EA Part 1 Mock Exam #2

Question 1 of 30

Michael, age 68, is single. During 2025 he received:

• Social Security benefits: $28,000

• Taxable pension: $22,000

• Tax-exempt municipal bond interest: $4,000

• Qualified dividends: $2,000

• No adjustments to income.

Which item is always excluded from gross income, regardless of whether any Social Security benefits become taxable?

A. Social Security benefits

B. Municipal bond interest

C. Qualified dividends

D. Pension income

B. Municipal bond interest

Why?

The correct answer is B. Municipal bond interest.

• ✅ Municipal bond interest is generally excluded from federal gross income (though it is included in the provisional income calculation for determining whether Social Security benefits are taxable).

• ❌ Social Security benefits are not always excluded. Depending on provisional income, up to 85% may be taxable.

• ❌ Qualified dividends are taxable income, even though they may receive preferential tax rates.

• ❌ Pension income is generally taxable unless a specific exclusion applies.

EA Trap: The exam loves to test the difference between:

• Excluded from gross income, and

• Still used in another tax calculation (like provisional income for Social Security)

A married couple (both under 65) filing jointly in 2025 has gross income of $31,500. What must they do?

• A) File a return (it's exactly at the threshold)

• B) File a return (it's at or above the threshold)

• C) No return required (below the threshold)

• D) File only if they have dependents

B) File a return (it's at or above the threshold)

The Trap:
Both A and B say they must file, which is correct. But the way tax rules are written matters. The filing requirement is stated as: "at least $31,500" or "at or above $31,500" — not "exactly at."

At $31,500, they ARE at the threshold and MUST file. But the precise language of the rule is "at or above," so B is the correct phrasing.

Why this matters on the exam: Test makers test precision of language. A says "exactly at the threshold" which is technically true but not how the IRS phrases requirements. B captures the proper wording: "at or above."

Key takeaway: When you see a threshold rule, remember it's always phrased as "at least" or "at or above" — meaning the threshold number is INCLUDED, not exceeded.

Which of the following is not generally considered gross income?

A. Wages
B. Interest income
C. Inherited property received from a decedent
D. Self-employment earnings

C. Inherited property received from a decedent

Question 2

An individual received a gift of stock from a parent. The parent's adjusted basis was $15,000 and the Fair Market Value (FMV) on the date of the gift was $12,000. The individual sells the stock two months later for $13,000. What is the recognized gain or loss?

A. $3,000 loss

B. $1,000 gain

C. No gain or loss

D. $2,000 loss

C. No gain or loss

ennifer purchased vacant land for $120,000.

She also paid:

• Legal fees: $2,000

• Recording fees: $800

• Property taxes owed by the seller that Jennifer agreed to pay at closing: $1,500

• Title insurance: $700

What is Jennifer's initial basis in the land?

A. $120,000

B. $123,500

C. $125,000

D. $124,500

Calculation

Purchase price: $120,000

Add capitalized acquisition costs:

• ✅ Legal fees: +$2,000

• ✅ Recording fees: +$800

• ✅ Title insurance: +$700

• ✅ Property taxes owed by the seller that the buyer pays at closing: +$1,500 (treated as part of the cost/basis rather than the buyer's deductible property tax)

Total basis = $120,000 + $2,000 + $800 + $700 + $1,500 = $125,000

✅ Answer: C

A single filer, age 64, with gross income of $17,750 in 2025:

• A) Must file (exceeds the $15,750 single threshold)

• B) Is at the 65-or-older threshold even though age 64

• C) Must file only if self-employed

• D) Cannot use the 65-or-older threshold; must use $15,750

Answer: A) Must file (exceeds the $15,750 single threshold)

Why A is correct:
At age 64, you use the "under 65" threshold ($15,750), not the 65+ threshold. Income of $17,750 exceeds $15,750, so they must file.

