ACC 460 Exam 4

Emma Doyle is employed as a corporate attorney. For 2020, she had AGI of $75,000 and paid the following medical expenses: Medical insurance premiums $3,700 Doctor and dentist bills for Bob and April (Emma's parents) 6,800 Doctor and dentist bills for Emma 5,200 Prescription medicines for Emma400Nonprescription insulin for Emma 350 Bob and April would qualify as Emma's dependents, except that they file a joint return. Emma's medical insurance policy does not cover them. Emma filed a claim for reimbursement of $2,800 of her own expenses with her insurance company in December 2020 and received the reimbursement in January 2021. What is Emma's maximum allowable medical expense deduction for 2020? Complete a memo for your firm's tax files in which you document your conclusions. TAX FILE MEMORANDUM DATE: February 27, 2021 FROM: Sam Massey SUBJECT: Emma Doyle's medical expense deduction Emma Doyle's deductible (after any limitations) medical expense deduction is $ Although Bob and April cannot be claimed as Emma's dependents, they could have been had they not filed a joint return. Therefore, medical expenses incurred on their behalf qualify for the medical expense deduction. Insulin isan exception to the rule that nonprescription drugs do not qualify as medical expenses. The insurance recovery was not received until 2021. Therefore, it has no effect on the medical expense deduction for 2020.

$10,825 Medical insurance premiums $3,700 Doctor and dentist bills for Bob and April 6,800 Doctor and dentist bills for Emma 5,200 Prescription medicines for Emma 400 Nonprescription insulin for Emma 350 Total medical expenses $16,450 Less: 7.5% of $75,000 (AGI) (5,625) Deductible portion of medical expenses $10,825 HW10

Jarrod receives a scholarship of $18,500 from East State University to be used to pursue a bachelor's degree. He spends $12,000 on tuition, $1,500 on books and supplies, $4,000 for room and board, and $1,000 for personal expenses. Which of these amounts, if any, may Jarrod exclude from his gross income?

$13,500 Jarrod may exclude $13,500 ($12,000 tuition + $1,500 books and supplies) from his gross income. The $4,000 spent for room and board and $1,000 spent for personal expenses are includible in Jarrod's gross income. HW10

Linda, who files as a single taxpayer, had AGI of $280,000 for 2020. She incurred the following expenses and losses during the year: Medical expenses (before the 7.5%-of-AGI limitation) $33,000 State and local income taxes 4,800 State sales tax 1,300 Real estate taxes 6,000 Home mortgage interest 5,000 Automobile loan interest 750 Credit card interest 1,000 Charitable contributions 7,000 Casualty loss (before 10% limitation but after $100 floor; not in a Federally declared disaster area) 34,000 Unreimbursed employee business expenses 7,600 Calculate Linda's allowable itemized deductions for the year.

$34,000 Medical expenses [$33,000 - (7.5% × $280,000)] $12,000 State and local, and real estate taxes ($4,800 income + $6,000 property; limited to $10,000) 10,000 Home mortgage interest 5,000 Charitable contributions 7,000 Total itemized deductions = $34,000 HW10

BUSINESS (and a bit of personal) TRAVEL Larry is the sole proprietor of a consulting business. This year, he took a business trip to Miami, spending 4 days conducting business and 6 days vacationing. His expenses for the entire trip were as follows: Air fare $ 700 Lodging 1,000 Meals 600 Golf green fees (half was with a client) 450 Explain how the expenses are treated on Larry's return. Be very specific as to amounts and locations of reportable items.

$520 deductible TO AGI. Allocate the business/personal costs as necessary, then apply the 50% cutback to meals. Golf green fees and client entertainment is no longer deductible. EXAM PRACTICE

QBI with Taxable Income over $163,300 Threshold

1. (Taxable Income - 163,300) /50,000 = Phaseout % 2. (QBI x 20%) - (W-2 x 50%) = Phaseout Amount 3. Phaseout Amount x Phaseout % = Applicable Phaseout 4. (QBI x 20%) - Applicable Phaseout = QBI Deduction

Sally was an all-state soccer player during her junior and senior years in high school. She accepted an athletic scholarship from State University. The scholarship provided the following: Tuition and fees $15,000 Housing and meals $6,000 Books and supplies $1,500 Transportation $1,200 Determine the effect of the scholarship on Sally's gross income. Included in/Excluded fromIncome 1. Tuition and fees 2. Housing and meals 3. Books and supplies 4. Transportation

1. Excluded From --> A scholarship recipient may exclude from gross income the amount used for tuition and related expenses (fees, books, supplies, and equipment required for courses), depending on the conditions of the grant. 2. Included In --> Amounts received for room and board are not excludable. 3. Excluded From --> See the explanation for tuition and fees above. 4. Included In --> Amounts received for transportation are not excludable. HW10

Patrick and Eva are planning to divorce in 2020. Patrick has offered to pay Eva $12,000 each year until their 11-year-old daughter reaches age 21. Alternatively, Patrick will transfer to Eva common stock that he owns with a fair market value of $100,000. What factors should Eva and Patrick consider in deciding between these two options? Select either "True" or "False" to classify the following regarding the two options. 1. The stock cannot be transferred without recognition of a gain by Patrick or Eva. 2. The cash payments, as presently structured, will not qualify as alimony. 3. Eva's cost basis in the stock will be fair market value on the day Patrick transfers it to her. 4. The cash payments qualify as alimony and are deductible by Patrick only if Eva agrees to report the alimony as income.

1. False 2. True 3. False 4. False 1. A transfer of property other than cash to a former spouse under a divorce decree or agreement is not a taxable event. The transferor is not entitled to a deduction and does not recognize gain or loss on the transfer. 2. The cash payments, as presently structured, will not qualify as alimony. The payments are not alimony because they are subject to a contingency related to the daughter, which suggests that the payments are for child support. In addition, to qualify as alimony, the cash payments must cease with the death of the payee, the agreement must not specify that the payments are not alimony, and Patrick and Eva cannot live in the same household when the payments are made. However, because the payments are made pursuant to a divorce after 2018, none of the cash payments made by Patrick to Eva are taxable or deductible, despite their classification as alimony or child support. 3. The transferee does not recognize income and has a cost basis equal to the transferor's basis. If Patrick's basis is less than the fair market value of the stock, Eva will recognize gain when the stock is sold, assuming the stock maintains its value. 4. To be classified as alimony, the payments must be in the form of cash, the cash payments must cease with the death of the payee, the agreement must not specify that the payments are not alimony, and Patrick and Eva cannot live in the same household when the payments are made. However, because the payments are made pursuant to a divorce after 2018, none of the cash payments made by Patrick to Eva are taxable or deductible, despite their classification as alimony or child support. HW10

Itemized Deductions: 6 Categories

1. Medical (7.5% AGI hurdle) 2. Taxes ($10,000 limit) 3. Interest 4. Charitable contributions (60%, 50%, & 30% AGI limit) 5. Casualty losses in Federal disaster area (10% AGI hurdle) 6. "Other" (gambling losses)

Herbert was employed for the first six months of 2020 and earned $90,000 in salary. During the next six months, he collected $8,800 of unemployment compensation, borrowed $12,000 (using his personal residence as collateral), and withdrew $2,000 from his savings account (including $60 of interest earned this year). He received dividends of $550. In December, he won $1,500 in the lottery on a $5 ticket. Indicate how much (if any) of each item is included in Herbert's gross income. I f your answer is zero enter "0". 1. Salary 2. Unemployment compensation 3. Loan proceeds 4. Savings account withdrawal (including interest) 5. Dividend income 6. Lottery winnings 7. Gross income

1. Salary -->.90k 2. Unemployment compensation --> 8,800 3. Loan proceeds --> 0 4. Savings account withdrawal (including interest) --> 60 5. Dividend income --> 550 6. Lottery winnings --> 1,500 7. Gross income --> 100,910 HW10

In 2020, Mindy Babson, a single taxpayer, has QBI of $110,000 and modified taxable income of $78,000 (this is also her taxable income before the QBI deduction). Given this information, what is Mindy's QBI deduction? Mindy's QBI deduction is $

15,600 HW11

n 2020, Meghann Babson, a single taxpayer, has QBI of $110,000 and modified taxable income of $178,000 (this is also her taxable income before the QBI deduction). Given this information, what is Meghann's QBI deduction? Meghann's QBI deduction is $

22,000 HW11

Which of the following is considered a specified service trade or business (SSTB) for purposes of the qualifying business income deduction? a.Accounting firm b.Manufacturing company c.Engineering firm d.Architectural services

A. Accounting services are considered an SSTB for purposes of the qualified business income deduction. CH 11

Kim was seriously injured at her job. As a result of her injury, she received the following payments. --> $5,000 reimbursement from employer-provided health insurance for medical expenses paid by Kim. The premiums this year paid by Kim's employer totaled $6,000. --> $15,000 disability pay. Kim has disability insurance provided by her employer as a nontaxable fringe benefit. Kim's employer paid $6,000 in disability premiums this year on behalf of Kim. --> $10,000 received for damages for personal physical injury. --> $200,000 in punitive damages. What amount is taxable to Kim? a.$215,000 b.$225,000 c.$236,000 d.$0

A. $215,000 (the amount received for disability pay and punitive damages) is taxable. The $15,000 disability pay is taxable because the insurance was paid by Kim's employer as a nontaxable fringe benefit. If Kim had paid the disability insurance premiums after tax, then the benefits received would not be included in gross income. The $200,000 received for punitive damages is fully taxable. The $5,000 reimbursement for medical expenses paid by Kim and the health insurance premiums are not included in gross income. The $10,000 received for damages for personal physical injury is also not taxable. Ch 10

Which of the following statements is true regarding the taxation of Social Security benefits? a.85% is the maximum amount of taxable Social Security benefits. b.50% is the maximum amount of taxable Social Security benefits. c.If a taxpayer's only source of income is $10,000 of Social Security benefits, then 50% of the benefits are taxable. d.If a taxpayer's only source of income is $10,000 of Social Security benefits, then 85% of the benefits are taxable.

