Income Tax Module 3 Quiz

In the current year, Kim is transferred by her employer from New Orleans to Houston. Her moving expenses are not reimbursed and are as follows: Costs of moving household furnishings $1,600 Transportation costs $300 Meals in route $400 Lodging in route $250 $2,550 Her deductible moving expenses are:

$0 Moving expenses are no longer deductible except for Armed Forces.

Thadra and Deb, both age 48, are married and filed a joint Federal income tax return for the current year. Their adjusted gross income was $100,000, including Thadra's $95,000 salary. Deb had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could they contribute to IRAs for 2018 to take advantage of their maximum allowable IRA deduction for their return?

$11,000 Since they are not covered by a pension plan, they are allowed a deductible $5,500 IRA contribution for Thadra plus a $5,500 deductible contribution to a spousal IRA. Total deductible IRA contribution of $11,000 is allowed

Jack purchased a personal residence for $180,000, and insured it for the full replacement value. It had a fair market value of $195,000 when it was damaged by a fire (declared natural disaster by the President). The fair market value after the fire was $155,000, and Jack received insurance proceeds of $15,000. What is the net amount of casualty loss that Jack can deduct if his adjusted gross income is $80,000?

$16,900 The loss is the $40,000 decline in value, reduced by the $15,000 of insurance proceeds. $40,000 ($15,000) Insurance $25,000 -$8,000 10% AGI -$100 Floor $16,900 Deduction

On October 15, 2018, Dara purchased stock in ABC Corporation (the stock is not small business stock) for $2,000. On June 15, 2019, the stock became worthless. How should Dara treat the loss in 2019?

$2,000 long-term capital loss. Worthless securities are treated as becoming worthless at year-end. Therefore, the loss is a long-term capital loss even though the actual holding period was only 8 months.

On September 19, 2018, an investor purchases 5,000 shares of Baritone Corporation for $5,000. On March 31, 2019, the stock became worthless. What is the deductible gain or loss in 2019 and how is it classified?

$3,000 LTCL If a security becomes worthless during the tax year, the loss shall be treated as if it occurred on the last day of the tax year. The holding period will be long term. If there are no capital gains for the year, $3,000 LTCL will be deductible for the year with a $2,000 LTCL carryover.

Two years ago, Cory loaned his friend, Candy, $5,000. In the current year, Candy paid Cory $1,500 in final settlement of the loan. Cory has $100,000 of salary and $5,000 of capital gains for the current year. What amount of the loss may he use in the current year?

$3,500 Short-term capital loss of $3,500 is used entirely against the $5,000 capital gains. Cory would have a net $1,500 capital gain for the year.

Nial had the following transactions for the most recent tax year: Alimony Paid (2017 divorce) $4,800 Commissions earned as a salesperson $65,000 Capital Loss on stock investment $2,000 Gift received from mother $5,000 Qualified residential interest paid on home mortgage $8,000 What is Nial's AGI?

$58,200 The gift is not taxable and the interest on the home mortgage is a deduction from AGI. Commission Earned $65,000 Less: Alimony Paid ($4,800) Less: Capital Loss ($2,000) $58,200

Last year, Jacques paid the following interest: • Interest on home mortgage: $7,300 • Interest on home equity loan used to purchase furniture for personal residence: $1,000 • Interest on loan used to purchase State of Louisiana general purpose bonds: $1,800 If Jacques itemizes his deductions for last year, what is the amount of deductible interest expense?

$7,300 The interest on the home equity loan used to purchase household furniture is non-deductible based on TCJA 2017. The interest on the loan to purchase State of Louisiana bonds is not deductible because he used the loan to purchase tax exempt municipal bonds

Andrea and Elliott are married and together they have AGI of $80,000. They have no dependents and they file a joint federal income tax return. Each pays $4,800 for medical insurance. During the year, they paid the following amounts for medical care, for which they were not reimbursed by insurance: • Doctor and dentist bills and hospital expenses = $3,600 • Prescription drugs = $800 Determine the deduction allowable for medical expenses paid during the year (2018).

$8,000 Andrea and Elliott can claim a medical expense deduction for the current year of $8,000. Insurance Premiums $9,600 Medical bills $3,600 Prescriptions $800 $14,000 7.5% AGI $6,000 $8,000 The AGI limit is reduced from 10% to 7.5% for 2017 and 2018.

Colby has decided to make charitable contributions of property this year. He donates a picture that he had created to a local art museum (adjusted basis $900, fair market value $40,000. His adjusted gross income is $90,000. What is his charitable deduction for this year?

$900 The deduction for a work of art created by a donor / creator is limited to the creator's adjusted basis in the property.

Christian owns a vacation home which he plans to rent for 190 days this year. He also plans to live in the house during the year. What is the maximum number of days he can live in the home without jeopardizing the property's status as a rental property?

19 days Since he will rent the home for 190 days, he can use the home as a personal residence for up to 19 days (the greater of 14 days or 10% of rental use) without jeopardizing the property's status as a rental property.