Why this is a trap:
Answer D is factually true—they cannot use the 65+ threshold. But it doesn't answer the question. The question asks what they must DO, not what threshold applies. Many test-takers get distracted by a true but irrelevant statement in the choices.

Key rule: Age determines threshold on December 31 of the tax year. Even one day before turning 65, you're under 65.

A taxpayer's spouse died on December 31, 2024. The taxpayer has no dependents. What is the taxpayer's filing status for the 2025 tax year?

• A.

  Single

• B.

  Married Filing Jointly

• C.

  Qualifying Surviving Spouse

• D.

  Head of Household

Single. to file for QSS you need to have dependents

A taxpayer has an Adjusted Gross Income (AGI) of $80,000. They incurred the following expenses: $5,000 in medical insurance premiums, $2,000 for LASIK eye surgery, and $1,000 for over-the-counter vitamins. What is their deductible medical expense on Schedule A?

• A.

  $8,000

• B.

  $7,000

• C.

  $1,000

• D.

  $2,000

• C.

  $1,000

  Correct

  Total qualified expenses = $5,000 (insurance) + $2,000 (LASIK) = $7,000. Vitamins are not deductible. The deduction is the amount exceeding 7.5% of AGI ($80,000×0.075=$6,000). $7,000−$6,000=$1,000.

Which of the following early distributions from a Traditional IRA is exempt from the 10% penalty but NOT exempt from income tax?

• A.

  Withdrawal for general financial hardship

• B.

  Rolling funds into a Roth IRA

• C.

  Health insurance premiums while unemployed

• D.

  Purchase of a second home

• C.

  Health insurance premiums while unemployed

A taxpayer has a $10,000 long-term capital loss and no capital gains. How much of the loss can be used to offset ordinary income, and what happens to the remainder?

• A.

  $10,000 used, $0 carried over.

• B.

  $3,000 used, $7,000 carried over as short-term.

• C.

  $0 used, $10,000 carried over.

• D.

  $3,000 used, $7,000 carried over as long-term.

• D.

  $3,000 used, $7,000 carried over as long-term.

A check for $500 was placed in a taxpayer's mailbox on December 31, 2025, but the taxpayer was on vacation and didn't open it until January 2, 2026. In which year is the income taxable?

• A.

  Neither year, as it is a gift

• B.

  2026

• C.

  2025

• D.

  Either year at taxpayer election

• C.

  2025

Following the death of a settlor, the executor of the probate estate and the trustee of the decedent's qualified revocable living trust wish to file a single combined Form 1041 covering both entities. Which statement correctly describes the election under IRC §645?

A

The election is made on Form 706 and is irrevocable for federal estate tax valuation purposes

B

The election applies only to revocable trusts that were established within three years before the settlor's death

C

The election is available only if the trust distributes all income annually to a single beneficiary

D

The election is made on Form 8855 and treats the qualified revocable trust as part of the related estate for income tax reporting purposes until the applicable date defined in §645(b)

RC §645 allows the executor of a decedent's estate and the trustee of a qualified revocable trust (QRT) to jointly elect to treat the trust as part of the estate for income tax purposes. The election is made on Form 8855 and runs from the date of death until the 'applicable date' — generally two years after death if no Form 706 is required, or six months after the final determination of estate tax liability if Form 706 is filed. During the election period the QRT files no separate Form 1041; its income, deductions, and credits are reported on the estate's Form 1041.

A is incorrect. The §645 election is an income tax election made on Form 8855 (a Form 1041 attachment), not a Form 706 election. Form 706 elections govern estate tax matters such as alternate valuation, special-use valuation, and QTIP — not the income-tax treatment of a revocable trust.

B is incorrect. Section 645 has no three-year lookback; eligibility turns on whether the trust was a 'qualified revocable trust' (treated as owned by the decedent under §676 by reason of a power held by the decedent) on the date of death.

C is incorrect. Section 645 imposes no requirement that the trust distribute all income annually or have a single beneficiary. Those characteristics describe a simple trust under §651, which is a separate concept.