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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 451
A taxpayer has an at-risk amount of $30,000 and a $50,000 loss from the activity. The at-risk limitation permits a deduction of:
Select an option first.
Correct answer: B — $30,000, with $20,000 suspended under the at-risk rules (then the PASSIVE test still applies)
Explanation: The AT-RISK limit permits $30,000. The remaining $20,000 is suspended. Note the surviving $30,000 must STILL clear the PASSIVE loss hurdle — the three tests apply in sequence: basis → at-risk → passive.
Question 452
A child has unearned income of $5,000 and no earned income. Assume the first $1,300 is tax-free and the next $1,300 is taxed at the child's rate. The amount taxed at the PARENT'S rate is:
Select an option first.
Correct answer: D — $2,400
Explanation: Kiddie tax: first $1,300 tax-free; next $1,300 at the CHILD'S rate; the EXCESS at the PARENT'S marginal rate. Excess = $5,000 − $1,300 − $1,300 = $2,400. (VERIFY the current threshold amounts — they are indexed.)
Question 453
A taxpayer with AGI of $110,000 has a $30,000 rental loss and actively participates. The $25,000 allowance phases out at 50 cents per dollar of AGI over $100,000. The deductible loss is:
Select an option first.
Correct answer: D — $20,000 — the allowance is reduced by 50% × ($110,000 − $100,000) = $5,000
Explanation: Phase-out = 50% × ($110,000 − $100,000) = $5,000. Allowance = $25,000 − $5,000 = $20,000. Deductible loss = $20,000; the remaining $10,000 is SUSPENDED. The allowance disappears entirely at AGI of $150,000.
Question 454
A taxpayer bought stock on 1 March Year 1 and sold it on 1 March Year 2. The gain is:
Select an option first.
Correct answer: A — SHORT-TERM — the holding period must exceed ONE YEAR, and this is exactly one year
Explanation: LONG-TERM requires MORE THAN one year. The holding period begins the DAY AFTER acquisition and includes the day of sale. Buying on 1 March Year 1 and selling on 1 March Year 2 is EXACTLY one year — SHORT-TERM. Selling on 2 March would be long-term. One day decides the rate.
Question 455
A taxpayer has $10,000 of STCG, $4,000 of STCL, $8,000 of LTCG and $15,000 of LTCL. The net result is:
Select an option first.
Correct answer: D — A $1,000 net LONG-TERM capital LOSS — $6,000 net STCG less $7,000 net LTCL
Explanation: Step 1 — net WITHIN each class: short-term = $10,000 − $4,000 = $6,000 net STCG. Long-term = $8,000 − $15,000 = $(7,000) net LTCL. Step 2 — net ACROSS classes: $6,000 − $7,000 = $(1,000) net LONG-TERM loss. Netting within classes BEFORE across classes is what determines the character of the result.
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Question 456
A residence used as a rental is sold. Original cost $400,000; accumulated straight-line depreciation $80,000; sale price $600,000. Unrecaptured §1250 gain taxed at 25% is:
Select an option first.
Correct answer: C — $80,000 — the straight-line depreciation taken
Explanation: Adjusted basis = $400,000 − $80,000 = $320,000. Total gain = $600,000 − $320,000 = $280,000. UNRECAPTURED §1250 GAIN = the straight-line depreciation of $80,000, taxed at a maximum of 25%. The remaining $200,000 is §1231 gain, eligible for the regular LTCG rates. Because post-1986 realty uses straight-line, there is NO §1250 ORDINARY recapture.
Question 457
A taxpayer's AMT: AMTI is $300,000, the exemption is $85,000, and the rate is 26%. Regular tax is $50,000. AMT payable is:
Select an option first.
Correct answer: C — $5,900 — the EXCESS of TMT over regular tax
Explanation: AMT base = $300,000 − $85,000 = $215,000. TMT = 26% × $215,000 = $55,900. AMT PAYABLE = TMT − regular tax = $55,900 − $50,000 = $5,900. You pay the EXCESS, not the full TMT — the AMT is a floor, not a second bill.
