Free SEE-1 practice questions

Margaret Holloway inherited a parcel of investment land from her late aunt, who had owned it for nine years. Margaret sold the land four months after the date of her aunt's death and realised a gain. How is this gain classified for capital gains purposes?

• ALong-term, because property acquired from a decedent is automatically treated as held for more than one year.check_circle Correct
• BShort-term, because Margaret personally held the land for only four months before selling it.
• CLong-term only if Margaret's combined holding period plus her aunt's nine years exceeds one year.
• DShort-term, because the aunt's holding period cannot be tacked on after death.

Why A is correct: Under the inheritance rules, property acquired from a decedent receives automatic long-term treatment on sale, so the heir's actual holding period is irrelevant to classification.

Why B is wrong: This applies the ordinary holding-period count to inherited property, but property acquired from a decedent is treated as held long-term regardless of how long the heir actually owns it.

Why C is wrong: This describes a carryover or tacking concept that applies to gifts, not inheritances; inherited property does not require tacking because long-term treatment is automatic.

Why D is wrong: It is true that the aunt's period is not tacked, but the conclusion is wrong because inherited property is deemed long-term by statute rather than by tacking.

David and Priya Sharma, who file jointly, bought a house and lived in it as their main home from January 2019 until they moved out in June 2022. They rented the property to tenants from July 2022 and sold it in May 2024, realising a gain of 180,000 dollars. Are they eligible to exclude this gain under the principal-residence exclusion?

• ANo, because the property was rented out at the time of sale and was therefore not their principal residence.
• BYes, because they owned and used the home as their principal residence for at least two of the five years before the sale.check_circle Correct
• CNo, because once a home is converted to rental use the principal-residence exclusion is permanently forfeited.
• DYes, but only the portion of gain attributable to the period before they converted the home to rental use.

Why A is wrong: The exclusion looks at use during the five years before sale, not the status on the sale date, so rental at the moment of sale does not by itself disqualify them.

Why B is correct: Their main-home use from January 2019 to June 2022 gives well over two years of qualifying use within the five years ending on the May 2024 sale date, satisfying both tests.

Why C is wrong: Conversion to rental does not permanently forfeit the exclusion; eligibility turns on meeting the ownership and use tests within the five-year look-back period.

Why D is wrong: This confuses the basic exclusion with depreciation recapture; the qualifying gain is excludable in full up to the limit, although depreciation taken after May 1997 is separately recaptured.

Elena Vasquez sold 100 shares of Cobalt Industries at a 2,000 dollar loss on 10 March 2024. On 28 March 2024 she purchased 100 shares of the same Cobalt Industries stock. How are the loss and the basis of the newly purchased shares treated?

• AThe 2,000 dollar loss is disallowed and is permanently lost because the shares were repurchased.
• BThe 2,000 dollar loss is allowed in full because Elena sold the shares before repurchasing them.
• CThe 2,000 dollar loss is disallowed and is added to the basis of the newly purchased shares.check_circle Correct
• DThe 2,000 dollar loss is allowed because the repurchase occurred more than 14 days after the sale.

Why A is wrong: The loss is indeed disallowed currently, but it is not lost; the wash-sale rule preserves it by adding it to the replacement shares' basis.

Why B is wrong: Selling first does not avoid the rule; a wash sale arises whenever substantially identical stock is bought within 30 days before or after the loss sale.

Why C is correct: The repurchase falls inside the 30-day window, so the wash-sale rule disallows the loss and rolls the disallowed amount into the basis of the replacement shares, preserving it for a later sale.

Why D is wrong: The relevant period is 30 days, not 14; the 28 March purchase is 18 days after the 10 March sale and therefore within the disallowance window.

Soraya Nasrallah, who itemises, paid unreimbursed medical and dental bills during 2024 and wants to know how much she can deduct on Schedule A. Which threshold must her qualifying medical expenses exceed before any amount becomes deductible?

• A7.5 percent of her adjusted gross income, with only the portion above that floor deductible.check_circle Correct
• B2 percent of her adjusted gross income, the same floor that applied to miscellaneous itemised deductions.
• C10 percent of her adjusted gross income, the floor in effect before recent changes.
• D7.5 percent of her taxable income after the standard deduction is subtracted.

