Tax Test 2 Questions
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2020 before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 2020 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 2020 as an offset against income from nonpassive sources? a. $0 b. $12,500 c. $25,000 d. $30,000
correct answer: a. $0 Any rental activity is a passive activity, whether or not the taxpayer participates in the activity. An individual who actively participates in rental real estate activity may use up to $25,000 of net losses from rental real estate activity to offset other income. The $25,000 is reduced by 50% of the amount by which AGI (determined without regard to Social Security, IRA contributions, and passive losses) exceeds $100,000.
Alan Curtis, who is single, had an adjusted gross income of $40,000 in 2020, and he used the standard deduction in his 2020 return. During 2020, Alan contributed $300 to the building fund of State University. What amount was deductible for contributions in Alan's 2020 return? a. $0 b. $50 c. $100 d. $300
correct answer: a. $0 Charitable contributions are allowed as an itemized deduction. Itemized deductions are an election in lieu of the standard deduction.
Mark established a Roth IRA at age 40 and contributed $6,000 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark's gross income? a. $0 b. $80,000 c. $120,000 d. $200,000
correct answer: a. $0 Qualified distributions from a Roth IRA are not included in the taxpayer's gross income and are not subject to the 10% early withdrawal tax. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be (1) made on or after the date an individual attains age 59 1/2; (2) made to a beneficiary (or the individual's estate) on or after the individual's death; (3) attributed to the individual being disabled; (4) used to pay qualified first-time homebuyer expenses; or (5) made upon the birth or adoption of a child. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.
Browne, a self-employed taxpayer, had 2020 business taxable income of $1,030,000 prior to any expense deduction for equipment purchases. In 2020, Browne purchased and placed into service, for business use, office machinery costing $1,035,000. This was Browne's only 2020 capital expenditure. Browne's business establishment was not in an economically distressed area. Browne made a proper and timely expense election to deduct the maximum amount. Browne was not a member of any pass-through entity. What is Browne's deduction under the election? a. $1,030,000 b. $1,035,000 c. $1,040,000 d. $2,590,000
correct answer: a. $1,030,000 Tangible and depreciable personal property can be expensed by up to $1,040,000 in 2020, the year of acquisition. This amount is reduced when the amount of Sec. 179 property placed in service in a given year exceeds $2,590,000. Since this limit does not apply, the maximum deduction would be $1,040,000; however, there are other limits. Section 179(b)(3)(A) limits the deduction to taxable income derived from the active conduct of any trade or business. In this case, the maximum deduction is $1,030,000.
An individual taxpayer reports the following information: U.S. Treasury bond income - $100 Municipal bond income - $200 Rental income - $500 Investment interest expense - $1,000 What amount of investment interest can the taxpayer deduct in the current year? a. $100 b. $300 c. $800 d. $1,000
correct answer: a. $100 Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because the $100 from U.S. Treasury bond income is the only taxable investment income, only $100 of the investment interest expense may be deducted in the current year.
For 2020, Val and Pat White, both age 30, filed a joint return. Val earned $45,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $6,000 in alimony payments (pursuant to a pre-2019 divorce) for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $6,000 to an IRA account. The allowable IRA deduction on their 2020 joint tax return is a. $12,000 b. $6,250 c. $6,000 d. $0
correct answer: a. $12,000 The maximum amount that any taxpayer under the age of 50 may deduct for a contribution to an IRA is limited to the lesser of $6,000 ($7,000 if qualified for a catch-up contribution) or the taxpayer's compensation gross income for the year. The limit is applied separately to each spouse who has compensation and makes a contribution to a separate IRA account. Taxable alimony is treated as compensation for this purpose. The deduction is for AGI. If one spouse is covered by an employer's retirement plan, the deduction is proportionately reduced once earned income exceeds $106,000 in 2020. Thus, Val and Pat may deduct $12,000.
In the current year, a taxpayer reports the following items: Salary - $50,000 Income from partnership A, in which the taxpayer materially participates - $20,000 Passive activity loss from partnership B - ($40,000) During the year, the taxpayer disposed of the interest in partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer's adjusted gross income for the current year? a. $20,000 b. $30,000 c. $60,000 d. $70,000
correct answer: a. $20,000 The salary and income from partnership A are taxable. The amount of a loss attributable to a person's passive activities is allowable as a deduction only to the extent of income attributable to passive activities. However, suspended and current-year losses from passive activities become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. Therefore, the $40,000 passive activity loss from partnership B and the suspended loss carryover of $10,000 are fully deductible. The taxpayer's AGI is Salary - $50,000 + Income from partnership A - $20,000 - Passive activity loss from partnership B - ($40,000) - Suspended loss carryover - ($10,000) = AGI - $20,000
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 12. During Year 12, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 12? a. $25,000 b. $14,000 c. $11,000 d. $0
correct answer: a. $25,000 Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor's AGI. Therefore, Taylor's maximum deductible charitable contribution is equal to 100% of the FMV of the donated land.
