CPA REG Federal taxation of individuals: practice questions with answers

Question 1

Signe Mortensen, age 52, is covered all of 2026 by her employer's group-term life insurance policy with a death benefit of $180,000. She pays $10 a month of the premium through after-tax payroll deductions. The IRS uniform premium table cost for ages 50 to 54 is $0.23 per $1,000 of coverage per month. What amount must Signe include in her 2026 gross income for this coverage (to the nearest dollar)?

1. A $239
2. B $359
3. C $377
4. D $497

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Answer: A. §79 excludes the cost of the first $50,000 of employer-provided group-term life coverage. The cost of the excess, measured with the IRS uniform premium table, is included, less any amount the employee paid.

- Excess coverage = $180,000 - $50,000 = $130,000
- Table cost = 130 x $0.23 x 12 = $359 ($358.80)
- Less employee payments = $120

Included = $239 ($238.80).

Question 2

On November 15, 2025 Imani Holt bought 400 shares of Ferrand Corp. for $25 a share and paid a $120 commission. She sold all the shares on November 15, 2026 for $41 a share and paid a $140 commission. How is the sale reported on her 2026 return?

1. A $6,140 short-term capital gain
2. B $6,140 long-term capital gain
3. C $6,280 short-term capital gain
4. D $6,400 long-term capital gain

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Answer: A. - Amount realized = 400 x $41 - $140 = $16,260
- Basis = 400 x $25 + $120 = $10,120
- Gain = $6,140

Holding period: it begins the day after acquisition (November 16, 2025). Long-term treatment requires holding for more than one year, i.e. a sale on or after November 16, 2026 (§1222). A sale on November 15, 2026 is short-term.

Question 3

Arturo Belasco is a general partner in a calendar-year partnership that operates a printing business. His 2026 Schedule K-1 shows ordinary business income $46,000, guaranteed payments for services $30,000, interest income $1,800, qualified dividends $2,200 and net long-term capital gain $5,000. What are Arturo's net earnings from self-employment from the partnership before the 92.35% adjustment?

1. A $30,000
2. B $46,000
3. C $70,186
4. D $76,000

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Answer: D. §1402(a): a general partner's net earnings from self-employment include his distributive share of ordinary business income and guaranteed payments for services. Portfolio income (interest, dividends) and capital gains are excluded (§1402(a)(2), (3)).

$46,000 + $30,000 = $76,000. SE tax is then computed on 92.35% of that amount.

Question 4

Basil is single. In 2026 his qualified business income (QBI) from a sole proprietorship that is not a specified service business is $95,000. His taxable income before the QBI deduction is $104,000, which includes qualified dividends of $9,000 and net long-term capital gain of $7,000. His taxable income is below the 2026 threshold of $201,750 at which the W-2 wage limitation begins. What is Basil's 2026 QBI deduction?

1. A $20,800
2. B $19,000
3. C $17,600
4. D $19,400

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Answer: C. Under IRC §199A(a) and (e), below the threshold the deduction is the lesser of:

1. 20% x QBI = 20% x $95,000 = $19,000
2. 20% x (taxable income before QBI deduction - net capital gain) = 20% x ($104,000 - $16,000) = $17,600

Net capital gain for this purpose includes qualified dividends ($9,000 + $7,000 = $16,000).

QBI deduction = $17,600

Question 5

On August 10, 2025 Matteo paid $12,000 for common shares of a publicly traded company (not small business stock). The company was liquidated and its shares became wholly worthless on May 3, 2026. Matteo had no other capital transactions. How is the loss treated on Matteo's 2026 return?

1. A A long-term capital loss treated as arising on December 31, 2026
2. B An ordinary loss fully deductible in 2026
3. C A short-term capital loss treated as arising on May 3, 2026
4. D A short-term capital loss treated as arising on December 31, 2026

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Answer: A. Under IRC §165(g)(1), a security that becomes worthless during the year is treated as sold on the last day of the tax year. The holding period runs from August 10, 2025 to December 31, 2026, more than one year, so the $12,000 is a long-term capital loss. With no other capital transactions, $3,000 is deducted in 2026 and $9,000 carries forward as long-term (IRC §1211(b), §1212(b)).

Question 6

Three siblings and their father paid for the father's support in 2026 as follows: Ana 45%, Ben 35%, Cora 12%, and the father himself 8%. The father, age 79, lives alone and had gross income of $3,000. For 2026 the gross income limit for a qualifying relative is $5,300. The siblings will sign a multiple support declaration. Who may claim the father as a dependent for 2026?

1. A Ana or Ben only, because each provided more than 25% of support
2. B No one, because no sibling provided more than half of his support
3. C Ana only, because she provided the largest share of support
4. D Ana, Ben or Cora, whichever one the others agree on in writing

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Answer: D. Under IRC §152(d)(3), when no one person provides more than half of a qualifying relative's support, a multiple support agreement lets one member of a group that together provided over half of the support claim the person, if:

- the claimant provided more than 10% of the support, and
- every other person who provided more than 10% signs a written declaration not to claim the person.

The siblings together provided 45% + 35% + 12% = 92%. Ana, Ben and Cora each provided more than 10%, so any one of them may claim the father. His gross income of $3,000 is below $5,300, and a parent need not live with the claimant.