Reg Chapter 2

Robbe, a cash basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $5,500, consisting solely of $5,500 of state income taxes paid last year. Robbe's itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? a. Include none of the refund in income in the current year. b. Amend the prior-year's return and reduce the claimed itemized deductions for that year. c. Include $1,150 in income in the current year. d. Include $1,500 in income in the current year.

Explanation Rule: IRC Section 111 provides that gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax previously imposed (the tax benefit rule). Choice "c" is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this question, only $1,150 of the state income taxes was actually deducted as an itemized deduction last year. The recovery is thus limited in the amount actually deducted (and not to the entire amount of the state tax refund). Choice "a" is incorrect. The amount deducted, not $0, is included in income in the current year. Choice "d" is incorrect. The amount originally deducted, not necessarily the entire amount of the refund, is included in income in the current year. Choice "b" is incorrect. The amount deducted is included in income in the current year. It is not necessary to amend the prior year's return.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for the current year? a. $0 b. $90 c. $400 d. $300

Choice "a" is correct. $0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty."

Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the regular standard deduction for a couple married filing jointly is $12,600. What is the maximum standard deduction available to Bob and Nancy? a. $15,100 b. $12,600 c. $13,850 d. $13,800

Choice "a" is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,250 each in addition to the regular amount. $12,600 + $1,250 + $1,250 = $15,100 Choices "b", "d", and "c" are incorrect. Per the above explanation, they would each be entitled to the additional standard deduction in the amount of $1,250 each.

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after school-care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return? a. $500 b. $1,200 c. $800 d. $1,600

Choice "a" is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for 1 dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500. Choices "d", "c", and "b" are incorrect, per the above explanation.

Which of the following credits can result in a refund even if the individual had no income tax liability? a. Earned Income Credit. b. Child and Dependent Care Credit. c. Credit for the Elderly or Permanently Disabled. d. Adoption Credit.

Choice "a" is correct. The Earned Income Credit is refundable. The other credits listed are not refundable. Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable. Choices "b", "d", and "c" are incorrect, per the above explanation.

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the: a. Deductible Keogh contribution and one-half of the self-employment tax. b. Self-employment tax. c. Deductible Keogh contribution. d. Self-employment tax and one-half of the deductible Keogh contribution.

Choice "a" is correct. For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax. Choice "c" is incorrect. For Keogh plans, earned income is also reduced by ½ the self-employment tax. Choice "b" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax, not the entire tax. Choice "d" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax and the full amount of the deductible Keogh contribution.

Cassidy, an individual, reported the following items of income and expense during the current year: Salary $ 50,000 Alimony paid to a former spouse 10,000 Inheritance from a grandparent 25,000 Proceeds of a lawsuit for physical injuries 50,000 What is the amount of Cassidy's adjusted gross income? a. $40,000 b. $115,000 c. $50,000 d. $125,000

Choice "a" is correct. Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries. Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income, as follows: Gross Income: Salary $ 50,000 Inheritance 0 Proceeds from physical injury lawsuit 0 Adjustments: Alimony paid (10,000) Adjusted gross income $ 40,000 Choice "c" is incorrect. Although salary is the only item of taxable gross income on the list, alimony is an allowable adjustment to arrive at adjusted gross income. Choice "b" is incorrect. This answer choice includes all items of income given and deducts the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income. Choice "d" is incorrect. This answer choice includes all items of income given and does not deduct the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income, and alimony IS an allowable deduction from gross income.

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year: a. Is limited to $100,000 on a joint income tax return. b. Must exceed the taxpayer's net equity in the residence. c. Includes acquisition indebtedness secured by a qualified residence. d. May exceed the fair market value of the residence.

Choice "a" is correct. Home equity indebtedness is limited to $100,000 on a joint income tax return (or single return), but only $50,000 if married filing separately. Choices "c" and "d" are incorrect. 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. Choice "b" is incorrect. There is no requirement that home equity indebtedness must exceed the taxpayer's net equity in the residence.

The self-employment tax is: a. One-half deductible from gross income in arriving at adjusted gross income. b. Not deductible. c. Fully deductible as an itemized deduction. d. Fully deductible in determining net income from self-employment.

Choice "a" is correct. One-half of the self-employment tax is deductible to arrive at adjusted gross income. Choice "c" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income. Choice "d" is incorrect. Self-employment tax is not deductible in determining self-employment income. Choice "b" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.