Lobster, Inc. purchased the following assets during Year 1: Computers - $35,000 Computer desks - $22,000 Office furniture - $4,000 Delivery trucks -$25,000 Building - $425,000 What should be reported as the cost basis for a MACRS 7-year property? $26,000 $86,000 $451,000 $511,000
correct answer: a. $26,000 Computers and delivery trucks are MACRS 5-year property. Buildings are real property and are depreciated using the straight-line method and the mid-month convention. Office furniture and computer desks are the only items listed that are MACRS 7-year property. The cost basis is $26,000 ($22,000 computer desks + $4,000 office furniture).
Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2020 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2020. The following unreimbursed cash expenditures were among those made by the Whites during 2020: Repair and maintenance of motorized wheelchair for physically handicapped, dependent child - $600 Tuition, meals, and lodging at special school for physically handicapped, dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care - $8,000 Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their 2020 return as qualifying medical expenses? a. $8,600 b. $8,000 c. $600 d. $0
correct answer: a. $8,600 The repair and maintenance of the wheelchair for a handicapped, dependent child is a qualifying medical expense. In addition, the expenses for tuition, meals, and lodging at a residence primarily for medical care for the child are qualifying medical expenses because the meals and lodging are necessary incidents to the medical care.
Which allowable deduction can be claimed in arriving at an individual's adjusted gross income? a. Alimony paid pursuant to a pre-2019 divorce. b. Charitable contribution. c. Federal disaster casualty loss. d. Unreimbursed business expense of an outside salesperson.
correct answer: a. Alimony paid pursuant to a pre-2019 divorce. Adjusted gross income (AGI) determines the allowable amount of several deductions from AGI. AGI equals gross income minus only those deductions named in Sec. 62(a). Alimony paid pursuant to a pre-2019 divorce decree is an above-the-line deduction.
Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns. Upon reviewing a client's computer-generated Year 1 itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct? I. The client's investment interest expense exceeds net investment income. II. The client's qualified residence interest expense reduces the deductible amount of investment interest expense. a. I only. b. II only. c. Both I and II. d. Neither I nor II.
correct answer: a. I only. The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.
Sam and Ann Jefferson filed a joint federal income tax return for the calendar year 2020. Among their cash expenditures during 2020 were the following: $3,000 real estate tax on residence; $400 state and city sales taxes; $900 state income tax. What is the maximum deduction for taxes on the Jeffersons' 2020 return? a. $4,300 b. $3,900 c. $3,400 d. $3,000
correct answer: b. $3,900 State and local real property taxes and state and local personal property taxes are deductible. Also allowed is a deduction for state income taxes (even if the income is exempt from federal tax) and a deduction of state and local sales tax in lieu of state income tax. Since these taxes are not allowed as a deduction for AGI, they are itemized deductions, and are reported on Schedule A.
With regard to depreciation computations made under the general MACRS method, the half-year convention provides that a. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in which the property is disposed of. b. The deduction will be based on the number of months the property was in service, so that one-half month's depreciation is allowed for the month in which the property is placed in service and for the month in which it is disposed of. c. Depreciation will be allowed in the first year of acquisition of the property only if the property is placed in service no later than June 30 for calendar-year corporations. d. Depreciation will be allowed in the last year of the property's economic life only if the property is disposed of after June 30 of the year of disposition for calendar-year corporations.
correct answer: a. One-half of the first year's depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year's depreciation is allowed for the year in which the property is disposed of. The half-year convention applies to all property placed in service after 1986 except for residential rental and nonresidential real property (to which the mid-month convention applies) and except when the mid-quarter convention applies. Under the half-year convention, all property to which it applies is treated as placed in service or disposed of at the midpoint of the year.
Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income? a. $0 b. $15,000 c. $20,000 d. $40,000
correct answer: b. $15,000 A person who actively participates in rental real estate activity is entitled to deduct up to $25,000 in losses from the passive activity against other than passive income. However, the $25,000 limit is reduced by 50% of that person's MAGI (AGI without regard to passive activity losses, Social Security benefits, and other qualified retirement contributions) over $100,000. Smith has $20,000 of MAGI over $100,000. Accordingly, the $25,000 loss deduction must be reduced by $10,000 ($20,000 MAGI excess × 50%), resulting in $15,000 of deductible loss limitation.
Maria, a single taxpayer, had losses totaling $30,000 from a rental real estate activity in which she actively participated. Maria also had $15,000 of income from another rental real estate activity in which she actively participated. She acquired both investments in the current year. If Maria has no other passive income and adjusted gross income before passive losses of $70,000, how much loss from rental activities can she use to offset her portfolio and active income? a. $0 b. $15,000 c. $25,000 d. $30,000
correct answer: b. $15,000 The $25,000 allowance of losses from rental real estate activities in which an individual actively participates is applied by first netting the income and losses from all rental real estate activities in which the taxpayer actively participates [Sec. 469(i)]. If there is a net loss for the year from such activities, net passive income (if any) is then applied against it to determine the amount eligible for the $25,000 allowance. Maria's net loss from active participation activities is $15,000 ($15,000 income - $30,000 losses). This is the amount that Maria may use to offset portfolio income and active income. Note that no phaseout of the $25,000 allowance is necessary since Maria's adjusted gross income before passive losses is less than $100,000.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current year's tax return for investment interest expenses? a. $0 b. $2,000 c. $3,000 d. $5,000
correct answer: b. $2,000 Investment interest may be deducted only to the extent of net investment income, which is any excess of investment income over investment expense. Net investment income equals $2,000 ($10,000 investment income - $8,000 noninterest investment expenses), therefore, only $2,000 of interest expense may be deducted.
During 2020, Jack and Mary Bronson paid the following taxes: Taxes on residence (for period January 1to September 30, 2020) - $2,700 State motor vehicle tax on value of the car - $360 The Bronsons sold their house on June 30, 2020, under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for 2020? a. $1,800 b. $2,160 c. $2,700 d. $3,060
correct answer: b. $2,160 A deduction is allowed for state and local real property taxes and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 [$2,700 × (6 months ÷ 9 months)]. The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted. The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income? a. $3,000 b. $2,600 c. $2,500 d. $1,600
correct answer: b. $2,600 Above-the-line deductions are subtracted from gross income to arrive at adjusted gross income. The $3,000 of wages is included in gross income, and the only above-the-line deduction is for the $400 student loan interest. Therefore, Cole's adjusted gross income is $2,600 ($3,000 wages - $400 student loan interest deduction).
The following information pertains to Cole's personal residence, which sustained (federally declared disaster area) casualty fire damage in 2020: Adjusted basis - $150,000 Fair market value immediately before the fire - $200,000 Fair market value immediately after the fire - $180,000 Fire damage repairs paid for by Cole in 2020 -$10,000 The house was uninsured. Before consideration of any "floor" or other limitation on tax deductibility, the amount of this 2020 casualty loss was a. $30,000 b. $20,000 c. $10,000 d. $0
correct answer: b. $20,000 The amount of a personal casualty loss in a federally declared disaster area is the lesser of the decrease in the fair market value of the property resulting from the casualty or the taxpayer's adjusted basis in the property. The decrease in the fair market value of Cole's residence is $20,000 ($200,000 - $180,000). This is less than the adjusted basis, so the casualty loss is $20,000.
In the current year (2020), Jensen had the following items: Salary - $50,000 Inheritance- $25,000 Alimony from ex-spouse paid pursuant to a 2020 divorce decree - $12,000 Child support from ex-spouse - $9,000 Capital loss on investment stock sale - $(6,000) What is Jensen's AGI for the current year? a. $44,000 b. $47,000 c. $62,000 d. $72,000
correct answer: b. $47,000 Adjusted gross income is gross income minus above the line deductions. Gross income includes wages but does not include inheritance, alimony paid pursuant to a 2020 divorce decree, or child support. Net capital losses are deductible to the lesser of $3,000 or ordinary income. Adjusted gross income is made up of $50,000 of salary and ($3,000) of capital loss for a total of $47,000.
