Adjustnment to the Income

Which of the following is not treated as compensation for purposes of figuring an IRA contribution deduction? Self-employment income Bonuses Tips Pension income

Pension income Publication 590-A, page 6, provides that compensation includes wages, salaries, tips, professional fees, bonuses, and self-employment income. Publication 590-A, page 7, provides that compensation does not include items such as pensions and annuity income and earnings and profits from property, such as rental income, interest income, and dividend income. Publication 590-A, pages 6-7

Which of the following statements is correct concerning contributions to a Roth IRA (individual retirement account) in 2022? Roth IRA contributions are deductible as adjustments to AGI. The maximum Roth IRA contribution is $6,000 if you are not yet 50. Roth IRA contributions may be deducted if they fall below certain income limits. None of the answer choices are correct.

The maximum Roth IRA contribution is $6,000 if you are not yet 50. A taxpayer is not permitted to claim a deduction for any contributions that are made to a Roth IRA. For 2022, the maximum contribution to a Roth IRA for a taxpayer under age 50 (did not celebrate his or her 50th birthday in 2022) is $6,000 or their taxable compensation ($7,000 if 50 or older). Publication 17, page 86

What is the maximum allowable deduction for contributions to a Roth IRA, if neither you nor your spouse was covered for any part of the year by an employer retirement plan in 2022, had a modified AGI of $80,000 from their employers, and both of you are under 50 years of age? $10,000 $11,000 $13,000 $0

0 The general rule as given in Publication 590-A, page 39, is that the maximum annual contribution to a person's Roth IRA for 2022 is the smaller of $6,000 ($7,000 if you are 50 or older) or the person's taxable compensation for the year. However, the Roth IRA contribution may be reduced or eliminated entirely depending on the taxpayer's filing status and modified AGI. If the taxpayer has a filing status of married joint, then the taxpayer is able to make (Publication 590-A, page 42): a full contribution if the taxpayer has a modified AGI of $204,000 or less, a partial contribution if the taxpayer has a modified AGI of between $204,000 and $214,000, and no contribution if the taxpayer has a modified AGI of $214,000 or more. The maximum contribution amount in this case is $12,000, but it is a nondeductible (not deductible) contribution that is made to a Roth IRA in any year. (Publication 590-A, pages 39 and 42, and Table I-2, page 5) Publication 590-A, pages 5, 39, and 42

Scott and Marie (spouses) are equal partners in a law firm. They had gross receipts of $120,000, less expenses of $40,000, resulting in net income of $80,000 for the law firm. Marie received an inheritance of $20,000. In addition, they had municipal bond interest of $3,000 and savings account interest of $2,000. What is their adjusted gross income on a married filing joint return? $105,000 $142,000 $ 82,000 $102,000

$ 82,000 A taxpayer must include for federal income tax purposes all income received from money, property, and services, unless specifically excluded by the code. This question deals with several different taxable and nontaxable items. (Publication 17, page 6) To begin with, a person is self-employed if the person carries on a trade or business as a sole proprietorship, is an independent contractor, is a member of a partnership, or is in business in any other way. In addition, a self-employed person includes in gross income the net profit or loss resulting from the business (line 7 of Schedule C (Form 1040)), which in this case is the partner's net income. (Publication 17, page 6) Conversely, property that is received as a gift, bequest, or inheritance is not included in taxable income (Publication 17, page 73). Finally, all interest received or accrued is fully taxable except interest on bonds used to finance government operations issued by the state or other municipalities (Publication 17, page 58). Therefore, Scott and Marie's adjusted gross income would be $82,000, computed as follows: Net Income from Partnership $80,000 Interest Income on Savings Account 2,000 Adjusted Gross Income (AGI) $82,000 Regulation Section 1.61-7 Publication 17, pages 6, 58, and 73

John is a self-employed carpenter. He reported a profit of $40,000 on his Schedule C. He had other taxable income of $10,000. He paid $4,000 for hospitalization insurance. He contributed $5,000 to a Keogh plan. The deductible portion of his self-employment tax was $2,826. He also made a $4,000 contribution to his Roth IRA. What is the amount John can deduct in arriving at AGI? $19,652 $11,826 $14,652 $15,826

$11,826 There are several pieces of this problem that need to be addressed to determine the deductible amount in arriving at AGI. First, a self-employed person is able to deduct, as an adjustment to income, up to 100% of the amount paid for medical and qualified long-term care insurance on behalf of the person, person's spouse, and dependents. The limitation here is that the insurance plan must be established under the individual's trade or business, and the person cannot take this deduction to the extent that the amount of the deduction is more than the taxpayer's earned income from that trade or business. (See Form 1040 and 1040-SR Instructions, line 16 on pages 31-32.) Second, if a taxpayer is self-employed (a sole proprietor or a partner), a deduction is allowed up to 50% (not 75%) of the taxpayer's self-employment taxes. (See Publication 17, Table 11-1, page 96, and the Form 1040 and 1040-SR Instructions for Schedule 1, line 14 on page 88.) Third, qualified plans set up by self-employed individuals are sometimes called Keogh or HR 10 plans. Contributions to Keogh plans are deductible for AGI. Finally, contributions to Roth IRAs are not deductible. (Publication 17, page 85) As a result of the above rules, John can deduct $11,826 in arriving at AGI, which is the sum of his hospitalization insurance of $4,000, Keogh contribution of $5,000, and the deductible portion of his self-employment taxes ($2,826).

Which of the following statements is correct concerning a health savings account (HSA)? An eligible individual may make a deductible contribution to an HSA. An employer on behalf of an eligible individual may contribute that is not included in the individual's gross income to an HSA. A family member may contribute on behalf of an eligible individual to an HSA. All of the answer choices are correct.