Question 458
A taxpayer has a $60,000 gain on §1231 property. In the prior 5 years they deducted $25,000 of net §1231 losses. The gain is treated as:
Select an option first.
Correct answer: C — $25,000 ORDINARY (lookback recapture) and $35,000 LTCG
Explanation: The §1231 LOOKBACK recharacterises the current-year gain as ORDINARY to the extent of unrecaptured net §1231 LOSSES from the prior 5 years: $25,000 ordinary. The remaining $35,000 is LTCG. The rule stops taxpayers converting ordinary losses into capital gains by timing.
Question 459
A taxpayer's gross income is $95,000, above-the-line deductions are $8,000, itemised deductions are $14,000, and the standard deduction is $15,000. Taxable income (ignoring QBI) is:
Select an option first.
Correct answer: D — $72,000
Explanation: AGI = $95,000 − $8,000 = $87,000. Then subtract the GREATER of standard ($15,000) or itemised ($14,000) = $15,000. Taxable income = $87,000 − $15,000 = $72,000.
Question 460
A self-employed taxpayer has net SE income of $200,000 (all above the Social Security wage base is ignored; assume the base is $170,000). The Social Security portion of SE tax is:
Select an option first.
Correct answer: D — $21,080
Explanation: SE base = $200,000 × 0.9235 = $184,700. The Social Security portion applies only up to the wage base of $170,000: 12.4% × $170,000 = $21,080. The Medicare portion (2.9%) applies to the FULL $184,700 = $5,356, and is uncapped.
Question 461
A taxpayer has W-2 wages of $210,000 (single; Additional Medicare threshold $200,000). The Additional Medicare Tax is:
Select an option first.
Correct answer: A — $90
Explanation: The ADDITIONAL MEDICARE TAX is 0.9% on wages ABOVE the threshold: 0.9% × ($210,000 − $200,000) = 0.9% × $10,000 = $90. It applies only to the EXCESS, not to all wages. It is also NOT deductible.
Question 462
A taxpayer donates cash of $70,000 to a public charity with AGI of $100,000 (60% AGI limit). The current deduction is:
Select an option first.
Correct answer: C — $60,000, with $10,000 carried forward 5 years
Explanation: CASH to a PUBLIC charity: 60% of AGI = 60% × $100,000 = $60,000. Deduction = $60,000. The excess $10,000 carries FORWARD 5 years.
Question 463
A taxpayer has a personal casualty loss of $40,000 from a federally declared disaster; AGI is $90,000. The deduction is:
Select an option first.
Correct answer: B — $30,900 — $40,000 less the $100 floor, less 10% of AGI
Explanation: Two floors: $100 per event, then 10% of AGI. Deduction = ($40,000 − $100) − (10% × $90,000) = $39,900 − $9,000 = $30,900.
Question 464
A taxpayer with AGI of $140,000 actively participates in rental real estate with a $22,000 loss. The deductible loss is:
Select an option first.
Correct answer: C — $5,000 — the $25,000 allowance is reduced by 50% × ($140,000 − $100,000) = $20,000
Explanation: Phase-out = 50% × ($140,000 − $100,000) = $20,000. Allowance = $25,000 − $20,000 = $5,000. Deductible loss = the LESSER of the loss ($22,000) or the allowance ($5,000) = $5,000. The remaining $17,000 is suspended.
Question 465
A taxpayer sells §1250 real property. Original cost $500,000; straight-line depreciation $120,000; sale price $700,000. The §1231 gain (above unrecaptured §1250) is:
Select an option first.
Correct answer: D — $200,000
Explanation: Adjusted basis = $500,000 − $120,000 = $380,000. Total gain = $700,000 − $380,000 = $320,000. Of that, $120,000 is UNRECAPTURED §1250 GAIN (taxed at 25% max). The REMAINING $200,000 is §1231 gain, eligible for the regular LTCG rates.