Which of the following types of deductions can be claimed in arriving at an individual's adjusted gross income?

Alimony payments for divorces prior to 2019. Alimony payments are deductible by the payor for AGI for divorces prior to 2019. The other items are either not deductible or are itemized deductions (from AGI)

Which of the following is an itemized deduction?

Medical Expenses Medical expenses in excess of 10% (7.5% for 2017 and 2018) of AGI are itemized deductibles below-the-line. The others are above-the-line deductions.

Which of the following is not generally one of the four main categories of itemized deductions?

State income, property, and sales taxes. The statement is incorrect since you can deduct state income tax OR state sales tax but not both and property tax. The rest are all itemized deductions.

In July, Phil leased a building to Bob for a period of 15 years at a monthly rental rate of $2,000 with no option to renew. At that time, the building had a remaining estimated useful life of twenty years. Prior to taking possession of the building, Bob made improvements at a cost of $18,000. These improvements had an estimated useful life of twenty years. The lease expired on June 30 of the current year at which point the improvements had a fair market value of $2,000. The amount that Phil, the landlord, should include in his gross income for the current year is:

$12,000 The lease payments in the current year equal 6 months x $2,000 = $12,000. Improvements made by the lessee are not included until such time as property is disposed of and then only at the property's retained fair market value.

During the current year, Austin, a self-employed individual, paid the following amounts: • Federal income tax - $5,000 • State income tax - $3,000 • Real estate taxes on land (held as an investment) - $800 • State sales taxes - $600 • State occupational license fee - $400. What amount can Austin deduct as taxes by itemizing his deductions?

$3,800 State income and real estate taxes are deductible as itemized deductions. Federal income taxes paid are deductible from the tax liability, but are not itemized deduction. Sales tax, unless a business expense, is not deductible. Occupational license fees are deductible as a direct business cost in which they are deducted for AGI not as itemized deductions.

Three years ago, Derrick loaned Robin $5,000 (Year 1) with the understanding that the loan would be repaid in two years. Last year (Year 3) Robin filed for bankruptcy, and Derrick learned that he would receive $0.10 on the dollar. In the current year, Year 4, the final settlement was made, and Derrick received $300. Assuming the loan is a nonbusiness bad debt, how should Derrick account for the loan?

$4,700 short-term capital loss in the current year. No deduction is allowed for partial worthlessness in the year of bankruptcy for a personal bad debt. Personal bad debts are always classified as short-term capital losses. The $4,700 short-term capital loss may be used to the extent of gains or to a limit of $3,000 short-term capital loss against ordinary income with a carryover of $1,700 shortterm capital loss to the future.

On January 1, Tara reviews her investment portfolio and discovers she had a very profitable year. To offset some of her gains, she sells 100 shares of ABC Corporation for $10,000. She had purchased those shares for $15,000 two years earlier. On January 25th of the same year, Tara reads a newspaper article indicating that the price of ABC Corporation is expected to substantially increase. Second-guessing the wisdom of previously selling her shares of ABC, she purchases an additional 100 shares of ABC for $8,000. What are the tax consequences to Tara this year?

$5,000 realized but not recognized loss Since Tara purchased and sold substantially identical securities within 30 days, a wash-sale occurs. Her realized loss on the sale of the original shares is calculated as follows: Amount realized $10,000 Less: Adjusted Basis $15,000 Gain (Loss) $(5,000) Due to the wash sale transaction, Tara will not be permitted to recognize the loss in the year it was incurred. Instead, the realized but unrecognized loss of $5,000 will be added to her basis of the replacement securities. Tara purchased the replacement securities for $8,000 so adding the unrecognized loss increases her basis for the new shares to $13,000. By increasing the basis in the amount of the unrecognized loss, she will receive that amount back tax-free when she ultimately sells the stock.

Martina, who is age 45 and divorced (2016), received alimony of $30,000 in 2018. In addition, she received $900 in earnings from a part-time job. Martina is not covered by a qualified pension plan. What was the maximum deductible regular IRA contribution that Martina could have made for 2018?

$5,500 Alimony counts as earned income for IRA purposes. Martina is not covered by a pension plan. Therefore, her maximum deductible IRA contribution is $5,500.

Jimmy and Dee Dee, both age 35, are married and filed a joint Federal income tax return for 2018. Jimmy earned a salary of $120,000 and was covered by his employer's pension plan. Dee Dee was not employed and the couple had no other income. On June 15, Jimmy contributed $5,500 to an IRA for himself and $5,500 to an IRA for Dee Dee. The allowable IRA deduction on Jimmy and Dee Dee's year 2018 joint tax return is:

$5,500 Jimmy's IRA is not deductible (phaseout of deductibility of taxpayer that is an active participant). Married filing joint phaseout begins at $101,000 and ends at $121,000 for 2018. Dee Dee's IRA is fully deductible. Active participation in an employer's pension plan by one spouse (Jimmy) does not effect the full deductibility of the other spouse's (Dee Dee) IRA as long as the other spouse (Dee Dee) is not an active participant in an employer-sponsored pension plan. Therefore, the correct answer is $5,500 (Dee Dee's contribution).