All of the answer choices are correct Publication 969, page 3, provides that a health savings account (HSA) may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed. Publication 969, page 3

During 2022, John (age 52) was self-employed with a net income of $50,000. Which of the following can he deduct as an adjustment to income? Up to $7,000 contribution to his traditional IRA Up to 75% of his self-employment taxes Up to 75% of his self-employed health insurance premiums All of the answer choices are correct.

Up to $7,000 contribution to his traditional IRA For 2022, a self-employed taxpayer with a net income of $50,000 can make adjustments to income in the amount of one-half (i.e., 50%) of self-employment tax (Publication 17, page 96, Table 11-1): all (i.e., 100% and not just 75%) of self-employed medical and long-term care insurance (Publication 502, page 21) as long as the taxpayer is not eligible to participate in a health plan subsidized by his or her employer; and $7,000 as an IRA deduction (not covered by a qualified plan and over age 50) (Publication 17, pages 76-77). Publication 17, pages 76-77 and 98 Publication 502, page 21

To determine net capital gains/losses for the year: net all capital gains, both long-term and short-term, together. net short-term gains/losses and long-term gains/losses separately, then combine. net short-term gains/losses and long-term gains/losses and report only any net gains. net all gain transactions together and all loss transactions together, then combine.

net short-term gains/losses and long-term gains/losses separately, then combine. Correct The determination of a taxpayer's capital gains or losses in a particular year goes through a process that is better known as the netting rules. That is, a taxpayer figures the total net gain or loss by combining the net short-term capital gain or loss (line 7 of Schedule D, Form 1040) with the net long-term capital gain or loss (line 15 of Schedule D, Form 1040). All short-term items are netted separately, and all long-term items are netted separately before the two are combined. For more information on this issue, you should read Chapter 4 of Publication 550. Publication 550, Chapter 4

Bernie is a self-employed accountant in 2022. He reported net income of $50,000 on his Schedule C for 2022. During the year, Bernie paid the following: $5,200 child support, $5,000 in alimony resulting from a divorce finalized in 2021, $6,000 in medical insurance premiums, deductible portion of self-employment taxes of $3,533, and $2,000 to his IRA plan. What amounts are deductible in arriving at adjusted gross income for 2022? $25,266 $21,733 $11,533 $16,533

$11,533 There are several pieces of this problem that need to be addressed to determine the deductible amount in arriving at AGI. First, a self-employed person is able to deduct, as an adjustment to income, up to 100% of the amount paid for medical and qualified long-term care insurance on behalf of the person and the person's spouse, dependents, and children who were under age 27 at the end of 2022. The limitation here is that the insurance plan must be established under the individual's trade or business, and the person cannot take this deduction to the extent that the amount of the deduction is more than the taxpayer's earned income from that trade or business. (See Publication 502, page 21.) Second, if a taxpayer is self-employed (a sole proprietor or a partner), a deduction is allowed for 50% of the taxpayer's self-employment taxes in 2022. (See Publication 17, Table 11-1, page 96.) Third, because Bernie is self-employed and therefore is not covered under an employer's pension plan, he is able to take a deduction for an IRA contribution. (See Table 9-2 in Publication 17, page 78.) Finally, for divorce or separation agreements executed after December 31, 2018, a taxpayer may no longer deduct an amount equal to the alimony or separate maintenance payments paid during the tax year, nor will the alimony or separate maintenance payments be included in the gross income of the recipient spouse. (Publication 504, page 17) As a result of the above rules, Bernie can deduct $11,533 in arriving at AGI, which is the sum of his hospitalization insurance of $6,000, IRA contribution of $2,000, and the deductible portion of his self-employment taxes of $3,533.

Joan received a scholarship for purposes of attending the University of California at Los Angeles. Joan is not a degree candidate. The scholarship consisted of $6,000 for tuition, $1,500 for fees, $500 for books, $800 for required equipment, and $6,000 for room and board. Which of the following amounts should Joan include in her taxable income? $6,000 $14,800 $0 $6,800

$14,800 Publication 17, page 74, states, in part, that a candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount received by a taxpayer that is for: tuition and fees to enroll at or attend an educational institution or fees, books, supplies, and equipment required for courses at the educational institution. Amounts used for room and board do not qualify for the exclusion. Since Joan is not a degree candidate, she would report the entire scholarship amount of $14,800 as taxable income. For additional information on qualified scholarships and fellowship grants, see Publication 970, Tax Benefits for Education. Publication 17, page 74

Consider the following expenditures and determine the total amount that would be deducted as Schedule 1 adjustments in arriving at adjusted gross income (assuming no income limitations) on Form 1040 or 1040-SR, U.S. Individual Income Tax Return: $1,000 interest paid on student loan $2,000 paid to a SIMPLE retirement plan $100 jury duty pay given to the employer $500 expenses from the nonbusiness rental of personal property $3,600 $2,600 $3,100 $1,100

$3,600 There are a number of adjustments to gross income in determining the AGI amount. This particular problem deals with four such adjustments. First, there is a special deduction allowed for paying interest on a student loan (also known as an education loan). This deduction can reduce the amount of the taxpayer's income subject to tax by up to $2,500 in 2022. To claim this deduction, the allowable amount is entered on Schedule 1 (Form 1040 or Form 1040-SR), line 20. (Publication 970, pages 34 and 35) For more information, see Table 4-2 (Publication 970, page 35), which summarizes the features of the student loan interest deduction. Second, sole proprietors are eligible to deduct contributions to SIMPLE retirement plans for themselves on line 15 of Schedule 1, (Form 1040, U.S. Individual Income Tax Return) (see page 11 of Publication 560). Third, a taxpayer reports expenses from nonbusiness rental of personal property on Schedule 1 (Form 1040 or 1040-SR), line 8, and enters the amount and "PPR" (personal property rental) on the dotted line next to line 8. (1040 Instructions, lines 8 and 22 on pages 86 and 93) Finally, jury duty pay received by a taxpayer must be included in the taxpayer's income on line 8 of Form 1040 or Form 1040-SR. If, however, the taxpayer must give the pay to his or her employer because the employee's employer continues to pay the person's salary while serving on the jury, the taxpayer can deduct the amount turned over to the employer as an adjustment to income. Specifically, the amount repaid to the employer is listed on Schedule 1 (Form 1040 or 1040-SR), line 22, and the taxpayer writes "Jury Pay" and the amount on the dotted line next to line 22 (see page 73 of Publication 17 and Form 1040 or 1040-SR Instructions, page 93). As a result, all four items are adjustments to income (also referred to as adjustments for AGI). Publication 17, page 73 Publication 560, page 11 Publication 970, 33-35 Instructions for Form 1040 and 1040-SR, pages 86 and 93