Mary, an unmarried taxpayer, made the following charitable contributions during the current year: A cash contribution to a church - $2,000 A donation of used furniture to a hospital's thrift shop, with a fair market value of - $500 A donation to a state university of publicly-traded stock purchased by Mary for $3,000 4 months ago, with a fair market value of - $4,000 Assuming that Mary's adjusted gross income was $50,000, what amount can Mary claim as a charitable contribution deduction? a. $5,000 b. $5,500 c. $6,000 d. $6,500
correct answer: b. $5,500 Cash contributions are deducted at the cash amount ($2,000). The donation of used furniture is tangible personal property, which is deducted at the lower of FMV or AB ($500, because only the FMV is given). The stock donation is ordinary income property because it is held for investment for less than 1 year and is deducted at the lower of FMV or AB ($3,000). The total deduction is therefore $5,500 ($2,000 cash + $500 furniture + $3,000 stock). The total allowed deduction is well below the overall 50%-of-AGI limit of $25,000 ($50,000 AGI × 50%) for churches, educational organizations, and hospitals; therefore, Mary's deduction is not limited by the overall AGI limit.
Phil and Joan Crawley made the following payments during 2020: Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds) - $4,000 Credit card interest- $500 Interest on home mortgage for period April 1 to December 31, 2020 - $2,700 Points paid to obtain conventional mortgage loan on April 1, 2020 - $900 The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2020? $3,600 $6,600 $7,100 $7,600
correct answer: b. $6,600 The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys' maximum interest deduction is Interest on bank loan - $3,000 + Interest on home mortgage - $2,700 + Points - $900 = Interest deduction$6,600
Based on the following information, compute the 2020 net operating loss (NOL) that an individual can carry over to 2021. 2019 NOL - ($15,000) Wages - $25,000 S corporation ordinary loss - ($40,000) Schedule C net profit - $7,000 Interest income - $1,000 Standard deduction - $12,400 a. $7,000 b. $8,000 c. $19,000 d. $23,000
correct answer: b. $8,000 A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness deductions in excess of nonbusiness income must be excluded. Interest and dividends are not business income. Wages - $25,000 + Schedule C net profit - $7,000 - S corporation ordinary loss - ($40,000) = Net operating loss - ($8,000) Nonbusiness deductions (the standard deduction) are not allowed because there is only $1,000 of nonbusiness income. The NOL carryover from 2019 is not allowed in arriving at the 2020 NOL. The entire NOL can be carried over to 2021.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes? a. As a $500 deduction to arrive at AGI for the year. b. As a $1,000 deduction to arrive at AGI for the year. c. As a $1,000 itemized deduction. d. As a nondeductible item of personal interest.
correct answer: b. As a $1,000 deduction to arrive at AGI for the year. Taxpayers may deduct up to $2,500 of interest paid on qualified educational loans. The deduction is subject to income limits. The phaseout range begins when AGI exceeds $70,000 for unmarried individuals and ends at $85,000. The deduction is taken above-the-line to arrive at AGI for the year.
In 2020, Welch paid the following expenses: Premiums on an insurance policy against loss of earnings due to sickness or accident - $3,000 Physical therapy after spinal surgery- $2,000 Premium on an insurance policy that covers reimbursement for the cost of prescription drugs- $500 In 2020, Welch 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 Welch's 2020 income tax return for medical expenses? a. $4,000 b. $3,500 c. $1,000 d. $500
correct answer: c. $1,000 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 - $1,500 reimbursement) + $500].
In 2020, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $2,591,000. What portion of the cost may Roe elect to treat as a Sec. 179 expense rather than as a capital expenditure? a. $1,019,000 b. $1,020,000 c. $1,039,000 d. $1,040,000
correct answer: c. $1,039,000 A taxpayer may treat up to $1,040,000 of the cost of Sec. 179 property acquired during 2020 as an expense rather than as a capital expenditure. The amount deductible under Sec. 179 must be reduced by the amount by which the cost of Sec. 179 property placed in service during the year exceeds $2,590,000. Thus, $1,040,000 is reduced by $1,000 ($2,591,000 - $2,590,000) to find the allowable Sec. 179 deduction.