What difference does it make if a taxpayer's expenses are classified as unreimbursed employee expenses rather than expenses from self-employment? 1. Unreimbursed employee expenses are not deductible. 2. Expenses from self-employment are deducted above the line and have no AGI floor. 3. Unreimbursed employee expenses are deducted above the line and have no AGI floor.

1 and 2 Unreimbursed employee expenses are not deductible. Expenses from self-employment are deducted above the line and have no AGI floor.

Which of the following are below the line income tax deductions? 1. Medical expenses. 2. Alimony paid. 3. Moving expenses. 4. Tax preparation fees.

1 and 4 Below the line deductions include all itemized deductions. Alimony and moving expenses are above the line deductions found in the Adjustment section of the 1040. Moving expenses are not deductible after 2017 except for active duty military.

Which of the following is/are deductible for adjusted gross income? 1. Alimony paid to the taxpayer's ex-spouse (2016 divorce). 2. Capital losses. 3. Ordinary and necessary expenses incurred in a business. 4. Contribution to a Roth IRA. 5. Child support paid to ex-spouse.

1, 2, and 3 Child support payments are excluded from income for the parent receiving the support, and the parent paying the support does not get a deduction. Contributions to Roth IRAs are not deductible for adjusted gross income.

Harold is 55 years old and has decided to purchase a Long-term Care Insurance Policy. Which of the following most accurately describes the tax and other benefits of purchasing a long term care policy? 1. The policy must be guaranteed renewable or non-cancelable for the premiums to be deductible. 2. Since Harold is less than age 62, only 10% of premiums paid are deductible. 3. Premiums paid are deductible but limited based upon age. 4. The long term care insurance deduction is from AGI.

1,3, and 4 The IRS provides guidelines for the amount of premiums that are deductible based upon the insured's age. The amount of premiums paid is included in the medical expense deduction for total expenditures exceeding 10% of AGI and is from AGI. The policy must be guaranteed renewable or non-cancelable to be qualified.

Clara pursued a hobby of selling antique furniture in her spare time. During the year she sold the furniture for $3,000. She incurred expenses as follows: Cost of goods sold $2,000 Supplies $1,200 Interest on loan to get business started $800 Advertising $750 Assuming that the activity is a hobby, and that she cannot itemize this year, how should she report these items on her tax return?

Include $3,000 in income and deduct nothing for AGI. Clara must include the $3,000 in income and deduct nothing. Hobby expenses are not deductible after 2017.

Which individual can make a deductible contribution to a traditional IRA in the current year?

Phil, who is married, has an AGI of $150,000, and his spouse is an active participant in her employer's defined contribution plan, but he is not an active participant Although Phil's spouse is an active participant, he is not. Therefore, he may make a deductible contribution to a traditional IRA as long as their joint AGI does not exceed $199,000 in 2018.

Which of the following is not a deduction for AGI?

Real estate taxes Real estate taxes are deductible from AGI and are limited to $10,000 after 2017. Moving expenses are not deductible from AGI but rather for AGI for members of the Armed Forces.

Kevin and Teddi own a house at the beach. The house was rented to unrelated parties for eight full weeks during the current year. Kevin and Teddi used the house 16 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income $6,400 Less: Mortgage interest and property taxes $7,000 Other allocated expenses 1,000 (8,000) Net rental loss ($1,600) What is the correct treatment of the rental income and expenses on Kevin and Teddi's joint income tax return for the current year?

The rental expenses (other than interest and taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. Since the personal use (16 days) was more than the greater of 14 days or 10% of rental use (5.6 days), the property will not qualify as primarily rental. The property is classified as mixed-use property. Therefore, no loss is allowed.

Bruce and Kim divorced three years ago. The divorce agreement called for support payments from Kim to Bruce of $100,000 for the first year, $50,000 for the second year, and $20,000 for the third year. Is there any Year 3 alimony recapture and if so, what is the amount?

Yes, $72,500 The shortcut formula for Year 3 alimony recapture is: R3 = P1 + P2 - 2P3 - $37,500 R3 = $100,000 + 50,000 - $40,000 - $37,500 = $72,500

Jack bought 100 shares of XYZ stock for $40 per share ($4,000) two years ago. The stock is now selling for $35 per share and Jack sells it to his son, Luke, for $35 per share. What is Jack's gain or loss and what is Luke's basis? Jack (G/L) Luke's Basis a. $0 $4,000 for gains b. ($500) STCL $3,500 c. $0 $3,500 d. ($500) LTCL $4,000 for losses

a Luke's basis is $4,000 for gains and $3,500 for losses. The double basis rule applies. A transferor (Jack) should never sell or gift an asset to a related party where the current FMV is less than the transferor's basis.