A. The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received. Depending on a taxpayer's level of provisional income (AGI plus tax-exempt interest plus 50% of Social Security benefits), a taxpayer may include 0%-85% of Social Security benefits received in gross income. Taxpayers must include in income the lesser of 50% (or 85%, depending on income) of Social Security received or 50% (or 85%, depending on income) of the excess provisional income over a threshold. 85% of Social Security benefits received is the maximum amount that is includable in gross income. CH 10

In 2020, Kathleen Tweardy incurs $30,000 of interest expense related to her investments. Her investment income includes $7,500 of interest, $6,000 of qualified dividends, and a $12,000 net capital gain on the sale of securities. Kathleen asks you to compute the amount of her deduction for investment interest, taking into consideration any options she might have. a. If Kathleen elects not to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be $ b. If Kathleen elects to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be $fill in the blank

A. $7,500 B. $25,500 ($7,500 interest + $6,000 qualified dividends + $12,000 capital gain) HW10

Ramon had AGI of $180,000 in 2020. He is considering making a charitable contribution this year to the American Heart Association, a qualified charitable organization. Determine the current allowable charitable contribution deduction in each of the following independent situations, and indicate the treatment for any amount that is not deductible currently. a. A cash gift of $95,000. In the current year, Ramon may deduct $ since his charitable contribution is limited to $. b. A gift of OakCo stock worth $95,000 on the contribution date. Ramon acquired the stock as an investment two years ago at a cost of $84,000. The stock's value for determining the contribution is $. The deduction for 2020 is $. The remaining $ can be carried forward for 5 years. c. A gift of a painting worth $95,000 that Ramon purchased three years ago for $60,000. The charity has indicated that it would sell the painting to generate cash to fund medical research. The contribution is valued at $. The amount deductible in the current year is $.

A. $95,000 (is fully deductible as a charitable contribution); $108,000 (60% of $180,000 AGI). B. $95,000; $54,000 (30% of $180,000 AGI); $41,000 (($95,000 − $54,000)); can be carried forward; 5. C. $60,000; $60,000.($95,000 current value less the $35,000 long-term capital gain element) HW10

Norma, who is single and uses the cash method of accounting, lives in a state that imposes an income tax. In April 2020, she files her state income tax return for 2019 and pays an additional $1,000 in state income taxes. During 2020, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax of $700. In April 2021, she files her state income tax return for 2020, claiming a refund of $1,800. Norma receives the refund in August 2021. Norma has no other state or local tax expenses. If an amount is zero, enter "0". a. Assuming that Norma itemized deductions in 2020, how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2020 (filed in April 2021)? b. Assuming that Norma itemized deductions in 2020 (which totaled $20,000), how will the refund of $1,800 that she received in 2021 be treated for Federal income tax purposes? Norma will include $ as income in 2021 c. Assume that Norma itemized deductions in 2020 (which totaled $20,000) and that she elects to have the $1,800 refund applied toward her 2021 state income tax liability. How will the $1,800 be treated for Federal income tax purposes? Norma will include $ as income in 2021. d. Assuming that Norma did not itemize deductions in 2020, how will the refund of $1,800 received in 2021 be treated for Federal income tax purposes? Norma will include $ as income in 2021.

A. 9,100 ($1,000 + $7,400 + $700). B. $1,800 C. 1,800 D. $0 ($0 will be included as income in 2021 because she did not receive a tax benefit in 2020.) HW10

Classify each of the following cases as "Included in" or "Excluded from" gross income. A. Eloise received $150,000 in the settlement of a sex discrimination case against her former employer. Ba.. Nell received $10,000 for damages to her personal reputation. Bb. Nell also received $40,000 in punitive damages. Ca. Beth received $10,000 in compensatory damages in a lawsuit she filed against a tanning parlor for severe burns she received from using the parlor's tanning equipment. Cb. Beth also received $30,000 in punitive damages in the lawsuit against the tanning parlor. Da. Joanne received compensatory damages of $75,000 from a cosmetic surgeon who botched her nose job. Db. Joanne also received $300,000 in punitive damages from the cosmetic surgeon who botched her nose job.

A. Included In --> The settlement in the sex discrimination case did not arise out of physical personal injury or sickness. Therefore, the $150,000 is included in Eloise's gross income. Ba. Included In --> The damages to Nell's personal reputation are not for physical personal injury or sickness. Therefore, Nell must include the $10,000 in her gross income. Bb. Included In --> Punitive damages are amounts that the person who caused the harm must pay to the victim as punishment for outrageous conduct. The amounts received as punitive damages may actually place the victim in a better economic position than before the harm was experienced; therefore, they are included in gross income. Nell must also include the $40,000 punitive damages in her gross income. Ca. Excluded From --> Compensatory damages are intended to compensate the taxpayer for the damages incurred. Only those compensatory damages received on account of physical personal injury or physical sickness can be excluded from gross income. The compensatory damages of $10,000 for the physical personal injury are not included in Beth's gross income. Cb. Included In --> The punitive damages of $30,000 must be included in her gross income for the same reason as given for Nell above. Da. Excluded From --> Since the compensatory damages of $75,000 arose from a physical personal injury, they are excluded from Joanne's gross income. Db. Included In --> The punitive damages of $300,000 are included in Joanne's gross income for the same reason as given for Nell above. HW10j

CHARITABLE CONTRIBUTIONS James, a single taxpayer with an expected AGI of $350,000 in 2020, has promised the NAU Franke College of Business a $100,000 contribution this year. For each of the following possible property contributions below, determine the amount of the contribution deduction on James' return. Property description = Deductible Amount A. Rollo Co. stock acquired in 2001 (basis = $65,000; FMV = $100,000) = ? B. DotCom stock acquired in 2020 (basis = $50,000; FMV = $100,000) = ? C. DropCo stock acquired in 2015 (basis = $130,000; FMV = $100,000) = ? Which of the above properties would you recommend that James contribute? Explain your reasoning.

A. Rollo = $100,000; DotCom = $50,000; Drop co. = $100,000. Rollo is best, b/c of free step-up. EXAM PRACTICE

Bob provides more than half of his mother's support. His mother earns $6,000 per year as a hairdresser. She lives in an apartment across town. Bob is unmarried and has no children. What is Bob's most advantageous filing status? a.Single b.Head of household c.Qualifying single d.Supporting single

A. Single Bob can only file as single. Bob does not meet the criteria to file as head-of-household. The head-of-household filing status is available to unmarried taxpayers who maintain a household for more than half the year for an unmarried son or daughter (not required to be a dependent, but must live with the taxpayer), father or mother (must be a dependent but not required to live with the taxpayer), or other dependent relative (must live with the taxpayer). In this case, Bob's mother does not meet the criteria to be considered his dependent. Specifically, she fails the qualifying relative gross income test. CQ9

Pat generated self-employment income in 2020 of $76,000. The self-employment tax is: a.$5,369.23. b.$11,628.00. c.$0. d.$10,738.46.

d $10,738.46 [ ($76,000 × 92.35% × 15.3%)]. CQ11

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years. The account is now worth $376,000. How much of these funds can Frank withdraw tax-free A.$131,244 B.$376,000 C.$244,756 D.$0

B CQ11

EMPLOYEE BUSINESS EXPENSES Joe Bob took a business trip to Dallas. His expenses for the trip were as follows: Air fare $700 Lodging 600 Meals 300 Joe Bob received a $1,500 reimbursement from his employer for the cost of the trip. Explain how the reimbursement and expenses are treated on Joe Bob's return if the reimbursements is under (a) an accountable plan, and (b) a nonaccountable plan.

Accountable Plan: $0 impact on Gross Income - $1,500 reimbursement is offset by $1,500 deduction To AGI (net zero effect). Nonaccountable Plan: $1,500 increase in Gross Income. No deduction for the expenses. EXAM PRACTICE

Myers, who is single, reports compensation income of $72,000 in 2020. He is an active participant in his employer's qualified retirement plan. Myers contributes $6,000 to a traditional IRA. Of the $6,000 contribution, how much can Myers deduct?

Answer: $1,800. For 2020, the contribution ceiling is the smaller of $6,000 (or $12,000 for spousal IRAs) or 100 percent of compensation. The contribution ceiling applies to all types of IRAs (traditional deductible, traditional nondeductible, and Roth). An individual who attains the age of 50 by the end of the tax year can make additional catch-up IRA contributions of up to $1,000 in 2020. The maximum contribution limit is increased by $1,000 each year. The amount accumulated in an IRA can be substantial. If the taxpayer is an active participant in a qualified plan, the traditional IRA deduction limitation is phased out proportionately between certain AGI ranges. For a taxpayer filing single, the phaseout begins at $65,000 and the phaseout range is $10,000. If AGI is above the phaseout range, no IRA deduction is allowed. There is a $200 floor on the IRA deduction limitation for individuals whose AGI is not above the phaseout range. The deductible amount for Myers is reduced from $6,000 by $4,200 because of the phaseout. The reduction is computed as follows: ($72,000 - $65,000)/ $10,000 x $6,000 = $4,200. Therefore the deductible amount is limited to $1,800 ($6,000 - $4,200). HW11

Ashley (a single taxpayer) is the owner of ABC LLC. The LLC (a sole proprietorship) generates QBI of $900,000 and is not a "specified services" business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of qualified property held by ABC is $30,000. Ashley's taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ashley's QBI deduction for 2020?