Kell Corporation's financial accounting income for 2020 includes operating expenses of $4,000 for depreciation of a machine that Kell purchased and placed in service in January 2020 for use in the active conduct of Kell's business. This machine cost $1,327,000 and has an estimated useful life of 4 years, with no salvage value. No other fixed assets were acquired during 2020. Kell has taxable income and wishes to minimize its 2020 income tax to the fullest possible extent. The proper election was made in connection with the tax treatment of this machine in Kell's 2020 income tax return. Kell's book income before tax for 2020 is $2,018,000. No other differences between book and tax income exist for 2020. How much can Kell expense under Sec. 179? a. $0 b. $1,020,000 c. $1,040,000 d. $1,327,000
correct answer: c. $1,040,000 If a firm wishes to minimize its taxable income for a given year, a Sec. 179 deduction may be made. Section 179 allows a taxpayer to elect to treat all or part of the cost of Sec. 179 property as an expense. The maximum amount that may be taken into account under this election for 2020 is $1,040,000.
On January 2, 2015, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2020, they borrowed $15,000 secured by their home and used the cash to add a new room to their residence. That same year, they took out a $5,000 auto loan. The following pertains to interest paid in 2020: Mortgage interest - $17,000 Interest on room construction loan - $1,500 Auto loan interest- $500 For 2020, how much interest is deductible prior to any itemized deduction limitations? a. $17,000 b. $17,500 c. $18,500 d. $19,000
correct answer: c. $18,500 The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence secured by a qualified residence to the extent it does not exceed the fair market value of the residence. Thus, the interest on the room construction loan is deductible. This is based on the assumption that the fair market value of the home is at least $215,000.
A review of Bearing's Year 2 records disclosed the following tax information: Wages - $18,000 Taxable interest and qualifying dividends - $4,000 Schedule C trucking business net income - $32,000 Rental (loss) from residential property - ($35,000) Limited partnership (loss) - ($5,000) Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's Year 2 adjusted gross income? a. $14,000 b. $19,000 c. $29,000 d. $54,000
correct answer: c. $29,000 Since the loss from the limited partnership interest is passive and there is no passive income, no loss deduction is permitted. Additionally, real estate losses for active participants are limited to $25,000 per year. Therefore, AGI is $29,000 ($18,000 wages + $4,000 taxable interest and qualifying dividends + $32,000 Schedule C net income - $25,000 rental loss).
What is the amount of the net operating loss for 2020 based on the following information? Total income:Interest on nonbusiness savings - $850 Net long-term capital gain on sale of business property - $2,000 Salary - $1,000 Total deductions:Net loss from business (sales of $86,000 less expenses of $92,000) - $6,000 Net nonbusiness short-term capital loss on sale of stock - $1,000 Standard deduction - $12,400 a. $0 b. $2,150 c. $3,000 d. $15,550
correct answer: c. $3,000 A net operating loss is defined as the excess of allowable deductions (as modified) over gross income [Sec. 172(c)]. An NOL generally includes only items that represent business income or loss. Personal casualty losses and wage or salary income are included as business items. Nonbusiness income in excess of nonbusiness deductions must be included. Interest and dividends are not business income. Net loss from business - ($6,000) + Capital gain on business property - $2,000 + Salary - $1,000 = Net operating loss - ($3,000) The nonbusiness capital loss cannot be offset against the business-related capital gain. The nonbusiness deductions (the standard deduction) exceed the nonbusiness income (interest), and both items are excluded from the NOL calculation.
Taxpayer G had the following items of income and loss in 2020: Wages - $28,000 Nonbusiness bad debt - $1,000 Gain on commodity futures held14 months -$1,000 Loss on stock purchased in 2000 - $800 Flood loss on personal residence owned since 2002 and located in a federally declared disaster area - $4,500 Gain on stock held 13 months - $4,500 Determine the overall result of the transactions. a. $200 long-term capital gain. b. $800 long-term capital loss. c. $3,700 long-term capital gain. d. $4,700 long-term capital gain.
correct answer: c. $3,700 long-term capital gain. Nonbusiness bad debts are treated as short-term capital losses. The nonbusiness bad debt is the only short-term transaction. The long-term transactions are the $800 loss on stock, the $4,500 gain on stock, and the $1,000 gain on commodity futures. The flood loss is an itemized deduction, not a deductible capital loss. Net short-term gain or loss: Nonbusiness bad debt - ($1,000) Net long-term gain or loss: 2000 stock loss - ($800) + 13-month stock gain - $4,500 + Commodity futures gain - $1,000 = 4,700 = Net capital gain - $3,700 The net capital gain is included in taxable income and is taxed as a long-term gain.