Question 466
An involuntary conversion: property with a basis of $200,000 is condemned; the taxpayer receives $350,000 and reinvests $320,000. Gain recognised is:
Select an option first.
Correct answer: C — $30,000 — the proceeds NOT reinvested
Explanation: Realised gain = $350,000 − $200,000 = $150,000. Under §1033, gain is recognised to the extent proceeds are NOT REINVESTED: $350,000 − $320,000 = $30,000. The remaining $120,000 is deferred.
Question 467
Continuing: the basis of the REPLACEMENT property is:
Select an option first.
Correct answer: D — $200,000 — replacement cost $320,000 LESS the $120,000 deferred gain
Explanation: New basis = Replacement cost ($320,000) − Deferred gain ($120,000) = $200,000. Equivalently: old basis $200,000 + gain recognised $30,000 − proceeds not reinvested $30,000 = $200,000. The deferred gain is embedded in the lower basis.
Question 468
MACRS 5-year property costing $60,000 placed in service; the Year 1 half-year table factor is 20%. Year 1 depreciation (ignoring §179 and bonus) is:
Select an option first.
Correct answer: B — $12,000
Explanation: MACRS Year 1 = $60,000 × 20% = $12,000. The 20% factor already INCORPORATES the half-year convention (a full-year 200% declining balance rate on 5-year property would be 40%; the half-year convention halves it). Applying a separate half-year adjustment on top ($6,000, option B) double-counts.
Question 469
A taxpayer has AMTI of $500,000. The exemption is $85,000 and phases out at 25 cents per dollar above $600,000. The exemption available is:
Select an option first.
Correct answer: C — $85,000 — AMTI is BELOW the $600,000 phase-out threshold, so the exemption is not reduced
Explanation: AMTI of $500,000 is BELOW the $600,000 phase-out threshold, so the FULL $85,000 exemption applies. Had AMTI been $700,000, the exemption would be reduced by 25% × ($700,000 − $600,000) = $25,000, leaving $60,000.
Question 470
A taxpayer exercises an ISO: 1,000 shares, exercise price $10, FMV at exercise $45. The AMT ADJUSTMENT is:
Select an option first.
Correct answer: B — $35,000 — the bargain element (1,000 × $35)
Explanation: Exercising an ISO produces NO REGULAR taxable income, but the BARGAIN ELEMENT is an AMT ADJUSTMENT: 1,000 × ($45 − $10) = $35,000. This can trigger a substantial AMT bill on stock the employee has not sold — the classic ISO trap.
Question 471
Same facts, but a NON-QUALIFIED option (NQSO). The ORDINARY income at exercise is:
Select an option first.
Correct answer: A — $35,000 of ORDINARY compensation income, subject to withholding, with a matching EMPLOYER deduction
Explanation: An NQSO exercise produces ORDINARY compensation income of 1,000 × ($45 − $10) = $35,000, subject to payroll withholding — and the EMPLOYER gets a corresponding DEDUCTION. Compare the ISO: no regular income, an AMT adjustment, and NO employer deduction on a qualifying disposition.
Question 472
A taxpayer's education expenses: the AOTC is 100% of the first $2,000 plus 25% of the next $2,000. With $3,000 of qualified expenses, the credit is:
Select an option first.
Correct answer: D — $2,250 — 100% × $2,000 + 25% × $1,000
Explanation: AOTC = 100% of the first $2,000 ($2,000) + 25% of the NEXT $2,000 (here only $1,000 remains, so 25% × $1,000 = $250) = $2,250. The maximum credit is $2,500, reached at $4,000 of expenses.
Question 473
A taxpayer's LLC (Lifetime Learning Credit) is 20% of the first $10,000 of qualified expenses. With $12,000 of expenses, the credit is:
Select an option first.
Correct answer: A — $2,000 — capped at 20% × $10,000, and it is PER RETURN, not per student
Explanation: LLC = 20% × the first $10,000 = $2,000 maximum, PER RETURN (not per student), and NONREFUNDABLE. Expenses above $10,000 generate no further credit.