Which of the following is not an adjustment to arrive at adjusted gross income? a. Qualified mortgage interest paid. b. Alimony paid. c. Self-employed FICA (50%). d. Self-employed health insurance.

Choice "a" is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction. Choices "d", "b", and "c" are incorrect. Each of these items is an adjustment to gross income to arrive at adjusted gross income.

Matthews was a cash basis taxpayer whose current year records showed the following: State and local income taxes withheld $ 1,500 State estimated income taxes paid December 30 of the current year 400 Federal income taxes withheld 2,500 State and local income taxes paid April 17 of the following year 300 What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040? a. $1,900 b. $1,500 c. $2,200 d. $4,700

Choice "a" is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900. Choice "d" is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid. Choice "c" is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid. Choice "b" is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year.

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income? a. Subscriptions to professional journals. b. Moving expenses. c. Medical expenses. d. Gambling losses to the extent of winnings.

Choice "a" is correct. Subscriptions to professional journals are miscellaneous itemized deductions subject to the 2% of AGI limitation. Choice "d" is incorrect. Gambling losses to the extent of winnings are considered to be miscellaneous itemized deductions. However, they are not subject to the 2% of AGI limitation. Choice "c" is incorrect. Medical expenses are a category of itemized deductions that are subject to a 10% AGI limitation (or 7.5% if age 65 or older). Choice "b" is incorrect. Moving expenses are an adjustment and not an itemized deduction.

Jeffrey, a single taxpayer, had $55,000 in adjusted gross income for the current year. During the current year he contributed $19,500 to his church. He had a $5,000 charitable contribution carryover from his prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Jeffrey could report as an itemized deduction for the current year? a. 24,500 b. 27,500 c. 5,000 d. 19,500

Choice "a" is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Jeffrey's contribution limit for the current year would be $55,000 × 50% = $27,500. Against that limit, he would be able to take his contribution carryover from the prior year ($5,000) and the current year's contributions ($19,500) for a total of $24,500. Choice "b" is incorrect. This is the maximum allowed; however, Jeffrey cannot deduct more than he actually contributed. Choice "d" is incorrect. Jeffrey is able to take his carryover contributions from the prior year as well. Choice "c" is incorrect. Jeffrey is not limited to only his carryover contributions.

During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense? a. $0 b. $2,700 c. $3,700 d. $3,000

Choice "a" is correct. There is no itemized deduction for temporary living expenses, and the direct moving expenses (such as the costs to move the goods and the costs to move the taxpayer's family from the old to the new location) are deductible before adjusted gross income, not as an itemized deduction.

Which of the following transportation expenses incurred by an employee is not deductible? a. An employee drives from home to his or her office. b. An employee drives from his or her office to the office of a client. c. An employee flies from San Francisco to Miami on business. d. An employee drives from a first job to second.

Choice "a" is correct. This is an example of a commuting expense and is not deductible. Choice "c" is incorrect. This is deductible out-of-town travel. Choice "d" is incorrect. Transportation from one job to another is deductible. Choice "b" is incorrect. Transportation from a main office to another office or temporary location is deductible.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for taxes expense in their itemized deductions on Schedule A for the current year? a. $7,650 b. $1,200 c. $3,825 d. $5,025

Choice "b" is correct. $1,200 tax deduction for state income tax. Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI.

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction of Jimet's current year income tax return? a. $2,000 b. $1,500 c. $0 d. $5,000

Choice "b" is correct. $1,500. Deductible amount is lower of: Stock at cost (short term property) $1,500* AGI limit (50% of $30,000) 15,000 *Allowable contribution Rule: Contributions of long-term property are generally deductible at fair market value at the date of the gift. Contributions of short-term property are generally deductible at the lower of cost or fair market value. The cash gift to the "needy family" is not deductible because charitable contributions need be made to organizations that are qualified by the IRS to be deductible.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A for the current year? a. $0 b. $60 c. $160 d. $100

Choice "b" is correct. $60 Payment to qualified charity $ 160 Fair value of 4 tickets at $25 (100) Charitable contribution $ 60

Which of the following requirements must be met in order for a single individual to qualify for the additional standard deduction? Must support dependent child or aged parent Must be age 65 or older or blind a. No No b. No Yes c. Yes Yes d. Yes No

Choice "b" is correct. In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.