What is the maximum contribution that a person can make to an HSA if they have self-only high deductible health plan (HDHP) coverage for 2022? $1,500 $3,600 $3,650 $7,300

$3,650 Publication 969, page 3, provides that the minimum annual deductible for HDHP self-only coverage is $1,500 and the maximum out-of-pocket for HDHP self-only coverage is $7,500 for 2022. (Publication 969, page 4) In the case of health savings account (HSA) contributions, the amount an eligible person can contribute to their HSA depends on the type of HDHP coverage the person has, their age, the date they become an eligible individual, and the date the person ceases to be an eligible individual. For 2022, a qualified person that has self-only HDHP coverage can contribute up to $3,650. If the person has family HDHP coverage, they can contribute up to $7,300. (Publication 969, page 5) Thus, in this case, the correct response is $3,650. Publication 969, pages 4-5

Leslie teaches in the local high school and Roger teaches in the local community college. During 2022, Leslie spent $425 on supplies that were used in her classes and Roger spent $150 on supplies that were used in his classes. What are the maximum educator expenses that the couple can claim on their tax return if the couple files jointly in 2022? $0 $300 for Leslie $150 for Roger $450, which is $300 for Leslie and $150 for Roger

$300 for Leslie Form 1040 Instructions, pages 87 and 88, states, in part, that an eligible educator can deduct up to $300 of qualified expenses paid in the year. If the taxpayer and their spouse are filing jointly and both were eligible educators, the maximum deduction is $600. However, neither spouse can deduct more than $300 of his or her qualified expenses. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. In this case, Leslie is a qualified educator; Roger is not. Thus, the couple would be able to deduct up to $300. That is, Leslie would be able to deduct up to $300 of her $425 expenses and Roger would not be able to deduct any of his expenses. Instructions for Form 1040, pages 87-88 IRC Section 62(a)(2)(D)

The following items are reported on Mr. and Mrs. Spice's 2022 joint return: Net profit on Mrs. Spice's Schedule C of $40,000 Mr. Spice paid court-ordered alimony from divorce finalized after December 31, 2018 of $5,000 Self-employment tax of $8,040 (of which deductible portion is $4,020) on Mrs. Spice's Schedule C profit Compute their adjusted gross income for 2022. $35,980 $30,980 $26,960 $40,000

$35,980 There are several pieces of this problem that need to be addressed to determine AGI. First, if a taxpayer is self-employed (a sole proprietor or a partner), a deduction is allowed for the deductible portion of the taxpayer's self-employment taxes in 2022. (See Publication 17, Table 11-1, page 96.) Second, for divorce or separation agreements executed after December 31, 2018, a taxpayer may no longer deduct an amount equal to the alimony or separate maintenance payments paid during the tax year, nor will the alimony or separate maintenance payments be included in the gross income of the recipient spouse. (See Publication 504, page 17) As a result of the above rules, Mr. and Mrs. Spice have an AGI amount of $35,980, which is the net profit from Mrs. Spice's Schedule C (i.e., $40,000) less Mrs. Spice's self-employment tax (i.e., $4,020). Publication 17, page 96 Publication 504, page 17

Paul owns and operates a gourmet food store as a sole proprietorship out of a building he also owns. Based on the following information regarding 2022, compute his self-employment income (for SE tax purposes) for 2022. Gross receipts $125,000 Cost of goods sold 63,000 Utilities 7,000 Real estate taxes 1,500 Gain on sale of business truck 2,000 Depreciation expense 4,000 Section 179 deductions 1,500 Mortgage interest on building 8,000 Contributions to Keogh retirement plan 2,000 Net operating loss from 2018 15,000 $25,000 $27,000 $38,000 $40,000

$40,000 Publication 334, page 9, provides, in part, that the maximum net self-employment earnings subject to the Social Security part of the self-employment tax is $147,000 for 2022. Thus, the net earnings in excess of $147,000 are not subject to the 12.4% Social Security part of the SE tax. The 2.9% Medicare part of the SE tax, however, is applied to all net earnings. Furthermore, Publication 334, page 9, states that a taxpayer must pay self-employment tax and file Schedule SE (Form 1040) if either of the following applies: The taxpayer's net earnings from self-employment (excluding church employee income) were $400 or more. The taxpayer had church employee income of $108.28 or more. A taxpayer's net earnings are the business gross income minus the allowable business deductions from that business. Although business deductions include contributions to SEP and qualified plans for common-law employees and the deduction for the deductible portion of the taxpayer's self-employment tax, these amounts are not included in a taxpayer's calculation of net earnings from self-employment or the person's self-employment tax. Rather, they are deducted as an adjustment for AGI on lines 14 and 15 of Schedule 1 of Form 1040 (Form 1040 Instructions, page 88). In general, net nonfarm earnings (or net profit) are the amount found on line 31 of Schedule C and included on Schedule 1, line 3 (Schedule C (Form 1040 or 1040-SR) Instructions, pages C-13 and C-14). In Paul's case, his self-employment income for the year is $40,000 and it is the gross sales of $125,000 less the total business expenses of $85,000. The business expenses are the sum of the cost of goods sold ($63,000), utilities ($7,000), real estate taxes ($1,500), depreciation expense ($4,000), Section 179 deduction ($1,500), and mortgage interest on building ($8,000). Net operating losses from prior years are not included in net earnings from self-employment (Schedule SE (Form 1040) Instructions, page SE-5). Publication 334, page 9 Instructions for Form 1040 and Form 1040-SR, page 88 Instructions for Schedule SE (Form 1040), page SE-5 Instructions for Schedule C (Form 1040), pages C-13 and C-14