Answer: $148,000. 1. 20% of qualified business income ($900,000 × 20%) $180,000 2. But no more than the greater of: • 50% of W-2 wages ($300,000 × 50%), or $150,000 • 25% of W-2 wages ($300,000 × 25%) plus $75,000 • 2.5% of the unadjusted basis of qualified property ($30,000 × 2.5%) 750 $75,750 And no more than: 3. 20% of modified taxable income ($740,000 × 20%) $148,000 HW11

Linda is an employee of JRH Corporation. Which of the following would be included in Linda's gross income? a.Premiums paid by JRH Corporation for a group term life insurance policy for $50,000 of coverage for Linda. b.$1,000 of tuition paid by JRH Corporation to State University for Linda's master's degree program. c.A $2,000 trip given to Linda by JRH Corporation for meeting sales goals. d.$1,200 paid by JRH Corporation for an annual parking pass for Linda.

Answers: $0; $0; $4,500; $0. a. $0. Section 105(b) generally excludes payments received for medical care of the employee, spouse, and dependents. The premiums are deductible by the employer and excluded from the employee's income. b. $0. The premiums for accident and health benefits, disability insurance, and long-term care plans are deductible by the employer and excluded from the employee's income. c. $4,500. Rex is required to include in gross income the $4,500 received from the wage continuation policy while he was ill. This amount is included in gross income only because the employer paid for the policy. d. $0. Qualified employer-provided educational assistance (tuition, fees, books, and supplies) at the undergraduate and graduate level is excludable from gross income. The exclusion is subject to an annual employee statutory ceiling of $5,250. HW11

Casper and Cecile divorced in 2018. As part of the divorce settlement, Casper transferred stock to Cecile. Casper purchased the stock for $25,000, and it had a market value of $43,000 on the date of the transfer. Cecile sold the stock for $40,000 a month after receiving it. In addition, Casper is required to pay Cecile $1,500 a month in alimony. He made five payments to her during the year. What are the tax consequences for Casper and Cecile regarding these transactions? a. How much gain or loss does Casper recognize on the transfer of the stock? b. Does Casper receive a deduction for the $7,500 alimony paid? c. How much income does Cecile have from the $7,500 alimony received? d. When Cecile sells the stock, how much gain or loss does she report? Cecile will report a (gain or loss) of $

Answers: $0; Yes; $7,500; gain; $15,000. For pre-2019 divorces, alimony and separate maintenance payments are deductible by the party making the payments and are includible in the gross income of the party receiving the payments. Thus, income is shifted from the income earner to the income beneficiary, who is better able to pay the tax on the amount received. A transfer of property other than cash to a former spouse under a divorce decree or agreement is not a taxable event. The transferor is not entitled to a deduction and does not recognize gain or loss on the transfer. The transferee does not recognize income and has a cost basis equal to the transferor's basis. Cecile must include the $7,500 of alimony received in her gross income, and Casper is allowed to deduct the $7,500 from his gross income. Furthermore, Casper is not required to recognize gain from the transfer of the stock to Cecile, and Cecile has a realized and recognized gain of $15,000 ($40,000 sales price - $25,000 carryover basis) when she sells the stock. HW10

In 2020, Simon, age 12, has interest income of $4,900 from funds he inherited from his grandmother and no earned income. He has no investment expenses. His parents have taxable income of $82,250 and file a joint return. Assume that no parental election is made. Simon's net unearned income is: Simon's allocable parental tax is: Simon's total tax is:

Answers: $2,700; $594; $704. Simon's net unearned income is $2,700, computed as follows: Unearned income: $4,900 Less: $1,100 Less: $1,100 of the standard deduction Equals: $2,700 The allocable parental tax is $594, computed as follows: Parent's taxable income: $82,250 Plus: Simon's net unearned income: $2,700 Revised taxable income: $84,950 Tax on revised parental income: $10,269 Less: Tax on the parental income: $9,675 Allocable parental tax: $594 Adjusted gross income: $4,900 Less: Standard deduction: $1,100 (limited) Equals: Taxable income: $3,800 Less: Net unearned income: $2,700 Nonparental source taxable income: $1,100 Tax on $1,100 is $110 ($1,100 × 10%). Simon's total tax is $704 ($594 + $110). Tax Computations: 1. $84,950 − $80,250 = $4,700. $4,700 × 22% = $1,034. $1,034 + $9,235 = $10,269. 2. $82,250 − $80,250 = $2,000. $2,000 × 22% = $440. $440 + $9,235 = $9,675. HW9

In 2020, Miranda records net earnings from self-employment of $158,500. She has no other gross income. Determine the amount of Miranda's self-employment tax and her for AGI income tax deduction. Miranda's self-employment tax is ________ and she has a _____________ deduction for AGI.

Answers: $21,320; $10,660. Individuals with net earnings of $400 or more from self-employment are subject to the self-employment tax. For 2020, the self-employment tax is 15.3 percent of self-employment income up to $137,700 and 2.9 percent of self-employment income in excess of $137,700. Currently, self-employed taxpayers are allowed a deduction from net earnings from self-employment, at one-half of the self-employment rate1 for purposes of determining self-employment tax and an income tax deduction (normally, one-half of the amount of self-employment tax paid). For income tax purposes, the amount to be reported is net earnings from self-employment before the deduction for the self-employment tax. Then the taxpayer is allowed a deduction for AGI of the appropriate amount of the self-employment tax. 1 The percent of net earnings used to compute the self-employment tax is 92.35% [1 - (.153 x 1/2)] = .9235, or 92.35%. Determining Miranda's self-employment tax involves several steps. 1.Net earnings from self-employment $158,500.002. Multiply by 92.35% $146,374.75 3.Excess amount over $137,700 $8,674.75 4.Multiply excess by 2.9% $251.57 5.Add amount from line 4 to $21,068.10* $21,319.67 Rounded to $21,320 *$21,068.10 = ($137,700 x 15.3%). In addition, Miranda is allowed a deduction for AGI of the appropriate amount of the self-employment tax. ($21,319.67 x 50% = $10,659.84). Rounded to $10,660. HW11

Taylor, age 18, is a dependent of her parents. For 2020, she has the following income: $4,000 of wages from a summer job, $1,800 of interest from a money market account, and $2,000 of interest from City of Chicago bonds. a. Determine the following: Taylor's standard deduction for 2020 is: Taylor's taxable income for 2020 is: b. Compute Taylor's "net unearned income" for the purpose of the kiddie tax: Compute Taylor's income tax. [Her parents file a joint return and have taxable income of $135,000 (no dividends or capital gains).]:

Answers: $4,350; $1,450. When filing his or her own tax return, a dependent's basic standard deduction in 2020 is limited to the greater of $1,100 or the sum of the individual's earned income for the year plus $350. However, if the sum of the individual's earned income plus $350 exceeds the normal standard deduction is limited to the normal standard deduction. Wages $4,000 Money market interest 1,800 Bond interest (City of Chicago bond interest is tax-exempt) 0 Gross income $5,800 Less: Standard deduction* (4,350) Taxable income $1,450 *A dependent's standard deduction is limited to the greater of $1,100 or the sum of his or her earned income plus $350. In this case it is $4,000 + $350 = $4,350. b. Answers: $0; $145. Money market interest $1,800 City of Chicago bond interest 0 Total unearned income $1,800 Minus: $1,100 + $1,100 standard deduction (2,200) Net unearned income $0 Income taxed at Taylor's rate $1,450 Total tax ($1,450 × 10%)* $145 *Since Taylor's unearned income is not more than $2,200, the "kiddie tax" does not apply and her tax is determined using the Single Tax Rate Schedule. HW9

Fred, a self-employed taxpayer, travels from Denver to Miami primarily on business. He spends five days conducting business and two days sightseeing. His expenses are $400 (airfare), $150 per day (meals), and $300 per night (lodging). Fred's deductible expenses are: Airfare: Lodging: Meals:

Answers: $400; $1,500; $375. HW11

Carri and Dane, ages 34 and 32, respectively, have been married for 11 years, and both are active participants in employer-qualified retirement plans. Their total AGI in 2020 is $199,000, and they earn salaries of $87,000 and $95,000, respectively. a. The amount each can contribute to a regular IRA. b. The amount each can deduct for regular IRA contributions. c. The amount each can contribute to a Roth IRA. d. The amount each can deduct for Roth IRA contributions.

Answers: $6,000; $0; $4,200; $0. a. $6,000. Carri and Dane both can contribute $6,000 ($12,000 combined) to their traditional IRA. b. $0. Neither Carri nor Dane can deduct their contributions to a traditional IRA because their AGI exceeds the phaseout ceiling of $124,000. c. $4,200. Carri and Dane both can contribute $4,200 ($8,400 combined) to a Roth IRA calculated as follows. $199,000 - $196,000 threshold = $3,000 excess AGI ($3,000 / 10,000)× $6,000 = $1,800 phaseout $6,000 ceiling - $1,800 phaseout = $4,200 (for each taxpayer) contribution ceiling d. $0. Unlike a traditional IRA, contributions to a Roth IRA are nondeductible. HW11

In June of this year, Dr. Spencer and his wife traveled to Denver to attend a three-day conference sponsored by the American Society of Implant Dentistry. Bret, a self-employed practicing oral surgeon, participated in scheduled technical sessions dealing with the latest developments in surgical procedures. On two days, Mrs. Spencer attended group meetings where various aspects of family tax planning were discussed. On the other day, she went sightseeing. Mrs. Spencer does not work for her husband, but she prepares their tax returns and manages the family investments. Expenses incurred in connection with the conference are summarized as follows. Airfare (two tickets) $2,000 Lodging (single and double occupancy are the same rate—$250 each day) 750 Meals ($200 x 3 days)* 600 Conference registration fee (includes $120 for Family Tax Planning sessions) 620 Car rental 300 *Split equally between Dr. and Mrs. Spencer. How much, if any, of these expenses can the Spencers deduct? Mrs. Spencer's activities _____________ constitute a trade or business. Therefore, she can deduct ______________ of her expenses. Bret's deductible expenses are: Airfare (one ticket) Lodging Meals Less: meals limitation Registration fee Car rental Total