Moore, a single taxpayer, had $50,000 in adjusted gross income for 2020. During 2020, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2019 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2020? a. $10,000 b. $23,000 c. $30,000 d. $33,000
correct answer: c. $30,000 Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer's AGI, or $30,000 in this case. The carryover is deductible this year to the extent that the total deduction does not exceed the 60%-of-AGI limit, or $7,000 ($30,000 - $23,000).
A taxpayer purchased and placed in service during the year a $100,000 piece of equipment. The equipment is 7-year property. The first-year depreciation for 7-year property is 14.29%. Assume that, of the allowable Sec. 179 limit for the current year, $25,000 is allocated to this piece of equipment. The taxpayer has opted out of bonus depreciation. What amount is the maximum allowable depreciation? a. $14,290 b. $25,000 c. $35,718 d. $39,290
correct answer: c. $35,718 Depreciation for an asset is first determined based upon the election of the taxpayer to take a Sec. 179 expense on the asset. However, if the taxpayer chooses to expense any of the property, the property's adjusted basis is reduced by the Sec. 179 expense in determining the applicable depreciation base. Therefore, the depreciation is calculated as follows: Purchase price of asset - $100,000 - Sec. 179 expense - ($25,000) = Depreciable basis - $75,000 - Times: Depreciation rate (14.29%) - ($10,718) = New adjusted basis of equipment - $64,282 Total depreciation for the first year equals $25,000 + $10,718 = $35,718.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2020. The following additional information is available for 2020: Cash contribution to church- $4,000 Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) - $1,200 Donation of used clothing to Salvation Army (fair value evidenced by receipt received)- $600 What is the maximum amount Spencer can claim as a deduction for charitable contributions in 2020? a. $5,400 b. $5,200 c. $5,000 d. $4,400
correct answer: c. $5,000 The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.
Robert Francis O'Connor, a single taxpayer age 30, had adjusted gross income of $17,250 in 2020. Upon examining his records, he listed the following deductions for the year: Medical expenses - $3,000 Charitable contributions - $2,300 State income taxes paid - $1,160 Business expenses paid with an advance from employer but excess was retained by Robert - $1,500 The amount of his allowable itemized deductions for 2020 is a. $2,866 b. $6,666 c. $5,166 d. $6,460
correct answer: c. $5,166 Qualifying medical expenses in excess of 7.5% of AGI may be deducted. State income taxes and qualifying charitable contributions also may be deducted. An employee's reimbursed business expenses must be covered under an accountable plan to be excluded from income. Otherwise, they are included in the employee's income and not deductible by the employee. Medical expenses$ 3,000 - 7.5% of AGI - ($1,294) = $1,706 + Charitable contributions - $2,300 + State income taxes paid - $1,160 = $5,166
Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be a. Neither carried back nor carried forward. b. Carried back 3 years or carried forward 15 years. c. Carried forward 5 years. d. Carried forward indefinitely until fully deducted.
correct answer: c. Carried forward 5 years. Any contributions that exceed the 50% limitation may be carried over and deducted in the subsequent 5 years. These carryovers are subject to the limitations that apply in subsequent years. Thus, carryovers may be deducted only to the extent that the limitation of the subsequent year exceeds the contributions made during that year. These general rules also apply with regard to the special limitations (e.g., the 60% or 30% limitation).
In computing an individual's net operating loss, which of the following is not considered business income or deduction(s)? a. Wages. b. Personal casualty loss. c. Gain on sale of investment property. d. Gain on sale of business property.
correct answer: c. Gain on sale of investment property. Business and nonbusiness income and deductions need to be distinguished because nonbusiness deductions are deductible in computing a NOL only to the extent of nonbusiness income. Nonbusiness deductions and income are those that are not attributable to, or derived from, a taxpayer's trade or business. Also, capital losses are only deductible to the extent of capital gains. A gain on the sale of investment property is a capital gain and not business income.
The 2020 deduction by an individual taxpayer for interest on investment indebtedness is a. Limited to investment interest paid in 2020. b. Limited to the taxpayer's 2020 interest income. c. Limited to the taxpayer's 2020 net investment income. d. Not limited.
correct answer: c. Limited to the taxpayer's 2020 net investment income. The deduction for interest on investment indebtedness is limited to the amount of net investment income for the taxable year. Any disallowed investment interest may be carried over and treated as investment interest paid or accrued in the succeeding taxable year.