Why A is correct: Unreimbursed qualifying medical and dental expenses are deductible only to the extent they exceed 7.5 percent of adjusted gross income, and only the excess over that floor is allowed.

Why B is wrong: The 2 percent floor applied to certain miscellaneous itemised deductions that are currently suspended, not to medical expenses, so it is the wrong threshold here.

Why C is wrong: A 10 percent floor applied in some earlier years, but the medical floor is 7.5 percent of adjusted gross income for 2024, so this overstates the threshold.

Why D is wrong: The percentage is correct but the base is wrong; the floor is measured against adjusted gross income, not taxable income, so this option misstates the calculation base.

Dimitri Pappadopoulos is single and itemises for 2024. He paid 7,800 dollars of state income tax, 6,400 dollars of real property tax on his home, and 900 dollars of personal property tax on his car. How is the state and local tax deduction limited on his Schedule A?

• AEach separate category of state and local tax is capped at 10,000 dollars on its own.
• BThe combined deductible state and local taxes are capped at 10,000 dollars for the year.check_circle Correct
• COnly the state income tax is capped at 10,000 dollars; property taxes are deducted in full.
• DThe combined state and local taxes are capped at 5,000 dollars because he files as a single taxpayer.

Why A is wrong: The cap is a single combined limit across all qualifying state and local taxes, not a separate 10,000 dollar limit for each category, so treating the categories independently is incorrect.

Why B is correct: State and local income, real property, and personal property taxes are aggregated and the total itemised deduction for them is capped at 10,000 dollars for a single filer, so the 15,100 dollars he paid is limited to 10,000 dollars.

Why C is wrong: Real and personal property taxes are part of the same combined state and local tax category and count toward the single cap, so exempting them from the limit is wrong.

Why D is wrong: The 5,000 dollar cap applies to married filing separately, not to a single filer; a single taxpayer's combined cap is 10,000 dollars.

Beatriz Okafor and her husband file married filing separately for 2024. Her husband chooses to itemise his deductions on his own separate return. Beatriz has very few itemisable expenses and would prefer the standard deduction. What is the consequence for Beatriz's return?

• AShe may still claim the full standard deduction because each spouse on a separate return chooses independently.
• BShe may claim the standard deduction but must reduce it by the amount her husband itemised.
• CHer standard deduction is reduced to zero, so she must itemise her own deductions even if they are small.check_circle Correct
• DShe must use the standard deduction because married filing separately taxpayers are barred from itemising.

Why A is wrong: Separate returns are not independent on this point; once one spouse itemises, the other loses access to the standard deduction, so independent choice does not apply here.

Why B is wrong: There is no rule reducing one spouse's standard deduction by the other's itemised total; the actual rule denies the standard deduction entirely, so this invented adjustment is wrong.

Why C is correct: When one spouse on a married filing separately return itemises, the other spouse's standard deduction is zero, so Beatriz must itemise her own deductions regardless of how small they are.

Why D is wrong: Married filing separately taxpayers are not barred from itemising; the opposite occurs here, because her husband's choice to itemise forces her to itemise as well.

Four single taxpayers each report 2024 modified adjusted gross income above 200,000 dollars but have different income mixes. Damien Fortescue has only wage income; Priya Venkataraman has only self-employment income from an active business she materially participates in; Rosalind Achterberg has substantial taxable interest and dividend income; and Theodore Mwangi has only a fully taxable distribution from his traditional 401(k). Which taxpayer is most clearly subject to the Net Investment Income Tax for 2024?

• ADamien Fortescue, because his wages push his modified adjusted gross income above the 200,000 dollar single threshold.
• BPriya Venkataraman, because her self-employment earnings are investment-type returns on the capital in her business.
• CRosalind Achterberg, because she has net investment income and modified adjusted gross income above the single threshold.check_circle Correct
• DTheodore Mwangi, because his retirement plan distribution is income earned from invested funds.