Answers: do not; $0; $1,000; $750; $300; $150; $150; $500; $300; $2,700. If the business/pleasure trip is from one point in the United States to another point in the United States, the transportation expenses are deductible only if the trip is primarily for business. Meals, lodging, and other expenses are allocated between business and personal days. For travel expenses to be deductible when they are incurred while attending a convention, the convention must be directly related to the taxpayer's trade or business. The Code also places stringent restrictions on the deductibility of travel expenses of the taxpayer's spouse or dependent. Generally, the accompaniment by the spouse or dependent must serve a bona fide business purpose, and the expenses must be otherwise deductible. Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). The activities of Mrs. Spencer do not serve a bona fide business purpose. Although they may be very useful to her family, Mrs. Spencer's activities do not constitute a trade or business. Consequently, her expenses at the conference are not deductible. Airfare (one ticket) $1,000 Lodging 750 Meals ($100 x 3 days) $300 Less: 50% limitation (150) Registration fee ($620 - $120) 500 Car rental 300 Total 2700 HW11

Susie, John, Luke, and Will provide support for their 80-year-old mother, Joyce. Joyce lives by herself in an apartment in Miami, Florida. Joyce earned $5,000 this year working at her church. Joyce provides 5% of her own support. Susie provides 30% of Joyce's support, John provides 10% of Joyce's support, Luke provides 15% of Joyce's support, and Will provides 40% of Joyce's support. Under a multiple support agreement, who may claim Joyce as a dependent? a.Susie, Luke, John, and Will b.Susie, Luke, and Will c.Susie and Will d.Will

B Under a multiple support agreement, Susie, Luke, and Will are eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce's support. CH 9

In the current tax year, Blake Smith provided more than half of the support for his cousin, his niece, and a close family friend. Blake lives alone and sends a monthly support check to each person. None of the individuals whom Blake supports has any income or files a tax return. All three individuals are U.S. citizens. Which of the three people Blake supports can he claim as a dependent on his tax return? a.Cousin b.Niece c.Family friend d.None.

B. The niece meets the SUPORT test for qualifying relative status. The cousin and family friend do not meet the "R" (relative) or "T" (taxpayer lives with individual) tests. All three people whom Blake supports fail the residency test for a qualifying child. CQ9

Jake pays the following amounts to his former spouse during the current year: Regular alimony payments $12,000 Child support 10,000 Residence as part of a property settlement 115,000 What amount can Jake deduct as alimony for the current year? Assume the divorce occurred before 2019. a.$0 b.$12,000 c.$22,000 d.$137,000

B. Alimony paid on a divorce or separation agreement executed on or before 12/31/18 is deductible as a for AGI deduction. The regular alimony payments are deductible, but the child support is not. The residence was a property settlement and is not part of deductible alimony. CH 10

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2020, he files his state return for 2019, paying an additional $600 in state income taxes. During 2020, his withholdings for state income tax purposes amount to $3,550. On April 13, 2021, he files his state return for 2020 claiming a refund of $800. Brad receives the refund on June 3, 2021. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2020 (filed in April 2021)? a.$3,550 b.$4,150 c.$5,150 d.$3,350

B. Brad is a cash basis taxpayer. His deduction is limited to the amounts paid in 2020. The $800 refund is reported as income in 2021 under the tax benefit rule. Brad's state income tax deduction for 2020 is determined as follows: Paid April 14, 2020, for 2019 $600 Withholdings for 2020 + 3,550 Total deduction = $4,150 CQ10

Jeff and Rhonda are married and have two children, Max and Jen. Max is 20, attends college in the Los Angeles area full-time, and works as a stunt double for a television show while he is in school. Max earns $15,000 per year as a stunt double and lives at home when school is not in session. Jeff and Rhonda pay for Max's tuition and all of his living expenses. Jen, who lives at home, is 18 years old and makes $18,000 per year working full-time as an office administrator. Jeff and Rhonda pay for 65% of Jen's living expenses. In addition, Rhonda's mother, Joanne (a widow), resides with the family, earns $3,000 per year in interest and dividends from her investments, and receives $9,000 per year in Social Security benefits. Jeff and Rhonda receive no rent from Joanne and provide all the support she needs for the year. Everyone mentioned is a U.S. citizen. How many people qualify as dependents for Jeff and Rhonda's income tax return? a.Two b.Three c.Four d.Five

B. Jeff and Rhonda may claim a total of three (3) dependents on their joint income tax return. --> Max is a qualifying child. He is full-time student under the age of 24, lives at home when he is not away for temporary absence at school and is supported more than 50% by Jeff and Rhonda. The gross income test does not apply. Max is a dependent. --> Jen is also a qualifying child. While she is not a full-time student, she is still under the age of 19, lives at home, and is supported over 50% by her parents. The gross income test does not apply. Jen is a dependent. --> Joanne is a qualifying relative. She receives all of her support from Jeff and Rhonda, makes less than the gross income threshold amount in taxable income (her Social Security would not be taxable in these circumstances), does not file a joint return, and is a relative. Joanne is a dependent. CH 9

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: a.$120,000. b.$270,000. c.$0. d.$100,000.

B. None of the damages received were the result of a physical personal injury or sickness and therefore the total amount received must be included in gross income. Even if the damages were the result of physical personal injury, the punitive damages would be included in his gross income. CQ10

Which of the following is the overall limitation to the qualifying business income (QBI) deduction? a.Lesser of: 50 percent of combined QBI or 20 percent of the taxpayer's taxable income in excess of net capital gain b.Lesser of: combined QBI or 20 percent of the taxpayer's taxable income in excess of net capital gain c.Lesser of: 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 per-cent of the unadjusted basis of qualified property d.Taxable income limitations based on filing status

B. Once the QBI deduction is calculated based on the taxpayer's eligibility, the overall deduction is limited to the lesser of combined QBI or 20% of the taxpayer's taxable income in excess of net capital gain. Ch 11

Paul, a calendar year single taxpayer, has the following information for 2020: AGI $175,000 State income taxes 13,500 State sales tax 3,000 Real estate taxes 18,900 Gambling losses (gambling gains were $12,000) 6,800 Paul's allowable itemized deductions for 2020 are: a.$42,200. b.$16,800. c.$39,200. d.$10,000.

B. State taxes are limited to $10,000. The itemized deductions allowed are $16,800 ($10,000 + $6,800). CQ10

Stephen is a graduate student at West University. He works part-time at the campus coffee shop earning $5,000 this year. Stephen also receives a $25,000 scholarship that pays for his tuition, fees, and books. What amount does Stephen include in his gross income? a.$25,000 b.$5,000 c.$30,000 d.$0

B. The $5,000 earnings from the part-time job is taxable because this is compensation. The $25,000 scholarship is not taxable. Scholarships used for tuition, fees, and books are not included in gross income. CH 11

What is the basic deduction calculation for the qualifying business income deduction? a.30% × Qualifying business income (QBI) b.20% × W-2 wages c.20% × Qualifying business income (QBI) d.30% × W-2 wages

C. 20% × Qualifying business income (QBI). The basic calculation for the QBI deduction is 20% × QBI. The deduction is subject to limitations. Ch 11

Jane is 20 years old and is a sophomore at Lake University. She is a full-time student and does not have any gross income. Jane spends the holidays and summers at home with her parents. Her total support for the current tax year is $30,000, including a scholarship for $5,000 to cover her tuition. Jane used $12,000 of her savings, and her grandparents provided $13,000. Which of the following statements regarding the dependency rules for Jane is true? a.If Jane's parents (rather than her grandparents) provided the $13,000, then they would not be able to claim Jane as a dependent because Jane provided more than half of her own support. b.Jane's grandparents can claim her as a dependent because Jane did not provide more than half of her own support. c.Jane's grandparents cannot claim her as a dependent because Jane provided more than half of her own support. d.Jane does not qualify as a dependent for either her parents or grandparents.

C. Jane does not qualify as a dependent for her grandparents as a qualifying child or relative. With respect to her grandparents, Jane's scholarship is treated as support and thus Jane provides more than half of her own support ($12,000 savings + $5,000 scholarship = $17,000; $17,000 ÷ $30,000 = 0.57 = 57%). Jane does qualify as a dependent of her parents because she is under 24, a full-time student, and the scholarship does not count as support with respect to her parents. She also meets all other tests of qualifying child for her parents. CH 9

In the current year, Wells paid the following expenses: Premiums on an insurance policy against loss of earnings dueto sickness or accident $3,000 Physical therapy after spinal surgery 2,000 Premium on an insurance policy that covers reimbursement forthe cost of prescription drugs 500 In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells's current-year income tax return for medical expenses? a.$4,000 b.$3,500 c.$1,000 d.$500

C. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 − $1,500 = $1,000). CH 10

Heather is single and has one son, Rhett, who is 19 years old. Rhett lived at home for four months of the current tax year before moving away to take a full-time job in another city. Heather provided more than half of Rhett's support for the taxable year. Rhett earned $20,000 in gross income and is unmarried. Which of the following statements regarding the dependency rules for Rhett is true? a.Heather may claim Rhett as a dependent because he is a qualifying child. b.Heather may claim Rhett as a dependent because he is a qualifying relative. c.Rhett fails the age limit test for a qualifying child. d.Rhett must live with Heather for the entire year to meet the qualifying relative test.