Which of the following statements about the alternative minimum tax (AMT) of an individual is correct? a. It is determined from the tax rate schedules and computed on income that exceeds $100,000. b. AMT credits may be carried forward to future tax years. c. It is calculated after certain tax preference items that may be used as an alternative to the regular tax are deducted. d. It is computed on an individual's regular taxable income at a rate of 28%.

Choice "b" is correct. AMT credits may be carried forward indefinitely against regular tax. Choice "a" is incorrect. The AMT of an individual is determined by adjusting the individual's regular taxable income by certain tax preference items and adjustments, subtracting the AMT exemption, and applying the applicable AMT rates to the resulting AMT income. Choice "d" is incorrect. AMT is based on tax rates of both 26% and 28%. Choice "c" is incorrect. Tax preference items are added back to taxable income in computing alternative minimum taxable income (AMTI).

During the current year, Wood's residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood's current year adjusted gross income was $60,000 and he did not have any casualty gains. What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations? a. $20,000 b. $13,900 c. $25,000 d. $19,900

Choice "b" is correct. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property's basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.) Choice "c" is incorrect. This is the market value decline minus the adjusted basis. Choice "a" is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied. Choice "d" is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.

Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to the two percent-of-adjusted-gross-income floor? a. Employee's unreimbursed moving expense. b. Employee's unreimbursed business car expense. c. One-half of the self-employment tax. d. Self-employed health insurance.

Choice "b" is correct. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor. Choice "c" is incorrect. One-half of the self-employment tax is deductible, but it is a deduction to arrive at adjusted gross income, not as an itemized deduction. Choice "a" is incorrect. The employee's unreimbursed moving expense is deductible, but it is a deduction to arrive at adjusted gross income, not an itemized deduction. Choice "d" is incorrect. Self-employed health insurance is deductible, but not as an itemized deduction subject to the 2% floor.

For the current year, Val and Pat White filed a joint return. Val earned $35,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $5,000 in alimony payments for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is: a. $2,000 b. $10,000 c. $0 d. $5,000

Choice "b" is correct. In 2016, taxpayers can contribute and deduct up to $5,500 per year to an IRA, and alimony is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at AGI of $98,000 and is complete at $118,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $184,000 and is complete at $194,000 (2016). The earned income for IRA purposes here is $40,000 ($35,000 + $5,000), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made. Choice "d" is incorrect. Pat's alimony is deemed "earned income" for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $5,500, provided the couple's combined earned income is at least $11,000. Choice "a" is incorrect. The $2,000 was a pre-2002 rule for IRA contribution limits for individuals and is a distractor in this case. Choice "c" is incorrect. When a taxpayer or taxpayer's spouse is an active participant in a pension plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as is in this case).

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes: Real estate tax on personal residence $ 2,000 Ad valorem tax on personal automobile 500 Current-year state and city income taxes withheld from paycheck 1,000 What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return? a. $1,000 b. $3,500 c. $2,500 d. $3,000

Choice "b" is correct. In answering this question, we must assume that the examiners mean to ask, "What total amount of the tax expense should the Rites claim as an itemized deduction?" Obviously, the Rites have more deductions than just those tax deductions above, or they would take advantage of the standard deduction. In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions. The total amount of deductions for tax expense is calculated as follows: Real estate tax on personal residence $ 2,000 Ad valorem tax on personal automobile 500 Current-year state and city income taxes withheld 1,000 Total deduction for taxes $ 3,500 Choice "a" is incorrect. Real estate taxes and personal property taxes are allowable itemized deductions. Choice "c" is incorrect. Current-year state and city income taxes withheld from a paycheck are allowable itemized deductions. Choice "d" is incorrect. Personal property taxes (e.g., ad valorem taxes paid) are allowable itemized deductions.

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 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 information pertains to interest paid in Year 4: Mortgage interest $17,000 Interest on room construction loan 1,500 Auto loan interest 500 For Year 4, how much interest is deductible, prior to any itemized deduction limitations? a. $19,000 b. $18,500 c. $17,000 d. $17,500

Choice "b" is correct. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Choice "c" is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Choice "d" is incorrect. Mortgages of up to $1,000,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Choice "a" is incorrect. Interest on auto loans (consumer interest) is not deductible.

