ABA Tax Preparation & Compliance 3 — Questions and Answers
Question 1: What is the penalty rate for failing to pay taxes by the due date (underpayment penalty) per month under IRC §6651?
- 0.5% per month, up to 25% (Correct answer)
- 1% per month, up to 25%
- 5% per month, up to 25%
- 2% per month, up to 20%
Correct answer: 0.5% per month, up to 25%
The failure-to-pay penalty under IRC §6651(a)(2) is 0.5% of unpaid tax per month (or part of a month), capped at 25% of the unpaid balance.
Question 2: For 2024, up to what amount of Social Security wages is subject to the 6.2% OASDI tax?
- $147,000
- $160,200
- $168,600 (Correct answer)
- $176,100
Correct answer: $168,600
The Social Security wage base for 2024 is $168,600; wages above this amount are not subject to the 6.2% OASDI portion of FICA.
Question 3: A taxpayer sells their primary residence of 6 years for a $320,000 gain. They are married filing jointly. How much gain is excludable?
- $250,000
- $500,000 (Correct answer)
- $320,000
- $0 — all gain is taxable
Correct answer: $500,000
Under IRC §121, married couples filing jointly can exclude up to $500,000 of gain on the sale of a principal residence if ownership and use tests are met.
Question 4: Which depreciation method assigns equal expense amounts each year over an asset's useful life?
- Double declining balance
- Sum-of-the-years'-digits
- Straight-line (Correct answer)
- MACRS 150% declining balance
Correct answer: Straight-line
Straight-line depreciation divides the depreciable basis evenly over the asset's recovery period, yielding the same deduction each year.
Question 5: A corporation distributes $10,000 to a shareholder from its earnings and profits (E&P). The shareholder's tax basis in the stock is $3,000. How is the distribution classified?
- $3,000 return of capital, $7,000 capital gain
- $10,000 ordinary dividend income (Correct answer)
- $10,000 return of capital
- $7,000 dividend, $3,000 return of capital
Correct answer: $10,000 ordinary dividend income
Distributions from current or accumulated E&P are treated as ordinary dividends to the extent of E&P; since $10,000 ≤ E&P, the full amount is a dividend.
Question 6: What is the primary purpose of Form 4868?
- Request an extension of time to pay taxes owed
- Request an automatic 6-month extension of time to file Form 1040 (Correct answer)
- Amend a previously filed return
- Report foreign bank accounts
Correct answer: Request an automatic 6-month extension of time to file Form 1040
Form 4868 grants an automatic 6-month extension to file Form 1040 but does NOT extend the time to pay any taxes due.
Question 7: Under the passive activity loss rules (IRC §469), which taxpayer can deduct up to $25,000 of rental real estate losses against ordinary income?
- Any taxpayer with rental property
- Active participants with AGI up to $100,000 (phase-out begins at $100,000) (Correct answer)
- Real estate professionals only
- Taxpayers who materially participate in all activities
Correct answer: Active participants with AGI up to $100,000 (phase-out begins at $100,000)
Active participants in rental real estate can deduct up to $25,000 of passive losses if AGI does not exceed $100,000, with a phase-out through $150,000.
ABA Tax Preparation & Compliance 3
What is the penalty rate for failing to pay taxes by the due date (underpayment penalty) per month under IRC §6651?