C. Rhett fails both the age limit and residency test for qualifying child status. CH 9

Katherine and Bill Grant have two children. Kelly is 22 years old and is a full-time student. She lives on campus at an out-of-state university but will return home for the summer. Kelly earns $5,000 a year working part-time. Her parents provide her with $15,000 of support, and her grandparents provide her with $15,000 of support. Jake is 15 years old and lives at home. He is fully supported by his parents. Jake's friend Luke also lives with the Grants. Luke is 15 years old and moved into the Grant home in April. The Grants pay all of Luke's support. How many total dependents may Katherine and Bill Grant claim for the current year? a.One b.Three c.Two d.Zero

C. The Grants have two dependents. Kelly is considered a qualifying child. Kelly meets the relationship test and age test. Her time away at college is counted as home for the residence test. Kelly does not provide more than half of her own support. Jake is considered a qualifying child and meets all tests. Luke fails the qualifying child test (he is not a relative). He does not meet the qualifying relative test because he did not live with the Grants for the entire year. CH 9

Which of the following credits is considered "refundable"? a.Child and dependent care credit b.Retirement plan contribution credit c.Child tax credit d.Credit for elderly

C. The child tax credit is the only one of the above credits that is considered "refundable," which means that the credit can reduce tax below zero and result in a refund. CH 10

Jim spent four years earning his undergraduate degree at a local university. He began his first year of law school in January of the current year. Assuming he is under the phaseout limitation, what education tax credit is Jim eligible for in the current year? a.American Opportunity credit b.Earned income credit c.Lifetime learning credit d.Professional education and training credit

C. The lifetime learning credit is available for the cost of tuition and fees for an unlimited number of years, whereas the American opportunity credit is available for the first four years of postsecondary education. CH 10

Under the terms of a divorce agreement entered into in 2017, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a 12-month period, Lanny can deduct from gross income (and Joyce must include in gross income): a.$30,000. b.$6,000. c.$24,000. d.$0

C. $24,000 The $500 per month for child support is not deductible by Lanny CQ10

In which of the following plans is this statement true: A deduction is allowed for contributions to the plan, and no income tax consequences result from distributions to the participant at retirement. a.Roth IRAs. b.Keogh (H.R. 10) plans. c.Traditional IRAs. d.None of these choices are correct.

D A deduction is allowed for contributions to traditional IRAs and Keogh (H.R. 10) plans but not to Roth IRAs. Distributions are free of income tax in the case of Roth IRAs but not for traditional IRAs and Keogh (H.R. 10) plans. Thus, the combination of a deduction and tax-free distributions does not exist ("None of these choices are correct.). CQ11

Calculate the taxpayer's 2020 qualifying business income deduction for a qualified trade or business: Filing status: Single Taxable income: $180,000 Net capital gains: $0 Qualified business income (QBI): $80,000 W-2 wages: $20,000 a.$16,000 b.$10,000 c.$2,700 d.$13,996

D. $180,000 taxable income − $163,300 threshold for 2020 = $16,700/$50,000 = 0.334 of phaseout applies. QBI $80,000 × 20% = $16,000 W-2 limit: $20,000 × 50% = $10,000 $16,000 − $10,000 = $6,000 complete phaseout amount 0.334 × $6,000 = $2,004 applicable phaseout THEREFORE: QBI $80,000 × 20% = $16,000 full QBI deduction $16,000 − $2,004 applicable phaseout = $13,996 QBI deduction CH 11

Calculate the taxpayer's qualifying business income deduction for a qualified trade or business: Filing status: Single Taxable income: $100,000 Net capital gains: $0 Qualified business income (QBI): $30,000 W-2 wages: $10,000 a.$5,000 b.$70,000 c.$20,000 d.$6,000

D. $30,000 QBI × 20% = $6,000. W-2 wage and property limits do not apply to qualified trades or businesses with income below the taxable income threshold (2020 threshold for single taxpayers = $163,300). CH 11

Where is the deduction for qualifying business income (QBI) applied in the individual tax formula? a.As an adjustment to arrive at adjusted gross income b.As an itemized deduction c.As an alternative to the standard deduction d.As a deduction from adjusted gross income separate from the standard deduction and itemized deductions

D. As a deduction from adjusted gross income separate from the standard deduction and itemized deductions. The QBI deduction is taken from adjusted gross income ("below the line"). It is not part of the itemized deductions. CH 11

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: a.Meals and lodging. b.Tuition only. c.Tuition, books, supplies, meals, and lodging. d.Tuition, books, and supplies.

D. CQ10

Bill and Jane Jones were divorced on January 1, 2018. They have no children. In accordance with the divorce decree, Bill transferred the title of their house over to Jane. The home had a fair market value of $250,000 and was subject to a $100,000 mortgage. Under the divorce agreement, Bill is to make $1,000 monthly mortgage payments on the home for the remainder of the mortgage. In the current year, Bill made 12 mortgage payments. What amount is taxable to Jane in the current year? a.$12,000 b.$250,000 c.$100,000 d.$0

D. If a divorce settlement provides for a property settlement by a spouse, the spouse gets no deduction for payments made and the payments are not includable in gross income of the spouse receiving the payment. CH 10

Jonathan Jones is a 19-year-old full-time college student at the local community college. He lives in an apartment near campus during the school year and returns home for the summer break and holidays. Jonathan earned $5,000 this year working at the campus bookstore. His parents gave him $20,000 and his grandparents gave him $10,000 this year in support. Which of the following statements is true? a.Jonathan does not qualify as a dependent for his parents because his gross income is too high. b.Jonathan does not meet the residency test for qualifying child. c.Jonathan's grandparents can claim him as a dependent. d.Jonathan's parents can claim him as a dependent.

D. Jonathan is a qualifying child of his parents. He meets all requirements CH 9

Bill and Anne Chambers are married and file a joint return. They have no children. Their college friend Ryan lived with them for the entire current tax year. Ryan is 40 years old and earned $2,000 at a part-time job and received $25,000 in municipal bond interest. Ryan is a citizen of the United States and is unmarried. Which of the following statements is true regarding claiming Ryan as a dependent on the Chamberses' tax return? a.If Ryan earns $15,000 in self-employment income in addition to the part-time job and municipal bond interest, he will qualify as a dependent on the Chamberses' tax return. b.Ryan qualifies as a dependent for the Chamberses under the qualifying child rules. c.As long as Ryan does not provide more than half of his own support, he qualifies as a dependent for the Chamberses under the qualifying relative rules because he lived with them for the entire year. d.As long as the Chamberses provide more than half of Ryan's support, he qualifies as a dependent for the Chamberses under the qualifying relative rules.

D. Ryan meets the SUPORT tests for a qualifying relative if the Chambers provide more than half of Ryan's support. Ryanʼs taxable income ($2,000) is under the gross income threshold amount. He doesn't file a joint return. He is a citizen of the United States and he lives with the Chambers for the entire year. CH 9

Early in the year, Marlon was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marlon paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marlon must include in gross income for the current year? a.$10,000. b.$15,000. c.$25,000. d.$0.

D. The medical expenses of $10,000 that were reimbursed by Marlon's medical insurance policy can be excluded from gross income. The $15,000 Marlon received for the physical personal injury damage settlement can be excluded from gross income even though the payment replaces his salary. CQ10

It is 2020. Bob and Nancy are married and file a joint return. They are both under age 50 and employed, with wages of $50,000 each. Their total AGI is $110,000. Neither of them is an active participant in a qualified plan. What is the maximum traditional IRA deduction they can take for the current year? a.$0 b.$6,000 c.$8,400 d.$12,000

D. They may each deduct the maximum amount of $6,000, which is a total of $12,000. Because Bob and Nancy are not active participants in another qualified plan, their deductible contribution is not phased out. CH 11

During 2020, Enrique had the following transactions: Salary $70,000 Interest income on Xerox bonds 2,000 Inheritance from uncle 40,000 Contribution to traditional IRA 5,500 Capital losses 2,500 Enrique's AGI is: a.$102,000. b.$62,000. c.$67,000. d.$64,000.

D. $64,000 $64,000 [$70,000 (salary) + $2,000 (interest) - $5,500 (IRA contribution) - $2,500 (capital losses)]. The inheritance is a nontaxable exclusion. The capital losses are deductible. CQ9

(T/F): For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

False $1,000 of tax-exempt income is equivalent to $1,538 [($1,000)/(1.00 - 0.35)] of income that is subject to taxation. Income before tax of $1,538 yields $1,000 [$1,538 × (1.00 - 0.35)] of after-tax income. CQ11

T/F: For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

False A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse. CQ10

T/F: George and Erin divorced in 2021, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

False Because the divorce occurred after 2018, the payor gets no deduction and the payment is not taxable to the recipient. CQ10

T/F: The tax benefits resulting from tax credits and tax deductions are both affected by the tax rate bracket of the taxpayer.

False CQ9

T/F: Benjamin, age 16, is claimed as a dependent by his parents. During 2020, he earned $850 at a car wash. Benjamin's standard deduction is $1,450 ($1,100 + $350).

False His standard deduction is the greater of $1,100 or $1,200 [$850 (earned income) + $350]. CQ9

T/F: Roy and Linda divorced in 2019. The divorce decree awards custody of their children (all under age 17) to Linda but is silent as to who is entitled to treat them as dependents for purposes of claiming the child tax credit. If Roy furnished more than half of their support, he can claim the child tax credit for them in 2020.

False Not unless Linda consents. CQ9

T/F: Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity. He acquired the stock 20 months ago for $7,000. He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).

False Ronaldo's deduction is $12,000, the FMV of the property. Capital gain property contributions usually are measured by FMV, not basis. CQ10

(T/F): Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation.

False The deduction is 20% (not 25%). CQ11

(T/F): Meg's employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. The premiums for Meg's coverage were $1,800. Meg was absent from work for two months as a result of a kidney infection. Her employer's insurance company paid Meg's regular salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had purchased. Meg must include $11,800 in her gross income.