Poole is 45 years old and unmarried. Assume that he is subject to a 15% tax bracket. He had adjusted gross income of $20,000. The following information applies to Poole: Medical expenses $ 8,000 Standard deduction 4,700 Personal exemption 3,000 Poole wishes to minimize his income tax. What is Poole's total income tax? a. $3,000 b. $1,650 c. $1,350 d. $1,845

Choice "b" is correct. Poole's total income tax would be calculated as follows: Adjusted gross income (AGI) $ 20,000 Itemized deductions (6,000) * 14,000 Personal exemption (3,000) Taxable income $ 11,000 Tax rate × 0.15 Total income tax $ 1,650 * Larger of $4,700 standard deduction or $6,000 itemized deduction ($8,000 medical expenses less 10% × $20,000 AGI). Choice "a" is incorrect. Deduct itemized deductions and the personal exemption from adjusted gross income to arrive at the taxable income. Choice "d" is incorrect. Deduct $6,000 itemized deductions ($8,000 medical expenses less 10% × $20,000 adjusted gross income) since it is larger than the $4,700 standard deduction. Choice "c" is incorrect. Deduct $6,000 in itemized deductions, not $8,000. Reduce the $8,000 medical expenses by 10% of the adjusted gross income ($8,000 − $2,000 = $6,000).

Grey, a calendar-year taxpayer, was employed and resided in New York. On February 2, of the current year, Grey was permanently transferred to Florida by his employer. Grey worked full-time for the entire year. In the current year, Grey incurred and paid the following unreimbursed expenses in relocating: Lodging and travel expenses while moving $ 1,000 Pre-move househunting costs 1,200 Costs of moving household furnishings and personal effects 1,800 What amount was deductible as moving expense on Grey's current year tax return? a. $1,800 b. $2,800 c. $1,000 d. $4,000

Choice "b" is correct. The $1,000 lodging and travel expenses are fully deductible. A pre-move househunting trip is not deductible. The $1,800 expense of moving household furnishings and personal effects is fully deductible. The total deductible amount is $2,800 ($1,000 + $1,800). Choice "d" is incorrect. Pre-move househunting costs are not deductible. Choice "a" is incorrect. Lodging and travel expenses while moving are fully deductible. Choice "c" is incorrect. Costs of moving household furnishings and personal effects are fully deductible.

Deet, an unmarried taxpayer, qualified to itemize current year deductions. Deet's adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet's current year income tax return? a. $3,500 b. $11,000 c. $12,500 d. $2,000

Choice "b" is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer's limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property. Choice "c" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Choice "a" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property. Choice "d" is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year: 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 the current year? a. $4,400 b. $5,000 c. $5,400 d. $5,200

Choice "b" is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). Note that the total contributions deduction is below the 50% of adjusted gross income ceiling (50% x $60,000 = $30,000), since $5,000 is less than $30,000. Choice "c" is incorrect. The art object deduction is not its fair market value of $800, but the $400 excess paid over its fair market value. Choice "d" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the art object deduction is only the $400 excess paid over fair market value, not the $1,200 paid. Choice "a" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value.

Which of the following is not a refundable tax credit? a. Earned income credit. b. Retirement savings contribution credit. c. Child tax credit. d. Excess social security paid.

Choice "b" is correct. The Retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess social security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Which of the following statements about the child and dependent care credit is correct? a. The child must be under the age of 18 years. b. The credit is nonrefundable. c. The child must be a direct descendant of the taxpayer. d. The maximum credit is $600.

Choice "b" is correct. The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a "personal" tax credit. Choice "a" is incorrect. The child must be under age 13, not age 18, to be a qualifying child and for there to be a credit. Choice "c" is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer. Choice "d" is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase out for AGI over $15,000. There is no pure $600 limit.

Robinson's personal residence was partially destroyed by fire. Its fair market value (FMV) before the fire was $500,000, and the FMV after the fire was $300,000. Robinson's adjusted basis in the home was $350,000. Robinson settled the insurance claim on the fire for $175,000. If Robinson's adjusted gross income for the year is $120,000, what amount of the casualty loss may Robinson claim after consideration of threshold limitations? a. $24,900 b. $12,900 c. $13,000 d. $25,000