Data Corp., a calendar-year corporation, purchased and placed into service office equipment during November 2020. No other equipment was placed into service during 2020. Under the general MACRS depreciation system, what convention must Data use? a. Full-year. b. Half-year. c. Mid-quarter. d. Mid-month.
correct answer: c. Mid-quarter. The taxpayer must apply the mid-quarter convention to all depreciable property acquired during the tax year when the sum of the bases of all depreciable personal property placed in service during the last quarter of the year exceeds 40% of those placed in service during the entire year. In this case, 100% of the property was placed into service in the last quarter.
In 2020, the Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as a. Deductible personal interest. b. Deductible qualified residence interest. c. Nondeductible interest. d. Investment interest expense.
correct answer: c. Nondeductible interest. Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.
Which one of the following expenditures qualifies as a deductible medical expense for tax purposes? a. Vitamins for general health not prescribed by a physician. b. Health club dues. c. Transportation to physician's office for required medical care. d. Mandatory employment taxes for basic coverage under Medicare A.
correct answer: c. Transportation to physician's office for required medical care. The IRC defines medical care as including transportation for needed medical care.
In 2020, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith's mother. Of this amount, $2,800 covered back taxes for 2019, and $3,200 covered 2020 taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith's itemized deductions on his 2020 return, what amount was Smith entitled to claim for realty taxes? a. $6,000 b. $3,200 c. $3,000 d. $0
correct answer: d. $0 Taxes may be deducted only by the person on whom they are legally levied or by someone with a legally recognized interest in the property. Smith does not own the house, therefore none of the taxes paid can be deducted on his tax return and the payment is treated as a gift to Smith's mother. Smith's mother is entitled to the deduction only if she pays the taxes.
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2020. During the year, they paid the following medical-related expenses: Over-the-counter medicines - $400 Prescription drugs -$300 Doctor fees - $830 Health club membership (recommended by the family doctor for general health care) - $800 Medical care insurance - $280 How much may the Waltons use as medical expenses in calculating itemized deductions for 2020? a. $1,410 b. $465 c. $110 d. $0
correct answer: d. $0 The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers' general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included. Medical care insurance - $280 + Doctor fees - $830 + Prescription drugs - $300 = Total expenses - $1,410 Less: 7.5% of AGI - ($1,875) = Allowable medical expense deduction - $0
Paul and Lois Lee, both age 50, are married and filed a joint return for 2020. Their 2020 adjusted gross income was $126,000, including Paul's $121,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could the Lees contribute to IRAs for 2020 to take advantage of their maximum allowable IRA deduction in their 2020 return? a. $0 b. $6,000 c. $13,000 d. $14,000
correct answer: d. $14,000 The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,000 or the taxpayer's compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up contribution is allowed in addition to the $6,000 per year IRA contribution limit. If one spouse is eligible to make deductible IRA contributions, that spouse may contribute up to $14,000 if a joint return is filed and both taxpayers are age 50 or over. Furthermore, the Lees may deduct their IRA contribution for AGI.
In 2020, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income? a. $55,000 b. $50,000 c. $46,000 d. $40,000
correct answer: d. $40,000 In 2020, self-employed individuals can deduct 50% of FICA taxes paid and 100% of payments made for health insurance coverage for the individual and his or her family. Alimony is gross income to the recipient and deductible by the payor. Contributions of up to $6,000 to an individual retirement account are deductible. The taxpayer's AGI is $40,000 [$57,000 GI - $4,000 SE tax paid - $6,000 health insurance - $5,000 alimony (paid pursuant to a pre-2019 divorce) - $2,000 contribution to IRA].
Mrs. King is a general partner with a 20% interest in a partnership that leases equipment on a long-term basis. She is not regularly involved in the partnership business. During the current year, the partnership has a $200,000 loss, which includes a $250,000 loss from operations and $50,000 of interest income on funds the partnership plans to use to buy more equipment. What is Mrs. King's passive loss for the current year? a. $0 b. $30,000 c. $40,000 d. $50,000
correct answer: d. $50,000 A passive activity includes a rental activity when the average rental period is not short-term. However, portfolio income of an activity (e.g., interest, dividend, royalty, or annuity income earned on funds set aside for the future use of the activity) is not treated as passive income from the activity [Sec. 469(e)]. Therefore, the $250,000 loss from operations is a loss from a passive activity. Mrs. King's passive loss is $50,000 ($250,000 × 20% interest). Note that the question is asking for the passive loss, not the deduction from the passive loss.