False The insurance premiums of $1,800 paid by the employer and the $2,000 Meg collected on the wage continuation policy she purchased are excluded from gross income. The sick pay benefits received of $8,000 must be included in Meg's gross income. CQ11

T/F: Debby, age 18, is claimed as a dependent by her mother. During 2020, Debby earned $1,200 in interest income on a savings account. Her standard deduction is $1,550 ($1,200 + $350).

False The interest income is unearned income. Debby's standard deduction is $1,100 the greater of $1,100 or $350 (earned income plus $350). CQ9

T/F: Once a child reaches age 19, the kiddie tax no longer applies.

False The kiddie tax applies if the child is a full-time student under age 24. CQ9

T/F: For all of the current year, Randy (a calendar year taxpayer) allowed the Salvation Army to use rent-free a building he owns. The building normally rents for $24,000 a year. Randy will be allowed a charitable contribution deduction this year of $24,000.

False The rent-free use of building space is not deductible as a charitable contribution. CQ10

T/F: Butch and Minerva divorced in December 2020. Since they were married for more than one-half of the year, they are considered as married for 2020.

False They must be married on the last day of the year (unless one spouse dies) to be considered married. CQ9

(T/F): Ethan, a bachelor with no immediate family, uses Pine Shadows Country Club exclusively for his business entertaining. All of Ethan's annual dues for his club membership are deductible.

False CQ11

(T/f): A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible.

False CQ11

(T/F): Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home.

False The absence must be a period substantially longer than an ordinary day's work and must require rest. CQ11

A. Standard Deductions So, a married couple (ages 66 and 64) who file jointly receive a standard deduction of -

Regular + Additional (65) = Total 24,800 + 1,300 = $26,100 → next year they will each get $13,000 (total 26,000)

a. Drew and Meg, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AGI of $125,000 and itemized deductions of $27,000. AGI = 125,000 Less: ___________ deductions: Taxable income: b. Sybil, age 40, is single and supports her dependent parents, who live with her, as well as her grandfather, who is in a nursing home. She has AGI of $80,000 and itemized deductions of $8,000. AGI = 80,000 Less: ___________ deductions: Taxable income: c. Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of $75,000 and itemized deductions of $10,100. AGI = 75,000 Less: ___________ deductions: Taxable income: d. Amelia, age 33, is an abandoned spouse who maintains a household for her three dependent children. She has AGI of $58,000 and itemized deductions of $10,650. AGI = 58,000 Less: ___________ deductions: Taxable income: e. Dale, age 42, is divorced but maintains the home in which he and his daughter, Jill, live. Jill is single and qualifies as Dale's dependent. Dale has AGI of $64,000 and itemized deductions of $9,900. AGI = 64,000 Less: ___________ deductions: Taxable income:

To determine whether to itemize, the taxpayer compares the total standard deduction (the sum of the basic standard deduction and any additional standard deductions) with total itemized deductions. Taxpayers are allowed to deduct the greater of itemized deductions or the standard deduction. The choice is elective each year. a. itemized deductions; $27,000; $98,000 b. standard deduction; $18,650; $61,350 c. standard deduction; $24,800; $50,200 d. standard deduction; $18,650; $39,350 e. standard deduction; $18,650; $45,350 a. Drew and Meg, ages 40 and 41, respectively, are married and file a joint return. In addition to four dependent children, they have AGI of $125,000 and itemized deductions of $27,000. b. Sybil, age 40, is single and supports her dependent parents, who live with her, as well as her grandfather, who is in a nursing home. She has AGI of $80,000 and itemized deductions of $8,000. c. Scott, age 49, is a surviving spouse. His household includes two unmarried stepsons who qualify as his dependents. He has AGI of $75,000 and itemized deductions of $10,100. d. Amelia, age 33, is an abandoned spouse who maintains a household for her three dependent children. She has AGI of $58,000 and itemized deductions of $10,650. e. Dale, age 42, is divorced but maintains the home in which he and his daughter, Jill, live. Jill is single and qualifies as Dale's dependent. Dale has AGI of $64,000 and itemized deductions of $9,900. HW9

T/F: Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

True CQ10

T/F: The child tax credit is based on the number of the taxpayer's qualifying children under age 17.

True CQ10

T/F: Darren, age 20 and not disabled, earns $4,500 during 2020. Darren's parents cannot claim him as a dependent unless he is a full-time student.

True CQ9

T/F: In 2020, a child who has unearned income of $2,200 or less cannot be subject to the kiddie tax.

True CQ9

T/F: Jason and Peg are married and file a joint return. Both are over 65 years of age and Jason is blind. Their standard deduction for 2020 is $28,700 ($24,800 + $1,300 + $1,300 + $1,300).

True CQ9

(T/F): When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from the IRA upon retirement are fully taxed.

True Contributions are deductible and distributions are taxable. CQ11

T/F: Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2020 as a model. Katelyn does not qualify for head of household filing status.

True Crissa is not Katelyn's dependent. She fails the age test for qualifying child purposes and the gross income test for the qualifying relative category. CQ9

T/F: Capital assets donated to a public charity that would result in long-term capital gain if sold are subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.

True However, a limited exception applies if the long-term capital gain property is tangible personalty that is put to an unrelated use by the charity. In this situation, the deduction is subject to the 50%-of-AGI limitation. CQ10

(T/F): Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.

True In the case of a traditional IRA, however, the income will be taxed when distributed to the participant. CQ11

(T/F): A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby-related expenses.

True Income from a hobby activity is included in income. Hobby-related expenses are miscellaneous itemized deductions (subject to the 2%-of-AGI floor) and not deductible from 2018 through 2025. CQ11

T/F: Phyllis, who is single, has itemized deductions totaling $20,000. She overpaid her 2019 state income tax and is entitled to a refund of $400 in 2020. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2020. She is required to recognize that amount as income in 2020.

True It does not matter for Federal income tax purposes whether the overpayment is refunded or applied toward the 2020 state income tax liability if the overpayment resulted in a tax benefit. CQ10

T/F: Lucas, age 17 and single, earns $6,000 during 2020. His parents cannot claim him as a dependent if he does not live with them.

True Lucas does not meet the definition of a qualifying child if the abode test is failed. He also fails the gross income test for a qualifying relative ($4,300 in 2020). CQ9

T/F: Ed is divorced and maintains a home in which he and a dependent friend live. Ed does not qualify for head of household filing status.

True To be head of household, the dependent involved must meet the relationship test. This is not the case with a friend. CQ9

(T/F): Qualified business income (QBI) is defined as the ordinary income less ordinary deductions a taxpayer earns from a qualified trade or business (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer.

True CQ11

(T/F): Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.

True CQ11

Indicate whether the following statements are "True" or "False" regarding the kiddie tax. a. Unearned income includes income such as taxable interest, dividends, capital gains, rents, royalties, pension and annuity income. b. The kiddie tax, applies to any child who is under age 19 (or under age 24 if a full-time student) and has unearned income of more than $1,100. c. The kiddie tax does not apply if both parents are deceased.

a. True b. False c.True. HW9

Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marion must include in gross income for the current year? a. $0. b. $15,000. c. $25,000. d. $10,000.

a. EXAM PRACTICE

Emily, whose husband died in December 2019, maintains a household in which her dependent mother lives. Which (if any) of the following is her filing status for the tax year 2020? a. Head of household b. Married, filing separately c. Surviving spouse d. Single e. Married, filing jointly

a. EXAM PRACTICE

For the current year 31, David, a married taxpayer filing a joint return, reported the following: Interest income from corporate bonds $24,000 Long-term capital gains on stock held for investment 25,000 Tax-exempt interest income 4,000 David had borrowed the funds to purchase investments producing the above income, and paid $70,000 of interest expense on the loan. Assuming David does not make the special election for the LTCG, what amount can David deduct this year as investment interest expense? a. $24,000 b. $49,000 c. $28,000 d.$70,000

a. EXAM PRACTICE

For the same amount of taxable income, which filing status will generally yield the lowest gross tax liability? a. Married filing jointly b. Single c. Head of Household d.Married filing separately

a. EXAM PRACTICE

Roger, age 19, is a full-time student at State College and is a dependent of his parents. During the year, he received the following payments: State scholarship for 10 months (tuition and books) $3,600 Loan from college financial aid office 1,500 Cash support from parents 3,000 Cash dividends 700 What is Roger's adjusted gross income for the year? a. $700 b. $2,200 c. $4,300 d.$9,300

a. EXAM PRACTICE

Which, if any, of the following is a deduction for AGI? a. Contributions to a traditional Individual Retirement Account. b. Child support payments. c. Funeral expenses. d. Loss on the sale of a personal residence. e. Medical expenses.

a. EXAM PRACTICE

Jim is a single taxpayer, over age 65. His AGI is $40,000 and itemized deductions of $13,000. What is his taxable income? a. $25,950 b. $25,350 c. $27,000 d.$27,080

a. Note the underlined part; don't forget the additional standard deductions. EXAM PRACTICE

Salary $80,000 Interest on bonds issued by the City of Boston 3,000 Interest on CD issued by Wells Fargo Bank 2,000 Cash dividend received on Chevron common stock 2,200 Life insurance proceeds paid on death of aunt (Aiden was the designated beneficiary of the policy) 200,000 Inheritance received upon death of aunt 100,000 Jackson (a cousin) repaid a loan Aiden made to him in 2010 (no interest was provided for) 5,000 Itemized deductions (state income tax, property taxes on residence, interest on home mortgage, and charitable contributions) 9,700 Number of dependents (children, ages 17 and 18, and mother-in-law, age 70) 3 Age 43 a. Indicate whether the items are taxable or not taxable to Aiden. 1. Cash dividend received on Chevron common stock 2. Salary 3. Interest on bonds issued by City of Boston 4. Life insurance proceeds 5. Interest on a CD issued by Wells Fargo Bank 6. Inheritance received upon the death of his aunt 7. Proceeds from repayment of a loan b. What is Aiden's filing status? c. Should Aiden itemize his deductions or take the standard deduction? d. Aiden's taxable income in 2020 is

a. 1. Taxable 2. Taxable 3. Not taxable 4. Not taxable 5. Taxable 6. Not taxable 7. Not taxable b. Head of household c. He should take the standard deduction. d. $65,550 Salary $80,000 Interest on CD 2,000 Dividend 2,200 AGI $84,200 Standard deduction (head of household) (18,650) Taxable income $65,550 HW9