Alex and Arthur are equal partners in the A & R Partnership. Alex receives a guaranteed payment of $5,000. The partnership had distributive net income (after deducting the guaranteed payment of $5,000) of $80,000. What amounts are subject to self-employment tax? $37,500 each for Alex and Arthur $42,500 each for Alex and Arthur $40,000 each for Alex and Arthur $45,000 for Alex and $40,000 for Arthur

$45,000 for Alex and $40,000 for Arthur Publication 541, page 7, provides that guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Furthermore, the partner's distributive share of ordinary income from a partnership and guaranteed payments are subject to self-employment (SE) tax by including that amount on Schedule SE (Form 1040). (Schedule SE Instructions, page SE-1). The exception to the above rule pertains to limited partners, which is not the case in this problem. Nevertheless, a limited partner generally does not include his or her distributive share of income or loss in computing net earnings from self-employment; however, limited partners do include guaranteed payments. (Schedule SE (Form 1040) Instructions, page SE-4) Therefore, Alex would include $45,000 as self-employment income, which is the sum of $5,000 from guaranteed payments and $40,000 from his one-half share of the partnership's distributive net income (i.e., $80,000). Arthur, on the other hand, would include only $40,000, which is his one-half share of the partnership's distributive net income (i.e., $80,000). Publication 541, page 7

Leslie teaches in the local high school and Roger teaches in the local community college. During 2022, Leslie spent $425 on supplies that were used in her classes and Roger spent $150 on supplies that were used in his classes. What are the maximum educator expenses that the couple can claim on their tax return if the couple files jointly in 2022? $0 $300 for Leslie $150 for Roger $450, which is $300 for Leslie and $150 for Roger

350 for Leslie Form 1040 Instructions, pages 87 and 88, states, in part, that an eligible educator can deduct up to $300 of qualified expenses paid in the year. If the taxpayer and their spouse are filing jointly and both were eligible educators, the maximum deduction is $600. However, neither spouse can deduct more than $300 of his or her qualified expenses. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. In this case, Leslie is a qualified educator; Roger is not. Thus, the couple would be able to deduct up to $300. That is, Leslie would be able to deduct up to $300 of her $425 expenses and Roger would not be able to deduct any of his expenses. Instructions for Form 1040, pages 87-88 IRC Section 62(a)(2)(D)

Which of the following contributions is the largest possible permitted amount by an eligible unmarried taxpayer, 50 years of age or older, in 2022? A $7,000 contribution to a traditional IRA and a $7,000 contribution to a Roth IRA A $6,000 contribution to a traditional IRA and a $6,000 contribution to a Roth IRA A $4,000 contribution to a traditional IRA and a $3,000 contribution to a Roth IRA A $3,000 contribution to a traditional IRA and a $2,500 contribution to a Roth IRA

A $4,000 contribution to a traditional IRA and a $3,000 contribution to a Roth IRA Publication 590-A, pages 5 (IRA) and 42 (Roth IRA), provides, in part, general information concerning contributions and deduction limits to traditional IRAs and Roth IRAs. In general: unless a taxpayer reaches age 50 before 2023, the most that can be contributed to the taxpayer's traditional IRA or Roth IRA for 2022 is the smaller of $6,000 or the taxpayer's taxable compensation for the year, or if a taxpayer reaches age 50 before 2023, the most that can be contributed to the taxpayer's traditional IRA or Roth IRA for 2022 is the smaller of $7,000 or the taxpayer's taxable compensation for the year. A taxpayer can make contributions to both traditional and Roth IRAs for the same year. However, the above limit of $6,000 or $7,000 applies to the aggregate contributions that are made on the taxpayer's behalf to the Roth IRA and traditional IRA. (Publication 590-A, pages 5 (Table I-2) and 42 (Table 2-1) Hence, the taxpayer is able to make a $4,000 contribution to the traditional IRA and a $3,000 contribution to the Roth IRA, which is $7,000 in total. Note: This question is tricky because the word "and" appears in each response. Thus, the maximum amount is being split between the IRA and the Roth IRA. Publication 590-A, pages 5 and 42

Derek is a self-employed carpenter and is also an employee of Krispy, Inc. His self-employment net income is $55,000, and he received a W-2 for salaries and wages of $45,000. He is covered by his employer's pension plan. Which of the following statements is correct for 2022's Form 1040? Derek is eligible to take a deduction for his IRA contribution. Derek is eligible to take a deduction of up to 50% of his self-employment taxes. Derek is eligible to take a deduction of up to 100% of his health insurance premiums. Derek is eligible to take a deduction of up to 50% of his self-employment taxes and up to 100% of his health insurance premiums.