Why A is wrong: Crossing the modified adjusted gross income threshold is necessary but not sufficient; the tax also requires net investment income, and wages are specifically excluded from that category, so Damien has no base to tax.

Why B is wrong: Income from an active trade or business in which the taxpayer materially participates is not net investment income; self-employment earnings are subject to self-employment tax, not the Net Investment Income Tax.

Why C is correct: Interest and dividends are net investment income, and she also exceeds the 200,000 dollar single modified adjusted gross income threshold, so both conditions for the 3.8 percent tax are met.

Why D is wrong: Distributions from qualified retirement plans such as a 401(k) are expressly excluded from net investment income, so the distribution does not create a Net Investment Income Tax base even though it raises adjusted gross income.

Estelle Brandeburg files single for 2024 with modified adjusted gross income of 240,000 dollars and net investment income of 30,000 dollars. The single threshold for the Net Investment Income Tax is 200,000 dollars. On which amount is her 3.8 percent Net Investment Income Tax imposed?

• AOn 40,000 dollars, the full amount by which her modified adjusted gross income exceeds the threshold.
• BOn 240,000 dollars, her entire modified adjusted gross income for the year.
• COn 70,000 dollars, the sum of her net investment income and the excess of modified adjusted gross income over the threshold.
• DOn 30,000 dollars, the lesser of her net investment income and the excess of her modified adjusted gross income over the threshold.check_circle Correct

Why A is wrong: The excess over the threshold is one of the two amounts compared, but the tax applies to the lesser of that excess and net investment income, and here net investment income of 30,000 dollars is smaller.

Why B is wrong: The tax never applies to total modified adjusted gross income; it is limited to the lesser of net investment income and the excess over the threshold, so taxing the whole figure greatly overstates the base.

Why C is wrong: The base is the lesser of the two figures, not their sum; adding net investment income to the threshold excess incorrectly combines amounts that the statute tells you to compare.

Why D is correct: The tax base is the smaller of net investment income (30,000 dollars) and the excess of modified adjusted gross income over the threshold (40,000 dollars), so 30,000 dollars is taxed at 3.8 percent.

Bartholomew Nkemelu is completing Form 8960 to figure his 2024 Net Investment Income Tax. He received taxable interest, ordinary dividends, net rental income from a passive rental, a net capital gain on stock, and wages from his employer. Which of these items is NOT included in his net investment income?

• AThe wages from his employer, because compensation for services is not investment income.check_circle Correct
• BThe net capital gain on the sale of his stock, because gains are returns of his own capital.
• CThe net rental income, because rental activities are treated as a trade or business.
• DThe taxable interest and ordinary dividends, because portfolio income is excluded from the calculation.

Why A is correct: Wages and other compensation for personal services are specifically excluded from net investment income, even though they count toward the modified adjusted gross income threshold that determines whether the tax applies.

Why B is wrong: Net gain from the disposition of investment property such as stock is included in net investment income, so the capital gain is part of the base rather than excluded from it.

Why C is wrong: Rental income from a passive activity is net investment income; calling it a trade or business does not remove it, because the activity is passive to him rather than one in which he materially participates.

Why D is wrong: Interest and dividends are core components of net investment income; portfolio income is included, not excluded, so removing it understates the base.

Marcus Delacroix's wife died in March 2024. He did not remarry during the year, and he has no dependants. He paid all the costs of keeping up his home for the full year. Which filing status may Marcus use for the 2024 tax return?

• AQualifying surviving spouse, because his wife died during the tax year.
• BHead of household, because he maintained the home on his own for the full year.
• CMarried filing jointly, because he is treated as married for the entire year his spouse died.check_circle Correct
• DSingle, because he was widowed before the end of the tax year.

Why A is wrong: Qualifying surviving spouse applies only to the two years AFTER the year of death and requires a dependent child, so it is unavailable both for the year of death and because Marcus has no dependants.

Why B is wrong: Head of household requires being unmarried or considered unmarried and a qualifying person in the home; Marcus is treated as married for the year and has no qualifying person, so this status does not apply.

Why C is correct: A taxpayer whose spouse dies during the year and who has not remarried by year end is considered married for that whole year and may file a joint return for the year of death.