Choice "b" is correct. The computation of the allowable casualty loss is as follows: Lesser of: Decrease in fair market value ($500,000 - $300,000) $ 200,000 or Adjusted basis $ 350,000 $ 200,000 Less: insurance proceeds (175,000) Economic loss 25,000 Less: 100 floor (applied to each separate casualty loss) (100) Remaining loss after applying 100 floor $ 24,900 Less: AGI threshold applied to all casualty losses in the aggregate: 10% of AGI of $120,000 (12,000) Loss after consideration of all threshold limits $ 12,900 Note: It is very important to remember that the $100 reduction applies to each separate casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate. Choice "c" is incorrect. Each casualty loss must be reduced by $100. Choice "a" is incorrect. All casualty losses in the aggregate must be reduced by 10% of AGI. Choice "d" is incorrect. Each casualty loss must be reduced by $100 and then all casualty losses in the aggregate must be reduced by 10% of AGI.

Smith paid the following unreimbursed medical expenses: Dentist and eye doctor fees $ 5,000 Contact lenses 500 Facial cosmetic surgery to improve Smith's personal appearance (surgery is unrelated to personal injury or congenital deformity) 10,000 Premium on disability insurance policy to pay him if he is injured and unable to work 2,000 What is the total amount of Smith's tax-deductible medical expenses before the adjusted gross income limitation? a. $15,500 b. $5,500 c. $7,500 d. $17,500

Choice "b" is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "d" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "a" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Choice "c" is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Which of the following credits can result in a refund even if the individual had no income tax liability? a. Child and dependent care credit. b. Earned income credit. c. Credit for prior year minimum tax. d. Elderly and permanently and totally disabled credit.

Choice "b" is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Smith, a single individual, made the following charitable contributions during the current year. Smith's adjusted gross income is $60,000. Donation to Smith's church $5,000 Art work donated to the local art museum (Smith purchased it for $2,000 four months ago and a local art dealer appraised it for) 3,000 Contribution to a needy family 1,000 What amount should Smith deduct as a charitable contribution? a. $8,000 b. $7,000 c. $5,000 d. $9,000

Choice "b" is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization. Choice "c" is incorrect. This choice excludes the donation of the artwork to the art museum. Choice "a" is incorrect. This choice erroneously includes the donation of the artwork at the art's fair market value. Choice "d" is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to the needy family, which is not a deductible donation.

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied? a. $4,100 b. $100 c. $0 d. $4,000

Choice "c" is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 - $4,000 - $100). Choice "a" is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions. Choice "d" is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction. Choice "b" is incorrect. $100 is merely the amount of the reduction per casualty.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their current year return as qualifying medical expenses? a. $0 b. $4,000 c. $4,300 d. $300

Choice "c" is correct. $4,300 medical expenses. Wheelchair repair $ 300 School for handicapped 4,000 Total $ 4,300

During the year, Scott charged $4,000 on his credit card for his dependent son's medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses? a. $0 b. $2,800 c. $6,800 d. $4,000

Choice "c" is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses. Rules: 1.Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. 2.Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death. Choices "a", "b", and "d" are incorrect, per the above rules.

In the current year, Drake, a disabled taxpayer, made the following home improvements: Cost Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $ 100,000 Widening doorways to accommodate Drake's wheelchair (the improvement did not increase the value of his home) 10,000 For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year? a. $10,000 b. $75,000 c. $85,000 d. $110,000

Choice "c" is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible. Choice "d" is incorrect. Although a capital expenditure for the improvement of a home qualifies as a medical expense, it is only deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. Choice "b" is incorrect. In addition, to the capital improvement expenditure of $75,000, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible. Choice "a" is incorrect. Both the capital improvement expenditure of $75,000 and the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively ($10,000) qualify as medical expenses.

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer? a. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000. b. A contemporaneous written acknowledgement is required for donations of $100. c. A charitable contribution deduction is not allowed for the value of services rendered to a charity. d. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.

Choice "c" is correct. A charitable contribution is not allowed for the value of services rendered to a charity. Choice "b" is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more. Choice "a" is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000. Choice "d" is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.

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. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income? a. $46,000 b. $55,000 c. $40,000 d. $50,000

Choice "c" is correct. Adjusted gross income is gross income plus or minus certain other amounts. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI. The AGI is thus $40,000. Choice "b" is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution. Choice "d" is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution. Choice "a" is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance.

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income? a. Individual taxpayer net operating losses. b. Deductible medical expenses. c. Passive activity losses. d. Deductible contributions to individual retirement accounts.