Derek is eligible to take a deduction of up to 50% of his self-employment taxes and up to 100% of his health insurance premiums. First, if a taxpayer is covered by an employer retirement plan, the taxpayer's deduction for an individual retirement account (IRA) may be limited or completely phased out, depending on the taxpayer's filing status and income. The amount of the deduction begins to phase out when income rises above a certain amount and completely phases out when income reaches a higher amount. These "amounts" are contingent on the filing status of the taxpayer as outlined in Table 9-1 below (Publication 17, page 78). If your filing status is single and AGI is $68000 or leess then you can take a full deduction If you are filing status is single an your agi is more than $68000 but less than $78000 a partial deduction if you are HoH and AFi is =78000 or > no deductions if you are MFJ and AGI is 109,000 or < a full deduction MFj and AGI > 109,000 but < 129,000 a partial deduction Qualified widower and AGI is 129000 or > no deductuon 1 If you did not live with your spouse at any time during the year, your filing status is considered "single" for this purpose (therefore, your IRA deduction is determined under the "Single" column). Please note that even though Derek is covered under his employer's plan, he is still eligible to set up a self-employed pension (SEP) based on his self-employed earnings. Making a contribution to a SEP would be deducted as an adjustment to income. However, this is not one of the answer options above. Second, self-employed taxpayers may deduct up to 50% of the taxpayer's self-employment taxes (Publication 17, Table 11-1, page 96). Finally, self-employed taxpayers may deduct from gross income 100% of amounts paid during the year for health insurance for themselves, spouses, and dependents (Publication 502, pages 21-22) and the taxpayer's children who were under age 27 at the end of 2022. As a result, Derek, who is single and covered under his employer's pension plan, is unable to take a deduction for an IRA, because his modified AGI is more than $74,000. However, Derek, who is self-employed, is eligible to deduct 50% of his self-employment taxes in 2022, and he is able to

When figuring compensation for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following is an incorrect statement? Pension or annuity income is not considered as compensation for an IRA plan. Earnings and profits from property, such as rental income, are considered compensation. Interest and dividend income are not considered as compensation for an IRA plan. Generally, any amount you exclude from income is not considered as compensation for an IRA plan

Earnings and profits from property, such as rental income, are considered compensation. Compensation, for the purposes of determining the amount of allowable contributions to an individual retirement account, includes wages, salaries, commissions, self-employment income, and alimony and separate maintenance payments. Compensation does not include any of the following items: Earnings and profits from property, such as rental income, interest income, and dividend income Pension or annuity income Deferred compensation received (compensation payments postponed from a past year) Income from a partnership for which you do not provide services that are a material income-producing factor Generally, any amounts you exclude from income, such as foreign earned income and housing costs (For example, combat pay is nontaxable and thus excluded; however, it is considered compensation for purposes of determining the amount of allowable contributions to an individual retirement account.) Therefore, earnings and profits from property, such as rental income, are not considered compensation. Publication 590-A, page 6

When figuring compensation for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following is an incorrect statement? Pension or annuity income is not considered as compensation for an IRA plan. Earnings and profits from property, such as rental income, are considered compensation. Interest and dividend income are not considered as compensation for an IRA plan. Generally, any amount you exclude from income is not considered as compensation for an IRA plan.

Earnings and profits from property, such as rental income, are considered compensation. Compensation, for the purposes of determining the amount of allowable contributions to an individual retirement account, includes wages, salaries, commissions, self-employment income, and alimony and separate maintenance payments. Compensation does not include any of the following items: Earnings and profits from property, such as rental income, interest income, and dividend income Pension or annuity income Deferred compensation received (compensation payments postponed from a past year) Income from a partnership for which you do not provide services that are a material income-producing factor Generally, any amounts you exclude from income, such as foreign earned income and housing costs (For example, combat pay is nontaxable and thus excluded; however, it is considered compensation for purposes of determining the amount of allowable contributions to an individual retirement account.) Therefore, earnings and profits from property, such as rental income, are not considered compensation. Publication 590-A, page 6

Edwin and Donna were married. He had established a traditional IRA to which he made contributions and had taken no distributions. The total value of the IRA was $50,000, of which $20,000 was nondeductible contributions. As the spousal beneficiary from inheritance, which of the following applies to Donna? Edwin's $20,000 basis in the IRA may be treated as basis to Donna. When Donna receives the distribution, she may not roll it over to her own traditional IRA. Donna must begin receiving periodic distributions by December 31 of the 5th year following Edwin's death. Donna must pay a 10% penalty on the funds in the IRA if she receives an immediate distribution after Edwin's death.

Edwin's $20,000 basis in the IRA may be treated as basis to Donna. Publication 590-B, page 6, provides the general rules for an IRA that is inherited from a spouse. In general, if the surviving spouse inherits a traditional IRA from his or her deceased spouse, the surviving spouse generally can do any of the following: Treat it as his or her own IRA by designating himself or herself as the account owner, Treat it as his or her own IRA by rolling it over into his or her traditional IRA, or to the extent it is taxable, into a qualified employer plan, qualified employee annuity plan (Section 403(a) plan), tax-sheltered annuity plan (Section 403(b) plan), or deferred compensation plan of a state or local government (Section 457 plan), or Treat himself or herself as the beneficiary rather than treating the IRA as his or her own. In addition, if a person inherits a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. (Publication 590-B, page 6) Finally, if an IRA owner is under age 59-1/2, the taxpayer must pay a 10% additional tax on the distribution of any assets (money or other property) from his or her traditional IRA. Distributions before you are age 59-1/2 are called early distributions. (Publication 590-B, page 25) In this situation, there are, however, exceptions. In this case, a person may not have to pay the 10% additional tax if the person is in 1 of the 8 situations that are listed in Publication 590-B, page 25. One of the exceptions is the beneficiary of a deceased IRA owner. Hence, the correct response in this problem is that Edwin's $20,000 basis in the IRA will carry over to Donna, his spouse. Publication 590-B, pages 6 and 25

George, single and age 40, is covered by a pension plan at work. For 2022, George could have contributed and deducted $3,000 to his individual retirement account, but could only afford to contribute $1,000, which he did on April 14, 2022. After April 15, 2022, George contributed $4,000. Since his modified AGI for 2022 was in the reduced IRA contribution range, George computed that his reduced IRA deduction for 2022 was $600. Which of the following is not an option available for George? He can deduct $2,600 in 2022 since he had a carryover from the immediately preceding tax year. He can withdraw the nondeductible $3,400 contribution by April 15, 2023. He can leave the entire contribution in the IRA and elect to treat the entire $4,000 as a nondeductible contribution. He can leave the entire contribution in the IRA as a $600 deductible contribution and a $3,400 nondeductible contribution.