Why D is wrong: Marital status for a decedent's final year keeps the surviving spouse as married for that year, so single is not the correct status for the year of death.

Priya Venkataraman is unmarried. Her widowed father lives in his own apartment across town, not with Priya, and qualifies as her dependent because she provides more than half of his support. She also pays more than half the cost of keeping up his apartment, which is his main home. Can Priya claim head of household based on her father?

• ANo, because a qualifying person must live with the taxpayer for more than half the year to support head of household.
• BNo, because head of household is available only to taxpayers who have a qualifying child rather than a qualifying relative.
• CYes, but only if her father also lived with her for at least part of the tax year.
• DYes, because a dependent parent need not live with the taxpayer if the taxpayer pays more than half the cost of the parent's main home.check_circle Correct

Why A is wrong: The general live-with rule has a specific exception for a dependent parent, so applying the residency rule without the parent exception reaches the wrong conclusion.

Why B is wrong: A qualifying relative such as a dependent parent can support head of household, so restricting the status to qualifying children is incorrect.

Why C is wrong: No part-year cohabitation is required for the parent exception; requiring even partial residence misstates the rule that applies to a dependent parent.

Why D is correct: The dependent-parent exception lets a parent be the qualifying person for head of household even when living elsewhere, provided the taxpayer pays more than half the cost of keeping up the parent's main home for the year.

Tobias Okonkwo is still legally married but has lived apart from his spouse since February 2024, with no time spent together for the last six months of the year. His son lived with Tobias for the whole year and is his dependant, and Tobias paid more than half the cost of keeping up that home. His spouse will file a separate return. Under the considered-unmarried rules, which filing status may Tobias use?

• AHead of household, because he is considered unmarried and met the abandoned-spouse conditions.check_circle Correct
• BQualifying surviving spouse, because he maintained a home for his dependent child all year.
• CSingle, because he lived apart from his spouse for more than half the year.
• DMarried filing separately, because that is the only status available while he remains legally married.

Why A is correct: A married taxpayer who lived apart from a spouse for the last six months, paid more than half the cost of a home that was a dependent child's main home for over half the year, and files separately is considered unmarried and may claim head of household.

Why B is wrong: Qualifying surviving spouse requires a deceased spouse within the prior two years; Tobias's spouse is living, so this status is unavailable regardless of the home he maintained.

Why C is wrong: Living apart does not legally end the marriage, so single is incorrect; the relevant treatment is being considered unmarried for head of household, not actually single.

Why D is wrong: Married filing separately is available, but it is not the only option; meeting the considered-unmarried test lets a still-married taxpayer claim the more favourable head of household.

Eleanor Whitcombe, a US citizen, died in 2024. At her death she owned a life insurance policy on her own life that paid 800,000 dollars to her adult son, a brokerage account held solely in her name, and a holiday cottage she had transferred to a revocable living trust during her lifetime, retaining the power to revoke it. Which of these is excluded from her federal gross estate on Form 706?

• AThe life insurance proceeds, because they were paid directly to a named beneficiary rather than to the estate.
• BThe holiday cottage in the revocable living trust, because legal title had already passed to the trust before death.
• CThe solely owned brokerage account, because liquid investment accounts pass outside the gross estate.
• DNone of these three assets is excluded, because each is brought into her gross estate under a separate inclusion rule on these facts.check_circle Correct

Why A is wrong: It is tempting because policy proceeds payable to a named beneficiary bypass probate, but probate avoidance does not control estate inclusion. Because the decedent held incidents of ownership in a policy on her own life, the proceeds are pulled into the gross estate under Section 2042 regardless of who received them.

Why B is wrong: Funding a revocable trust feels like a completed transfer that removes the asset from the estate, but the retained power to revoke makes the transfer incomplete for estate-tax purposes. Section 2038 includes property over which the decedent kept the power to alter, amend, or revoke, so the cottage stays in the gross estate.

Why C is wrong: Some candidates assume only real property is taxed in the estate, but the form of the asset is irrelevant. A brokerage account titled solely in the decedent's name is property she owned at death and is included under Section 2033.