Ten years ago, Liam, who is single, purchased a personal residence for $340,000 and took out a mortgage of $200,000 on the property. In May 2018, when the residence had a fair market value of $440,000 and Liam owed $140,000 on the mortgage, he took out a home equity loan for $220,000. He used the funds to purchase a fully-equipped recreational vehicle, which he uses 100% for personal use. a. Can Liam deduct all of the interest related to the original mortgage? (yes or no) b. Can Liam deduct any of the interest related to the home equity loan of $220,000? (yes or no) c. If the RV was the security for the loan, the maximum amount of debt on which Liam could deduct interest is $

a. Yes b. No c. $360,000 HW10

Determine the amount of the standard deduction allowed for 2020 in the following independent situations. In each case, assume that the taxpayer is the dependent of another taxpayer. a. Curtis, age 18, has income as follows: $700 interest from a certificate of deposit and $12,600 from repairing cars. b. Mattie, age 18, has income as follows: $600 cash dividends from a stock investment and $4,700 from handling a paper route. c. Jason, age 16, has income as follows: $675 interest on a bank savings account and $800 for painting a neighbor's fence. d. Ayla, age 15, has income as follows: $400 cash dividends from a stock investment and $500 from grooming pets. e. Sarah, age 67 and a widow, has income as follows: $500 from a bank savings account and $3,200 from babysitting.

a. $12,400 Although $12,600 (earned income) + $350 = $12,950, the amount allowed cannot exceed that available in 2020 for single taxpayers, which is $12,400. b. $5,050 $4,700 (earned income) + $350. c. $1,150 The greater of $1,100 or $1,150 ($800 earned income + $350.) d. $1,100 The greater of $1,100 or $500 (earned income) + $350. e. $5,200. $3,200 (earned income) + $350 + $1,650 (additional standard deduction). HW9

Meredith, who is single, would like to contribute $6,000 to her Roth IRA. Her AGI is $125,000. a. What is the maximum amount that Meredith can contribute? b. Assume that Meredith's AGI is $100,000. She plans to put $6,000 each year into her Roth IRA, hoping to earn 6% annually. What future value will accumulate in her Roth at the end of 20 years? The future value of an ordinary annuity at 6% for 20 years is 36.7856. c. In part (b), instead assume that Meredith puts the $6,000 into the Roth for 15 years at 6%. How much will accumulate at the end of this period? The future value of an ordinary annuity at 6% for 15 years is 23.2760.

a. $5,600. The maximum allowable annual contribution to a Roth IRA for 2020 is the smaller of $6,000 ($12,000 for spousal IRAs) or 100 percent of the individual's compensation for the year. Contributions to a Roth IRA must be made by the due date (excluding extensions) of the taxpayer's tax return. Roth IRAs are not subject to the minimum distribution rules that apply to traditional IRAs. Contributions to a Roth IRA (like a traditional IRA) may continue as long as the person generates compensation income and is not subject to the AGI limits. In 2020, the maximum annual contribution of $6,000 is phased out beginning at AGI of $124,000 for single taxpayers and $196,000 for married couples who file a joint return. The phaseout range is $10,000 for married filing jointly and $15,000 for single taxpayers. For a married taxpayer filing separately, the phaseout begins with AGI of $0 and is phased out over a $10,000 range. Therefore, Meredith can only contribute $5,600. Excess AGI = ($125,000 - $124,000) = $1,000. Percentage reduction: ($1,000/$15,000) = 0.0667 = 6.67% Reduction amount: $6,000 x 6.67% = $400 reduction. Contribution allowed: $6,000 - $400 = $5,600 contribution. b. $220,714. The taxpayer will have $220,714 ($6,000 x 36.7856). c. Answer: $139,656. The taxpayer will have $139,656 ($6,000 x 23.2760). HW11

During the year, John (a self-employed management consultant) went from Milwaukee to Hawaii on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are: Airfare $3,200 Lodging 900 Meals 800 Entertainment600 Presuming no reimbursement, deductible expenses are: a.$4,500. b.$5,500. c.$3,900. d.$3,200.

a. 4,500 $4,500 [$3,200 + $900 + $400 (50% x $800)]. No allocation is required for domestic transportation costs (i.e., the airfare) since the trip is primarily business related. CQ11

Rosa's employer has instituted a flexible benefits program. Rosa will use the plan to pay for her daughter's dental expenses and other medical expenses that are not covered by health insurance. Rosa is in the 24% marginal tax bracket and estimates that the medical and dental expenses not covered by health insurance will be within the range of $4,000 to $5,000. Her employer's plan permits her to set aside as much as $5,000 in the flexible benefits account. Rosa does not itemize her deductions. a. Rosa puts $4,000 in her flexible benefits account, and her actual expenses are $5,000. What is her cost of underestimating the expenses? b. Rosa puts $5,000 in her flexible benefits account, and her actual expenses are only $4,000. What is her cost of overestimating her expenses? (Assume this is a "use or lose" plan). c. What is Rosa's cost of underfunding as compared with the cost of overfunding the flexible benefits account? d. Does your answer in part (c) suggest that Rosa should fund the account closer to the low end or to the high end of her estimates?

a. Answer: $240. Under a flexible spending plan, the employee accepts lower cash compensation in return for the employer agreeing to pay certain costs that the employer can pay without the employee recognizing gross income. The employee estimates his or her medical expenses for the upcoming year and agrees to a salary reduction equal to the estimated expenses. The employer then pays or reimburses the employee for the expenses incurred, with a ceiling of the amount of the salary reduction. If the employee's actual expenses are less than the reduction in cash compensation, the employee cannot recover the difference. Hence, these plans are often referred to as "use or lose" plans. If Rosa underfunds the account by $1,000, the cost of the error is her marginal tax rate times the underfunded amount or $240 (24% × $1,000). b. Answer: $760. Per the discussion above, if Rosa overfunds the account by $1,000, the cost of the error is $760 [(1 - 0.24) × $1,000]. c. Answer: The underfunding error costs 32% of the cost of overfunding. The cost of underfunding is a 0.24 × error, and the cost of overfunding is a 0.76 (1 - 0.24) × error; that is, the underfunding error costs only 32% (0.24/0.76) of the cost of overfunding. d. Answer: Low end. Rosa should fund the flexible benefit account using an amount closer to the low end of the estimate rather than to the high end. HW11

Indicate whether the following items are "Included in" or "Excluded from" gross income. a. Alimony payments received from a divorce settlement in 2016. b. Damages award received by the taxpayer for personal physical injury—none were for punitive damages. c. A new golf cart won in a church raffle. d. Amount collected on a loan previously made to a college friend. e. Insurance proceeds paid to the taxpayer on the death of her uncle—she was the designated beneficiary under the policy. f. Interest income on City of Chicago bonds. g. Jury duty fees. h. Stolen funds the taxpayer had collected for a local food bank drive. i. Reward paid by the IRS for information provided that led to the conviction of the taxpayer's former employer for tax evasion. j. An envelope containing $8,000 found (and unclaimed) by the taxpayer in a bus station.

a. Included in b. Excluded from c. Included in d. Excluded from e. Excluded from f. Excluded from g. Included in h. Included in i. Included in j. Included in. HW9

Indicate the most advantageous filing status for the following taxpayers. Select "Single", "Married, filing jointly", "Head of household", "Married, filing separately" or "Surviving spouse", whichever is applicable. a. Alfred is single and fully supports his friend who lives in another state. b. Tedra has two dependent children. Her husband Fred died during the year. c. James is single and supports his grandmother who lives with him. d. Archie has one dependent child. His wife died two years ago.

a. Single. A taxpayer who is unmarried or separated from his or her spouse by a decree of divorce or separate maintenance and does not qualify for another filing status must use the rates for single taxpayers. To qualify for head-of-household rates, a taxpayer must pay more than half the cost of maintaining a household as his or her home. The household must also be the principal home of a dependent. A dependent must be either a qualifying child or a qualifying relative who meets the relationship test (other than a member-of-the-household test). Alfred does not qualify for head of household unless his friend lives with him and is a qualified dependent. b. Married, filing jointly. Marital status is determined as of the last day of the tax year, except when a spouse dies during the year. In that case, marital status is determined as of the date of death. Therefore, for the year of death, the surviving spouse is treated as being married. Thus, a joint return can be filed if the deceased spouse's executor agrees. c. Head of household. Unmarried individuals who maintain a household for a dependent (or dependents) are generally entitled to use the head-of-household rates. To qualify for head-of-household rates, a taxpayer must pay more than half the cost of maintaining a household as his or her home. The household must also be the principal home of a dependent. A dependent must be either a qualifying child or a qualifying relative who meets the relationship test (other than a member-of-the-household test). d. Surviving spouse. The joint return rates also apply for two years following the death of one spouse if the surviving spouse maintains a household for a dependent child. The child must be a son, stepson, daughter, or stepdaughter who qualifies as a dependent of the taxpayer. This is referred to as surviving spouse status. HW9