He can deduct $2,600 in 2022 since he had a carryover from the immediately preceding tax year. If contributions to a taxpayer's traditional IRA for a year were less than the maximum limit, the taxpayer cannot contribute more after the due date of his or her tax return for that year to make up the difference. Therefore, it is incorrect to state that George can deduct $2,600 in 2022 because of a carryover from the immediately preceding tax year (Publication 590-A, page 9). Although a taxpayer's deduction for IRA contributions may be reduced or eliminated, contributions can be made to the IRA up to the general limit as nondeductible contributions. (Publication 590-A, page 15) In addition, a taxpayer will not have to pay the 6% tax if the taxpayer withdraws the excess contribution amount and any income earned on it by the date the tax return for that year is due, including extensions. (Publication 590-A, page 35) Publication 590-A, pages 9, 15, and 35

A self-employed consultant has a business history of net profits and net losses as follows: 2018 $(400) 2019 800 2020 200 2021 (500) In 2022, he would like to pay self-employment tax even though he incurred a loss of $(2,200). Which of the following statements is correct? He can use either the optional self-employment tax computation or the regular tax method. He qualifies for the optional self-employment tax computation because he has been in business for 5 years or less. He does not qualify for the optional self-employment tax computation. He qualifies for the optional self-employment tax computation because he had positive net earnings in at least 2 of the 3 years

He does not qualify for the optional self-employment tax computation. Publication 334, page 40, provides that a self-employed taxpayer must pay self-employment (SE) tax and file Schedule SE (Form 1040) if the taxpayer's net earnings from self-employment were $400 or more. In addition to the regular method for computing a person's SE tax, a person may want to use the optional method (see Publication 334, page 42, and Schedule SE (Form 1040) Instructions) when he or she has a loss or a small net profit and the taxpayer: wants to receive credit for Social Security benefit coverage, incurred child or dependent care expenses and could claim a credit, is entitled to the earned income credit, or is entitled to the additional child tax credit. To qualify for use of the nonfarm optional method as given in Publication 334, page 42, the taxpayer must satisfy all of the following tests: The taxpayer is self-employed on a regular basis. This means that actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the current taxable year for which this method is being elected. The net earnings can be from either farm or nonfarm earnings or both, and The taxpayer has used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be one after another, and The taxpayer's net nonfarm profits were less than $5,891, and less than 72.189% of the taxpayer's gross nonfarm income. The facts given in this problem do not satisfy the first test of $400 in at least 2 of the 3 years. Therefore, the taxpayer does not qualify for the optional self-employment tax computation. Publication 334, pages 40-42 Instructions for Schedule SE (Form 1040)

After many years as a bachelor, Buddy, age 50, married Penny, age 63. Penny's only income was $10,800 of Social Security. They filed a joint return for tax year 2022 with a modified adjusted gross income of $132,000. Buddy is covered by a retirement plan at work where he receives compensation of $120,000. He wishes to contribute to an IRA for himself and Penny. Which of the following will provide them the greatest allowable tax benefit? He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to his IRA. He may contribute $6,000 to each IRA, but take no deduction for either IRA. He may contribute $6,000 to each IRA, and take a deduction of $6,000 for each IRA. He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to Penny's IRA.

He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to Penny's IRA. Deductible contributions to a traditional IRA are reduced or eliminated depending on the taxpayer's filing status, participation in a qualified plan, and modified AGI (MAGI) amounts. Publication 590-A, pages 13 and 14, provides the general rules for taxpayers with a married filing joint status. Traditional IRA deductible contribution limits are as follows for a wage earner that is covered by an employer's qualified plan: If MAGI is $109,000 or less, a full deduction is permitted. If MAGI is between $109,000 and $129,000, a partial deduction is permitted. If MAGI is $129,000 or more, no deduction is permitted. Traditional IRA deductible contribution limits are as follows for the spouse that is not covered by an employer's qualified plan: If MAGI is $204,000 or less, a full deduction is permitted. If MAGI is between $204,000 and $214,000, a partial deduction is permitted. If MAGI is $214,000 or more, no deduction is permitted. Coverage under Social Security or railroad retirement is not coverage under an employer retirement plan. In light of the couple's MAGI amount and Buddy's coverage by an employer-sponsored plan, the best situation is for Buddy to make a $6,000 contribution to both IRAs, but only take a deduction for Penny's contribution. Note: Of course, since both spouses are 50 or older, they could contribute up to $7,000 each instead of only $6,000 (Publication 590-A, page 8). Publication 590-A, pages 8-14

Kimberly, age 30, a full-time student with no taxable compensation, married Michael, age 30, during 2022. For the year, Michael had taxable compensation of $35,000. He plans to contribute and deduct $6,000 to his traditional IRA. If he and Kimberly file a joint return, how much may each deduct in 2022 for contributions to their individual traditional IRAs, and what is the compensation Kimberly uses to figure her contribution limit? IRA Deduction: $6,000; Compensation for Kimberly to Figure IRA Contribution Limit: $29,000 IRA Deduction: $6,000; Compensation for Kimberly to Figure IRA Contribution Limit: $35,000 IRA Deduction: $7,000; Compensation for Kimberly to Figure IRA Contribution Limit: $35,000 IRA Deduction: $7,000; Compensation for Kimberly to Figure IRA Contribution Limit: $28,000

IRA Deduction: $6,000; Compensation for Kimberly to Figure IRA Contribution Limit: $29,000 If a taxpayer files a joint return and has taxable compensation that is less than that of the taxpayer's spouse, the most that can be contributed for the year to an IRA is the smaller of the following two amounts: $6,000 ($7,000 if the taxpayer is 50 or older) or The total compensation includible in the gross income of both spouses for the year, reduced by the following two amounts:The taxpayer's spouse's IRA contribution for the year to a traditional IRA andAny contributions for the year to a Roth IRA on behalf of the taxpayer's spouse. Therefore, the total combined contributions that can be made for the year to both spouses' IRAs can be as much as $12,000 ($13,000 if only one spouse is 50 or older, or $14,000 if both spouses are 50 or older). Thus, Kimberly who has no compensation can add Michael's compensation, reduced by the amount of his IRA contribution, ($35,000 less $6,000, which is $29,000) to her own compensation ($0) to figure her maximum contribution to a traditional IRA. In her case, $6,000 is her contribution limit, because $6,000 is less than $29,000 (her compensation for purposes of figuring her contribution limit). Publication 590-A, pages 8-9