Why D is correct: Correct. Property owned solely by the decedent is included under Section 2033, life insurance on the decedent's life with retained incidents of ownership is included under Section 2042, and revocable-trust property is included under Section 2038, so every listed asset is part of the gross estate.

Gerald Ashworth died in 2024 leaving most of his applicable exclusion amount unused. His surviving wife, Margaret, wants to preserve his unused exclusion so she can apply it against her own future transfers under the portability rules. Gerald's gross estate is well below the filing threshold, so no estate tax is due and the executor would not otherwise file. What must happen for Margaret to be able to use Gerald's deceased spousal unused exclusion?

• AThe executor must make the portability election on a timely filed Form 706 for Gerald's estate, even though no estate tax is owed.check_circle Correct
• BMargaret simply claims the unused exclusion on her own next Form 709 or Form 706; no filing is required for Gerald's estate.
• CPortability applies automatically by operation of law because the spouses were married at Gerald's death.
• DGerald's executor must file Form 709 to transfer his unused exclusion to Margaret before any gift is made.

Why A is correct: Correct. Portability is not automatic. Under Section 2010(c) the deceased spousal unused exclusion transfers only if the executor affirmatively elects portability on a Form 706 filed for the deceased spouse's estate, and that return must be filed even when the estate owes no tax and is otherwise below the filing threshold.

Why B is wrong: This is tempting because the unused exclusion ultimately benefits Margaret's returns, but she cannot claim it unilaterally. The deceased spousal unused exclusion exists only if the executor first elected portability on Gerald's Form 706; without that election there is nothing for Margaret to claim.

Why C is wrong: Marriage is necessary but not sufficient. Section 2010(c) requires an affirmative election by the executor on a filed estate-tax return, so portability is never automatic merely because the couple was married.

Why D is wrong: Form 709 is the gift-tax return filed by a living donor, not the vehicle for portability. The deceased spousal unused exclusion is elected on the decedent's Form 706, so directing the executor to file Form 709 confuses the gift and estate return regimes.

Priscilla Okonkwo, a US citizen, held foreign financial accounts during 2024. The combined balance of her accounts reached an aggregate high of 14,000 dollars at one point in the year, but the value of her specified foreign financial assets never came close to the higher reporting thresholds that apply to Form 8938. Based only on these facts, which reporting obligation applies to her for 2024?

• AShe must file Form 8938 with her income tax return but is not required to file the FinCEN Form 114 (FBAR).
• BShe must file the FinCEN Form 114 (FBAR) because her aggregate foreign account balance exceeded 10,000 dollars at some point during the year.check_circle Correct
• CShe has no foreign reporting obligation for 2024 because she did not meet the Form 8938 thresholds.
• DShe must file both the FinCEN Form 114 (FBAR) and Form 8938 because any foreign account triggers both forms.

Why A is wrong: This reverses the two regimes. Form 8938 reports specified foreign financial assets only once the higher FATCA thresholds are met, and the facts state those thresholds were not reached, so Form 8938 is not triggered while the FBAR is.

Why B is correct: Correct. The FBAR is required when the aggregate value of foreign financial accounts exceeds 10,000 dollars at any time during the calendar year. Her accounts peaked at 14,000 dollars, so the FinCEN Form 114 must be filed, while the separate and higher Form 8938 thresholds were not met.

Why C is wrong: It is tempting to treat the higher Form 8938 thresholds as the only test, but the FBAR is a separate regime with its own lower trigger. Crossing the 10,000 dollar aggregate at any time during the year requires a FinCEN Form 114 even when Form 8938 does not apply.

Why D is wrong: The two forms have different thresholds and are not triggered together by merely holding a foreign account. The FBAR applies because the 10,000 dollar aggregate was exceeded, but Form 8938 is not triggered on these facts because the higher FATCA thresholds were not met.

Maria Delgado filed a joint return with her former husband. He had understated income from a side business, and Maria can show she did not know and had no reason to know of the understatement when she signed. She is still legally married to him and they live in the same household. Which form of spousal relief is designed for a taxpayer in Maria's circumstances?