Bryan and Beth, a married couple (both under 65) who file a joint tax return and have adjusted gross income of $50,000, incurred the following expenses for themselves and their three dependent children for medical and dental services during the year: 1. Cost of routine dental services, $300. 2. Prescription drugs, $1,000. 3. Nonprescription medications and vitamins, $200. 4. Annual fee for family health club, $500. 5. Contact lenses, $200. 6. Medical insurance premiums paid by Bryan, $2,400. 7. Doctor and hospital costs not compensated for by insurance, $1,500. 8. Shaun T's workout videos, $100. 9. Organically grown fruits and vegetables from the local health food store, $200 What is the net medical expense deduction that Bryan and Beth may claim on their current year's tax return? a. $5,400 b. $1,650 c. $400 d.$-0-

b. 1, 2, 5, 6, 7 qualify; apply the hurdle. EXAM PRACTICE

A scholarship recipient may exclude from gross income the scholarship proceeds received for: a. tuition, housing, and meals. b. tuition, books, and supplies. c. meals, but not housing, d. meals and housing, but not supplies.

b. EXAM PRACTICE

During the current year, Mrs. A operated a business from her personal residence. She used 20% of her residence exclusively for business purposes. It was her principal place of business. The income and expenses attributable to the business portion of her residence were as follows: Gross income $4,000 Supplies expense 2,000 20% of interest on residence 600 20% of taxes on residence 800 20% of maintenance, insurance, and utilities on residence 400 Allowable depreciation on residence 1,200 Mrs. A's current-year return should reflect: a. A net loss from business of $1,000. b. No profit or loss from business and a $1,000 expense carryover to the next year. c. A net profit from business of $2,000. d.No profit or loss from business and no carryover to the next year.

b. EXAM PRACTICE

Ernie's employer pays 100% of the cost of all employees' group-term life insurance under a nondiscriminatory plan. What is the maximum amount of coverage that may be provided tax-free by his employer under this plan? a. $5,000 b. $50,000 c. $100,000 d.There is no limit.

b. EXAM PRACTICE

George Ball, a salaried taxpayer, paid the following taxes which were not incurred in connection with a trade or business during the year: Federal income tax (withheld by employer) $250 State income tax (withheld by employer) 900 FICA tax (withheld by employer) 700 State sales taxes 300 Property tax on principal residence 2,000 Property tax on vacation home 800 What total taxes are allowable itemized deductions for taxes? a. $3,100 b. $3,700 c. $1,250 d. $4,000

b. EXAM PRACTICE

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees. Which of the following is correct? a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500. b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200. c. Heather reduced her salary by $1,200, and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800. d. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300.

b. EXAM PRACTICE

Ms. Oak was divorced on January 1 of the current year. She had an unmarried son living in her home for the entire year. It cost $3,000 to maintain Ms. Oak's home for the year, of which she contributed $2,000 and Joe Oak, her ex-husband, contributed $1,000 through support payments. Joe Oak, however, provides more than half of the son's total support and claims him as his dependent, as Ms. Oak signed a waiver. Which is the most advantageous filing status for which Mrs. Oak can qualify? a. Married filing joint return. b. Head of household. c. Married filing separately. d.Single.

b. EXAM PRACTICE

Dana, age 31 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $128,000. The phase-out range for Roth IRAs is $124,000 - $139,000. What amount, if any, may Dana contribute to a Roth IRA in 2020? a. $0. b. $4,400. c. $1,600. d. $6,000.

b. apply the hurdles for medical & miscellaneous. EXAM PRACTICE

During the year, Al made the following contributions to his church: Cash $20,000 Stock in Wren Corporation (FMV) 60,000 The stock in Wren was acquired as an investment three years ago at a cost of $32,000. Al's AGI is $140,000. Assuming no special election is made, what is Al's charitable contribution deduction? a. $70,000 b. $80,000 c. $62,000 d. $52,000

c. Be sure to apply the 30% & 50% limits correctly. EXAM PRACTICE

Darron died in 2017. His wife, Samantha, did not remarry, continued to maintain a home for herself and her dependent four-year old daughter, and provided full support for herself and her child for all years in question. Determine Samantha's filing status for 2017, 2018, and 2020 (note that I skipped 2019). 2017 : 2018 : 2020 a. Married, joint : Head of Household : Head of Household b. Surviving spouse : Surviving spouse : Head of Household c. Married, joint : Surviving spouse : Head of Household d.Surviving spouse : Surviving spouse : Surviving spouse

c. EXAM PRACTICE

Mr. T has been a night watchman at Y company for 10 years. During he current year, he received the following payments from Y Company: Salary $15,000 Hospitalization insurance premiums 3,600 Required lodging on Y's premises for Y's convenience to T's employment 2,400 Reward for preventing a break-in 1,000 Reimbursed community college tuition under a plan available to all employees 200 What amount is includible in Mr. T's gross income in the current year? a. $17,400 b. $16,200 c. $16,000 d. $15,000

c. EXAM PRACTICE

The ceiling amounts and percentages for 2018 for the two portions of the self-employment tax are: Social Security portion : Medicare portion a. $137,700; 12.4% : $137,700; 2.9% b. $137,700; 15.3% : Unlimited; 2.9% c. $137,700; 12.4% : Unlimited; 2.9% d. Unlimited; 15.3% : $137,700; 2.9%

c. EXAM PRACTICE

The self-employment tax is a. fully deductible as an itemized deduction. b. fully deductible in determining net income from self-employment. c. one-half deductible from gross income in arriving at AGI. d. not deductible.

c. EXAM PRACTICE

Jack borrowed $120,000 on a home equity loan during the year. He spent $50,000 of the loan to remodel his home and install a swimming pool and $70,000 for a Corvette (canary yellow, in case you're interested). The interest on what amount of the loan is treated as qualified (deductible) residence interest? a. $0 b. $120,000 c. $100,000 d.$50,000

d. $50k qualifies as acquisition debt; $70k qualifies as home equity. EXAM PRACTICE

During the year, Molly paid the following interest charges: Home mortgage $4,200 On loan to purchase new car 800 On loan to purchase City of New Orleans general purpose bonds (wholly tax-exempt) 1,300 If Molly itemizes her deductions, the amount deductible as interest expense is: a. $6,300 b. $5,500 c. $5,000 d. $4,200

d. EXAM PRACTICE

Gary and Gladys invest in bonds. In the current year, they received the following interest: California general revenue bonds $800 New York City sanitation fund bonds 1,000 Seattle School District bonds 400 AT&T 20-year bonds 600 The state and local bonds are not private activity bonds. How much interest income may Gary and Gladys exclude from gross income on their joint return? a. $0 b. $800 c. $1,800 d. $2,200

d. EXAM PRACTICE

James and Edna Smith are a childless married couple who lived apart for all of the current year. On December 26, they were legally divorced. Which of the following is the only filing status choice available to them for the current year? a. Married filing joint return. b. Married filing separate return. c. Head of household. d.Single.

d. EXAM PRACTICE

Mark established an IRA at age 40 and made qualifying contributions of $2,000 per year to the account for 25 years. At his retirement, the balance in the IRA is $100,000. If Mark withdraws $10,000 from his IRA, what is the amount of the distribution that is included in Mark's gross income if the IRA is (1) a traditional IRA and (2) a Roth IRA? Traditional : Roth a. $0 : $0 b. $10,000 : $5,000 c. $0 : $10,000 d. $10,000 : $0

d. EXAM PRACTICE

Sally, a single, full-time college student, had over one-half of her support provided by her parents who claimed Sally as their dependent. For the year, Sally earned $1,500 from a summer job, $100 in dividends from stock of a domestic corporation she inherited from her grandmother, and $3,000 in interest from a savings account funded by her parents and transferred to Sally several years ago. What is Sally's taxable income for the year? a. $3,500 b. $(7,600) c. $ 600 d. $ 2,750

d. EXAM PRACTICE

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. I. Group medical and hospitalization insurance for the employee, $3,600 a year. II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year. III. Child-care payments, actual cost but not more than $4,800 a year. IV. Cash required to bring the total of benefits and cash to $8,000. Which of the following statements is true? a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000. b. Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is required to include the $8,000 in income. c. Sue, a full-time employee, elects to receive choices I, II, and $3,200 for III. Sue is not required to include any of the above in gross income. d.All of the above are true.

d. EXAM PRACTICE

Which of the following best describes the tax treatment of charitable contributions that are made in excess of the maximum amount that the taxpayer is allowed to deduct in a given year? a. Any excess amount is lost as a deduction. b. Any excess amount may be carried back for 2 years and forward for 20 years. c. Any excess amount may be carried forward indefinitely. d.Any excess amount may be carried forward for 5 years.

d. EXAM PRACTICE

Which of the following is NOT a benefit of qualified retirement plans? a. Employee taxes on investment earnings are deferred until retirement years. b. Employees defer income recognition until their retirement years. c. Employers can deduct contributions to qualified plans as they are made. d.Any employer contributions to the plan are never taxed to the employee.

d. EXAM PRACTICE

DR. BOB QUESTION? Tim and Janet were divorced in 2018. Their only marital property was a personal residence with a value of $120,000 and cost of $50,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement did not contain the word "alimony." a. Tim must recognize a $35,000 [$60,000 - 1/2($50,000)] gain on the sale of his interest in the house. b. Tim does not recognize any income from the above transactions. c. Janet is not allowed any alimony deductions. d. Janet is allowed to deduct $15,000 each year for alimony paid.

d. Payments do not meet the definition of tax alimony (note the death issue.) EXAM PRACTICE

Residence Test: A qualifying child must live with the taxpayer for ________________. For this purpose, temporary absences are __________ . Age Test: A qualifying child must be under age _______ or under age ____________ in the case of a full-time student. An individual ________ be older than the taxpayer claiming him or her as a qualifying child. Support Test: To be a qualifying child, the individual must not provide more than one-half of his or her own support. In the case of a child who is a full-time student, scholarships are not considered to be support.

more than half of the; disregarded; 19; 24; cannot; one-half; are not. HW9