regular tax. You pay the regular tax PLUS that excess — the AMT is a FLOOR, not a second bill. Post-TCJA the higher exemptions mean far fewer individuals are affected, but the mechanics remain examinable.
Question 348
A taxpayer's filing status is determined:
Select an option first.
Correct answer: C — On the LAST DAY of the tax year (31 December)
Explanation: Filing status is determined on the LAST DAY of the tax year. A taxpayer married on 31 December is treated as married for the WHOLE year. Death of a spouse is an exception: the survivor may file jointly for the year of death.
Question 349
Gross income includes:
Select an option first.
Correct answer: C — ALL income from whatever source derived, unless specifically EXCLUDED by the Code
Explanation: §61 defines gross income as ALL INCOME FROM WHATEVER SOURCE DERIVED. The presumption is INCLUSION; exclusions must be found in a specific statutory provision. This starting presumption is the foundation of the entire individual chapter.
Question 350
Scholarship amounts used for TUITION and required fees by a degree candidate are:
Select an option first.
Correct answer: D — EXCLUDED from gross income
Explanation: A scholarship is EXCLUDED to the extent used for TUITION, FEES, BOOKS and required equipment by a DEGREE CANDIDATE. Amounts used for ROOM AND BOARD are TAXABLE — as is any amount representing payment for SERVICES (teaching or research).
Question 351
Employer-provided health insurance premiums are:
Select an option first.
Correct answer: B — EXCLUDED from the employee's gross income
Explanation: Employer-provided HEALTH INSURANCE is EXCLUDED from the employee's income — one of the largest exclusions in the Code. Employer-provided GROUP TERM LIFE insurance is excluded only up to $50,000 of coverage; the cost of excess coverage IS taxable.
Question 352
The exclusion for employer-provided GROUP TERM LIFE insurance is limited to coverage of:
Select an option first.
Correct answer: A — $50,000
Explanation: Employer-paid GROUP TERM LIFE insurance is excluded up to $50,000 of COVERAGE. The cost of coverage ABOVE $50,000 is TAXABLE to the employee, computed using an IRS uniform premium table (not the employer's actual cost).
Question 353
A traditional IRA contribution is deductible unless:
Select an option first.
Correct answer: D — The taxpayer (or spouse) is covered by an EMPLOYER PLAN and income exceeds the phase-out range
Explanation: A traditional IRA contribution is FULLY deductible unless the taxpayer (or their spouse) is an ACTIVE PARTICIPANT in an employer retirement plan AND modified AGI exceeds the phase-out range. Absent employer plan coverage, the deduction is available regardless of income.
Question 354
A ROTH IRA offers:
Select an option first.
Correct answer: C — NO current deduction, but TAX-FREE qualified withdrawals of both contributions and earnings
Explanation: A ROTH IRA is funded with AFTER-TAX dollars (no deduction), and QUALIFIED withdrawals — of contributions AND earnings — are entirely TAX-FREE. It is favourable when the taxpayer expects a HIGHER tax rate in retirement. A TRADITIONAL IRA gives the deduction now and taxes the withdrawal later.
Question 355
The student loan interest deduction is:
Select an option first.
Correct answer: C — An ABOVE-THE-LINE deduction, subject to an annual cap and an AGI phase-out
Explanation: Student loan interest is an ABOVE-THE-LINE deduction (reducing AGI), subject to an annual dollar CAP and an AGI-based PHASE-OUT. It is available even to taxpayers who take the standard deduction — which is the practical advantage of an above-the-line item.
Question 356
The SALT (state and local tax) itemised deduction is:
Select an option first.
Correct answer: B — CAPPED at a statutory amount, which has changed with legislation — VERIFY the current cap
Explanation: The SALT deduction is CAPPED. The cap amount is the single most politically volatile number in the Code and has changed repeatedly — VERIFY it against the current examinable window every year. The deduction covers state and local income (or sales) taxes plus property taxes.
Question 357
Investment interest expense is deductible up to:
Select an option first.
Correct answer: A — NET INVESTMENT INCOME; the excess carries forward INDEFINITELY
Explanation: Investment interest expense is deductible only to the extent of NET INVESTMENT INCOME, with the excess carried forward INDEFINITELY. Note that LTCG and qualified dividends are EXCLUDED from net investment income unless the taxpayer ELECTS to treat them as ordinary — an election that forfeits the preferential rate.
Question 358
A cash-basis taxpayer recognises income when:
Select an option first.
Correct answer: D — It is ACTUALLY or CONSTRUCTIVELY RECEIVED
Explanation: A CASH-BASIS taxpayer recognises income on ACTUAL or CONSTRUCTIVE receipt. CONSTRUCTIVE RECEIPT means the income is credited to the account, set apart, or otherwise made available without substantial limitation — you cannot defer tax simply by declining to cash a cheque you have in hand.
Question 359
An accrual-basis taxpayer recognises income when:
Select an option first.
Correct answer: A — The ALL-EVENTS TEST is met — the right to income is fixed and the amount is determinable with reasonable accuracy
Explanation: The ALL-EVENTS TEST: income accrues when all events have occurred that FIX the right to receive it and the amount can be determined with reasonable accuracy. For DEDUCTIONS, an additional requirement applies — ECONOMIC PERFORMANCE must have occurred.
Question 360
The Child Tax Credit is available for a qualifying child who is:
Select an option first.
Correct answer: C — UNDER 17 at the end of the tax year
Explanation: The CHILD TAX CREDIT requires the qualifying child to be UNDER 17 at year-end. A child who turns 17 during the year drops to the (much smaller) Credit for Other Dependents. That single year of age is worth a substantial sum — a favourite exam trap.
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