• AInnocent spouse relief, available where an understatement is attributable to the other spouse and the requesting spouse did not know and had no reason to know of itcheck_circle Correct
• BSeparation of liability relief, which allocates the understatement between the spouses as if they had filed separately
• CInjured spouse relief, which returns the requesting spouse's share of a joint refund applied to the other spouse's separate debt
• DEquitable relief, the discretionary fallback that becomes the only avenue once both the knowledge test and the marital-status requirements have failed

Why A is correct: Section 6015(b) innocent spouse relief fits exactly: there is an understatement attributable to the other spouse's erroneous item, the requesting spouse did not know and had no reason to know of it, and it would be inequitable to hold her liable; marital status and household are not bars to this branch.

Why B is wrong: Separation of liability under Section 6015(c) requires that the requesting spouse be divorced, legally separated, widowed, or living apart from the other spouse for the 12 months before the request; because Maria remains married and in the same household, she does not qualify for this branch.

Why C is wrong: Injured spouse relief, claimed on Form 8379, addresses a refund offset for a spouse's separate past-due obligation such as child support; it does not relieve a spouse of liability for an understatement of tax and so does not address Maria's situation.

Why D is wrong: Equitable relief under Section 6015(f) is a discretionary fallback available only when relief is not available under the other two branches; because Maria satisfies the innocent spouse knowledge test, she qualifies under that branch and need not rely on equitable relief.

Daniel Foster timely filed his 2024 individual return on 15 April 2025, reporting gross income of 90,000 dollars. He did not commit fraud, and he did not omit more than 25 percent of his gross income. Absent any extension or agreement, what is the latest date on which the IRS may generally assess additional tax for that year?

• A15 April 2031, applying the six-year period for a substantial omission of gross income
• B15 April 2028, applying the general three-year assessment period measured from the date the return was filedcheck_circle Correct
• C15 April 2027, applying a two-year period measured from the filing of the return
• DNo deadline applies, because the assessment period never expires once a return has been filed

Why A is wrong: The six-year period under Section 6501(e) applies only when the taxpayer omits more than 25 percent of gross income; Daniel made no such substantial omission, so the extended six-year window does not apply.

Why B is correct: Under Section 6501 the general assessment period is three years from the date the return is filed, and a return filed on the due date is treated as filed on that date; three years from 15 April 2025 is 15 April 2028.

Why C is wrong: Two years is the period for an innocent spouse election running from first collection activity and for certain refund claims, not the general assessment statute; it is not the correct measure for assessing additional tax.

Why D is wrong: An unlimited assessment period applies only where no return was filed or the return was fraudulent; Daniel filed a non-fraudulent return, so a definite limitations period governs and the statute does eventually close.

Priya Nair underpaid her 2024 tax because she claimed a deduction with no reasonable basis, producing a substantial understatement of income tax. The IRS determines the underpayment was not due to fraud and was not the result of a valuation misstatement. Which penalty most directly applies, and at what rate on the underpayment?

• AThe fraud penalty at 75 percent of the portion of the underpayment attributable to fraud
• BThe failure-to-pay penalty at 0.5 percent of the unpaid tax for each month it remains unpaid
• CThe accuracy-related penalty at 20 percent of the underpayment attributable to the substantial understatementcheck_circle Correct
• DThe failure-to-file penalty at 5 percent of the unpaid tax for each month the return is late

Why A is wrong: The civil fraud penalty under Section 6663 is 75 percent but requires the IRS to prove the underpayment was due to fraud; the facts state there was no fraud, so this penalty does not apply.

Why B is wrong: The failure-to-pay penalty addresses tax shown as due but not paid by the deadline; here the issue is an understatement of the correct liability from a bad-basis deduction, which is an accuracy problem rather than a non-payment of reported tax.

Why C is correct: Section 6662 imposes a 20 percent accuracy-related penalty on the portion of an underpayment due to negligence or a substantial understatement of income tax; a deduction with no reasonable basis producing a substantial understatement falls squarely within this penalty.

Why D is wrong: The failure-to-file penalty applies when a return is filed late; nothing indicates a late return, and the problem here is the accuracy of the reported liability rather than the timing of filing.