Which of the following statements is correct for purposes of figuring and reporting self-employment tax? If a taxpayer has more than one business, the taxpayer must combine the net profits of all businesses and separately combine the net losses of all the other businesses. If a taxpayer has more than one business, the taxpayer must combine the net profits and losses of all businesses. If a taxpayer has more than one business, the taxpayer must treat each business independently. If a taxpayer has more than one business, the taxpayer must follow state tax law to determine if the net profits and losses are treated separately or combined.

If a taxpayer has more than one business, the taxpayer must combine the net profits and losses of all businesses. Publication 334, page 44, provides that if a taxpayer has earnings subject to self-employment (SE) tax from more than one trade, business, or profession, the taxpayer must combine the net profit (or loss) from each to determine total earnings subject to SE tax. A loss from one business reduces the taxpayer's profit from another business. Publication 334, page 44 Instructions for Schedule SE (Form 1040)

When figuring compensation for a self-employed individual for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following statements is not true? Self-employment income must be reduced by the deduction allowed for one-half of your self-employment taxes. When you have both self-employment income, and salary and wages, your compensation includes both amounts. If you have a net loss from self-employment, you must subtract the loss from any salary or wages received when figuring total compensation. In order to include net earnings from a trade or business as compensation, your personal services must be a material income-producing factor.

If you have a net loss from self-employment, you must subtract the loss from any salary or wages received when figuring total compensation. Pursuant to Publication 590-A, page 6, compensation in determining the amount of an allowable contribution to a traditional IRA includes wages, salaries, commissions, self-employment income, and alimony and separate maintenance payments. If a taxpayer is self-employed, compensation for this purpose is the net earnings from the trade or business reduced by the total of: the deduction for contributions made on the taxpayer's behalf to retirement plans and the deduction allowed for the deductible part of a person's self-employment taxes. Moreover, compensation includes earnings from self-employment even if they are not subject to self-employment tax due to religious beliefs. Additionally, if there is a net loss from self-employment, this amount is not subtracted from salaries or wages when calculating total compensation. Therefore, all of the responses given are true except a net loss from self-employment is not subtracted from any salary or wages received when figuring total compensation. Publication 590-A, page 6

Maude has a small business that has a profit of $15,000. Her husband, Harold, has a farm that has a loss of $7,000. They are married. Which of the following is correct regarding their self-employment tax computation? If they file separately, Harold may not elect to use the optional method. Maude must pay self-employment tax on $15,000. On a joint return, the self-employment tax may be computed based on $8,000 of income for Maude only. If they file separately, they may elect to split the net profit for self-employment tax purposes, each paying based on $4,000.

Maude must pay self-employment tax on $15,000. Publication 334, page 44, provides the following information concerning self-employment tax and filing a joint return. If a taxpayer files a joint return, the taxpayer cannot file a joint Schedule SE. This is true whether one spouse or both spouses have earnings subject to SE tax. In addition, a taxpayer's spouse is not considered self-employed just because the taxpayer is self-employed. If both of the spouses have earnings subject to SE tax, then each spouse must complete a separate Schedule SE. In this case, Maude must pay self-employment tax on the $15,000 of profit that she made in her business. Publication 334, page 44 Instructions for Schedule SE (Form 1040)

What is your maximum allowable deduction for contributions to a Roth IRA, if neither you nor your spouse was covered for any part of the year by an employer retirement plan, in 2022? $6,000 if younger than 50 $7,000 if older than 50 Both answer choices are correct. Neither answer choice is correct.

Neither answer choice is correct. Pursuant to Publication 590-A, page 38, a taxpayer, regardless of his or her age, may be able to establish and make nondeductible contributions to a Roth IRA. For the record, if this statement concerned a traditional IRA (not a Roth IRA), then both answer choices would be correct. That is, a taxpayer can contribute $6,000 for each spouse ($7,000 if 50 or older). Note Be careful when reading questions concerning traditional IRAs and Roth IRAs. Traditional IRA contributions can be either deductible or nondeductible, whereas Roth IRA contributions are never deductible. Publication 590-A, page 38

Generally, which of the following rules apply to both traditional IRAs and Roth IRAs in 2022? Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less. Contributions are always nondeductible. Contributions may not be made for the tax year in which you reach age 72 and for years thereafter. Contribution phaseout limits are the same for both traditional IRA and Roth IRAs.

Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less. Publication 590-A, Table I-2, page 5, provides the contribution limits for both the traditional IRA and a Roth IRA. Unless a wage earner has reached age 50 by the end of 2022, the most that can be contributed to his or her traditional IRA, Roth IRA, or combination of both for 2021 is the smaller of $7,000 if the taxpayer is age 50 or older by the end of 2022 or the person's taxable compensation for the year. Contributions may be made for the tax year in which you reach age 72 and for years thereafter is correct for an IRA contribution in 2022. Contributions for the traditional IRA may be deductible or nondeductible; contributions to the Roth IRA are always nondeductible. In addition, the phaseout limits for the traditional IRA is lower than those for the Roth IRA. The correct response for this problem is the statement that the non-rollover contribution amount is the same for both IRAs. Publication 590-A, page 5

Which of the following is treated as compensation for purposes of determining an allowed IRA contribution? Income passed through to a limited partner Foreign earned income that is excluded from income Pension income None of the answer choices are treated as compensation for determining an allowed IRA contribution.