Question 474
A taxpayer has $50,000 of STCL and $30,000 of LTCG. The net result is:
Select an option first.
Correct answer: D — A $20,000 net SHORT-TERM capital loss ($3,000 deductible this year)
Explanation: Net within classes: short-term = $(50,000); long-term = $30,000. Net across: $(50,000) + $30,000 = $(20,000) net SHORT-TERM loss. Only $3,000 is deductible against ordinary income this year; $17,000 carries forward, retaining its SHORT-TERM character.
Question 475
A taxpayer's home office is 300 sq ft of a 2,000 sq ft home. Total home expenses (mortgage interest, utilities, insurance, depreciation) are $30,000. The home office deduction (actual method) is:
Select an option first.
Correct answer: B — $4,500 — 15% of $30,000 (300/2,000)
Explanation: Business use percentage = 300/2,000 = 15%. Deduction = 15% × $30,000 = $4,500. (The SIMPLIFIED method would give $5/sq ft × 300 = $1,500, capped at 300 sq ft — an alternative the taxpayer may elect instead.)
Question 476
An installment sale: selling price $600,000; basis $360,000; the buyer assumes a $200,000 qualifying mortgage. The gross profit percentage is:
Select an option first.
Correct answer: B — 60% — GP of $240,000 over a CONTRACT PRICE of $400,000
Explanation: Gross profit = $600,000 − $360,000 = $240,000. CONTRACT PRICE = selling price LESS qualifying debt assumed = $600,000 − $200,000 = $400,000. GP% = $240,000 / $400,000 = 60%. Using the SELLING price as the denominator gives 40% (option A) — the intended trap.
Question 477
A taxpayer holds two stock lots: 100 shares bought at $10 and 100 at $30. They sell 100 shares for $40 without identifying the lot. The gain is:
Select an option first.
Correct answer: D — $3,000 — FIFO applies absent identification, so the $10 lot is deemed sold
Explanation: Absent ADEQUATE IDENTIFICATION, FIFO applies: the EARLIEST lot (100 @ $10) is deemed sold. Gain = 100 × ($40 − $10) = $3,000. Had the taxpayer identified the $30 lot, the gain would be only 100 × $10 = $1,000 — which is why specific identification matters.
Question 478
A taxpayer sells stock held for 11 months at a $20,000 gain, and stock held for 3 years at a $12,000 loss. The net result is:
Select an option first.
Correct answer: B — $20,000 STCG and $12,000 LTCL, netting to an $8,000 net SHORT-TERM capital gain
Explanation: Net within classes: short-term = $20,000 gain (11 months is SHORT-term — more than one year is required). Long-term = $(12,000). Net across = $8,000 net SHORT-TERM gain, taxed at ORDINARY rates. The character matters enormously: an $8,000 LTCG would be taxed at preferential rates.
Question 479
A taxpayer's qualified dividends are $10,000 and they are in the 15% LTCG bracket. The tax on the dividends is:
Select an option first.
Correct answer: C — $1,500 — qualified dividends are taxed at the LTCG rates
Explanation: QUALIFIED dividends are taxed at the LTCG rates: 15% × $10,000 = $1,500. NON-qualified (ordinary) dividends would be taxed at the ordinary marginal rate. The holding period requirement is what makes them qualified.
Question 480
A taxpayer sells §1245 property for $90,000. Cost $100,000; accumulated depreciation $60,000. In the prior 5 years, they deducted $10,000 of net §1231 losses. The character of the gain is:
Select an option first.
Correct answer: D — $50,000 ORDINARY — the ENTIRE gain is §1245 recapture, so the §1231 lookback never comes into play
Explanation: Adjusted basis = $100,000 − $60,000 = $40,000. Gain = $90,000 − $40,000 = $50,000. §1245 recapture = the LESSER of gain ($50,000) or depreciation ($60,000) = $50,000 — ALL ORDINARY. Since NO §1231 gain remains, the §1231 LOOKBACK has nothing to recharacterise. Recapture is applied FIRST; the lookback operates only on what survives it.
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