Juliet bought and placed in service computer equipment in 2020. She paid $10,000 and received a $2,000 trade-in allowance for her old computer equipment. She had an adjusted basis of $3,000 in the old computer equipment. Juliet used both the old and new equipment 90% for business and 10% for personal purposes. Her allowable Sec. 179 expense deduction is a. $12,000 b. $10,800 c. $10,000 d. $9,000
correct answer: d. $9,000 In 2020, Sec. 179 allows a taxpayer to treat up to $1,040,000 of the cost of Sec. 179 property acquired as an expense rather than as a capital expenditure. However, the cost of Sec. 179 property does not include the basis determined by reference to other property held by the taxpayer [Sec. 179(d)(3)]. The basis of the new computer is $12,000 ($2,000 basis of old computer + $10,000 purchase price). Since Sec. 179 does not apply to any portion of the basis that references an asset that was previously held by the taxpayer, only $10,000 of basis is eligible for Sec. 179 [Reg. 1.179-4(d)]. However, only the 90% portion of the computer used for business will qualify. Therefore, the Sec. 179 expense is $9,000 (90% × $10,000 cost).
George wants to take bonus depreciation on equipment he placed in service in 2020. What percentage of the cost of equipment can George deduct in 2020 as bonus depreciation? a. 80% b. 40% c. 60% d. 100%
correct answer: d. 100% The 50% first-year bonus depreciation increased to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. For certain properties with longer production periods, the acquisition and placed-in-service period is after September 27, 2017, and before January 1, 2024.
Which of the following is not an itemized deduction? a. Gambling losses up to the amount of gambling winnings. b. Medical expenses. c. Real estate tax. d. Employee business expenses.
correct answer: d. Employee business expenses. The miscellaneous itemized deductions subject to a 2%-of-AGI exclusion were suspended after 2017. The three categories of these miscellaneous itemized deductions were employee expenses, tax determination expenses, and other expenses.
Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2019 income tax return. Harvey plans to itemize again in 2020, and the following information relating to his state income taxes is available: Taxes withheld in 2020 - $2,500 Refund received in 2020 of 2019 tax - $500 Assessment paid in 2020 of 2018 tax - $700 The above information should be reported by Harvey in his 2020 tax return as a. State and local income taxes of $2,500. b. State and local income taxes of $2,700. c. State and local income taxes of $3,200. d. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.
correct answer: d. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500. State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her employer in the year such amounts are withheld. Assessments of state income taxes are deductible in the year of payment by a cash-basis taxpayer even if the payments relate to prior years. A refund of a prior year's tax payment must be included in the taxpayer's gross income in the year received if the taxpayer deducted the taxes in an earlier year. In 2020, Harvey should deduct the taxes withheld of $2,500 and the assessment paid of $700. He should include the $500 refund he received in gross income.
Which of the following statements regarding the Sec. 179 deduction is not true? a. The amount that is not deductible due to the taxable income limitation can be carried forward. b. The amount expensed cannot exceed the taxable income derived from any trade or business during the tax year. c. The maximum deductible amount is reduced if property placed in service during the tax year exceeds $2,590,000. d. The maximum cost that is deductible for 2020 is $1,020,000.
correct answer: d. The maximum cost that is deductible for 2020 is $1,020,000. There are several limitations on the deduction allowed by Sec. 179. One limitation is taxable income and, to the extent that causes an amount to be nondeductible, such amount may be carried forward to be deducted in future years. This carryover is subject to all the limitations as if it were an expense of the current year. The maximum cost that is deductible for 2020 is $1,040,000. This amount is reduced if the Sec. 179 property placed in service during the year exceeds $2,590,000. The prior year maximum was $1,020,000.
Select the true statement based on the following information for the taxpayer's current year: Nonpassive income from activity A - $35,000 Passive activity income from activity B - $10,000 Suspended loss carryover from passive activity C [activity C was disposed of in the current year] - ($12,000) a. The suspended loss reduces activity B income to $0 and the $2,000 balance of loss is lost. b. The suspended loss of activity C is lost due to disposal of the activity. c. The suspended loss reduces activity A income to $23,000. d. The suspended loss reduces activity A income to $33,000.
correct answer: d. The suspended loss reduces activity A income to $33,000. Suspended losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity. The loss is deductible first against net income or gain from other passive activities, and any remainder of the loss is treated as nonpassive loss deduction. Therefore, the activity C $12,000 suspended loss first reduces the activity B $10,000 income to $0, and the remaining $2,000 reduces the activity A income to $33,000.