None of the answer choices are treated as compensation for determining an allowed IRA contribution. Publication 590-A, page 7, provides some situations where income does not count as compensation for IRA contribution purposes. Compensation does not include any of the following: Earnings and profits from property, such as rental income, interest income, and dividend income Pension or annuity income Deferred compensation received (compensation payments postponed from a past year) Income from a partnership for which the taxpayer does not provide services that are a material income-producing factor Any amounts the taxpayer excludes from income, such as foreign earned income and housing costs All of the answer choices are items that would not qualify as compensation for IRA purposes. Publication 590-A, page 7

Which of the following taxes is imposed on wagering activities? Occupational tax only Wagering tax only Occupational tax and wagering tax None of the taxes listed

Occupational tax and wagering tax Federal wagering tax laws apply to both authorized and unauthorized gaming activities conducted by exempt organizations. The facts and circumstances of the types of wagering conducted, as well as the benefits derived therefrom, may have a bearing on whether the wagers are subject to the taxes. Internal Revenue Code Sections 4401 and 4411 impose excise taxes on the gaming industry. Section 4401 figures the tax on the wagers themselves while its companion occupational tax under Section 4411 is figured by two rates of tax. Form 730, Tax on Wagering, and Form 11-C, Special Tax Return and Application for Registry - Wagering, are used for reporting wagering taxes to the Internal Revenue Service. Effective January 1, 1997, Forms 11-C and 730 processing will be centralized at Cincinnati Service Center. Excise Tax on Wagering IRC 4401(a)(1) imposes a 0.25 percent tax on the amount of any wager authorized under the law of the state in which accepted. IRC 4401(a)(2) imposes a 2 percent tax on the amount of any wager not described in IRC 4401(a)(2) (i.e., those not authorized by state law). IRC 4901 and Reg. 44.4901-1(a) hold that persons who plan to engage in the business of accepting wagers; conducting any wagering pool or lottery; or receive wagers for, or on behalf of, any other person are liable for the tax on wagers. Form 11-C is used by the person who accepts the wagers subject to excise tax to pay the annual occupational tax under IRC 4411. Form 11-C is also used by each individual who accepts wagers for another person to register under IRC 4412 and pay the annual occupational tax. Reg. 44.4412-1 provides that registration is made by filing Form 11-C. After the form is filed and the tax is paid, the Service issues the taxpayer a special tax stamp as evidence of registration and payment. See Reg. 44.4901-1. IRC 4411(a) imposes an occupational tax of $500 per year on each person liable for the tax under IRC 4401 on wagers, or upon the person engaged in receiving wagers for or on behalf of any person so liable. IRC 4411(b) reduces the occupational tax to $50 where liability for the tax under IRC 4401 is determined under IRC 4401(a)(1) (i.e., state authorized wagers) and for persons

Generally, an IRA contribution is limited to the lesser of $6,000 in 2022 or the taxpayer's compensation. However, which of the following items is not treated as compensation for this limitation? Wages earned by an individual under the age of 18 Taxable alimony Self-employment loss Commissions

Self-employment loss Unless a taxpayer reaches age 50 before 2023, the most that can be contributed to a traditional IRA for 2022 is the smaller of $6,000 or taxable compensation for the year. (Publication 590-A, page 9) If the taxpayer reaches age 50 before 2023, the most that can be contributed to a traditional IRA for 2022 is the smaller of $7,000 or taxable compensation for the year. Compensation for this purpose includes wages (age is not an issue), salaries, commissions, self-employment income, and taxable alimony and separate maintenance payments. Additionally, if there is a net loss from self-employment, this amount is not subtracted from salaries or wages when calculating total compensation. (Publication 590-A, page 6) Therefore, all of the listed items are treated as compensation except self-employment loss. Publication 590-A, pages 6 and 9

Which of the following is compensation for the purpose of contributions to individual retirement accounts? Deferred compensation received Foreign earned income excluded from income Pension or annuity income Taxable alimony and separate maintenance

Taxable alimony and separate maintenance Compensation, for the purposes of determining the amount of allowable contributions to an individual retirement account, includes wages, salaries, tips, professional fees, bonuses, and other amounts a taxpayer receives for providing personal services. The IRS treats as compensation any amount properly shown in box 1 of Form W-2 Wage and Tax Statement. Compensation also includes commissions, self-employment net income, and taxable alimony and separate maintenance payments. Remember, for divorce and separation agreements executed after December 31, 2018, you may no longer deduct an amount equal to the alimony or separate maintenance payments paid during the tax year, nor will the alimony or separate maintenance payments be included in the gross income of the recipient spouse. Therefore, only taxable alimony and separate maintenance in the above items is treated as compensation for the purpose of contributions to individual retirement accounts. Note the key word is "taxable alimony" in this question. Publication 17, pages 75-76

Marco and Leigh Ann Green (spouses) moved from New Jersey to Florida on May 1, 2022, at Marco's request. Leigh Ann immediately found a job as a part-time substitute teacher, but only worked 23 weeks during the year. Marco, a self-employed solar heating unit salesman, could not continue in the same line of work after the move. In Florida, he held one full-time job for 10 weeks, then another full-time job for 16 more weeks during 2022. Marco expects that he will start a new full-time job as an employee of a landscaping company in January 2023. Can Marco and Leigh Ann claim a deduction for moving expenses on their 2022 jointly filed return? They cannot, since Marco did not meet the 39-week test in 2022 They can, since Leigh Ann worked 23 weeks and Marco worked 16 weeks for a total of 39 weeks They can, since Marco expects to meet the 39-week test in 2023 They cannot, since the deduction is not available in 2022

They cannot, since the deduction is not available in 2022 Publication 3 provides that for tax years beginning after 2017, the deduction for moving expenses is suspended unless the taxpayer is a member of the Armed Forces who moves pursuant to a military order and incident to a permanent change of station. Thus, Marco and Leigh Ann cannot claim a deduction for moving regardless of their employment status after the move. Publication 3