Choice "d" is correct. Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer's alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes. Choices "a", "c", and "b" are incorrect. Adjustments to arrive at AMTI include individual net operating losses, passive activity losses, and medical expenses (to the extent they do not exceed 10% of AGI).

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual? a. Traditional IRA account contribution. b. One-half of the self-employment tax deduction. c. Personal exemptions. d. Charitable contributions.

Choice "c" is correct. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income. Choice "a" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Traditional IRA contributions are not added back. Therefore, they are deducted to arrive at Alternative minimum taxable income. Choice "b" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. One half of the self-employment tax deduction is not added back. Therefore, it is deducted to arrive at alternative minimum taxable income. Choice "d" is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Charitable contributions are not added back. Therefore, they are deducted to arrive at alternative minimum taxable income.

For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university's pension plan. Sheila is a volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in interest income and $50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to an individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct? Deductible Contribution Claim Credit a. No No b. Yes No c. Yes Yes d. No Yes

Choice "c" is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit. Choices "b", "d", and "a" are incorrect based upon the above explanation.

Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be: a. Carried back two years or carried forward twenty years. b. Neither carried back nor carried forward. c. Carried forward five years. d. Carried forward indefinitely until fully deducted.

Choice "c" is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years. Choice "b" is incorrect. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward. Choice "a" is incorrect. Net operating losses, not charitable contributions, are carried back 2 years and forward 20 years. Choice "d" is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer's death).

During the year, the Andradis', who were both under age 65, paid the following expenses: Unreimbursed costs for prescription drugs required for their dependent daughter's medical condition $ 2,300 Mrs. Andradis' face lift 4,000 Physical therapy for their dependent son's soccer injury 3,000 Massage therapy fees at Mr. Andradis' health club obtained because he enjoys massages 500 The Andradis' adjusted gross income for the current year was $65,000. What amount could be claimed on the Andradis' current year tax return for medical expenses? a. $2,300 b. $5,300 c. $0 d. $4,875

Choice "c" is correct. Deductible medical expenses are limited to the amount that exceeds 10% of the taxpayer's adjusted gross income. Deductible medical expenses are those expenses that are "necessary" (such as doctors, prescriptions, required surgery, etc.) Non-deductible expenses are such things as elective surgeries, health club memberships and unnecessary medical expenditures. The Andradis' AGI is $65,000; 10% of that is $6,500. Qualified medical expenses are $2,300 for their daughter's prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $5,300 are less than the threshold of $6,500. So the answer is zero. Choice "a" is incorrect. The son's physical therapy is also a deductible expenditure, and the $2,300 does not take into account the 10% threshold. Choice "d" is incorrect. This answer is the threshold, which should then be compared to the qualified expenses in order to figure the amount to be deducted on Schedule A. Choice "b" is incorrect. This answer is the total deductible medical expenses; however, the answer does not take into account the 10% threshold.

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return? a. August 15. b. October 15. c. April 15. d. November 1.

Choice "c" is correct. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered). Choices "b", "a", and "d" are incorrect, per the above explanation.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for the current year. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land 15 years ago 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 the current year? a. $0 b. $14,000 c. $25,000 d. $11,000

Choice "c" is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30% of the taxpayer's AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 and is within the allowable amount.

For the current year, the Stevenson's are filing married filing joint, and their adjusted gross income was $58,250. Additional information is as follows: Interest paid on their home mortgage $ 5,200 State taxes paid 2,000 Medical expenses in excess of 10% AGI 1,500 Deductible contributions to IRAs 4,000 Alimony paid to Mr. Stevenson's first wife 5,000 Child support paid for Mr. Stevenson's daughter 5,100 What amount may the Stevenson's claim as itemized deductions on their current year Schedule A? a. $13,800 b. $12,300 c. $8,700 d. $7,200

Choice "c" is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of 10% AGI are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction. Home mortgage interest $ 5,200 State taxes paid 2,000 Medical expenses 1,500 Total itemized deductions $ 8,700 Choice "d" is incorrect. This answer includes only the interest paid on the mortgage and the state taxes. The medical expenses in excess of 10% AGI are also deductible on Schedule A. Choice "b" is incorrect. This answer includes the interest, state taxes paid and the child support. It does not include the medical expenses (as is proper) and should not include the child support. Choice "a" is incorrect. This is the total of all items listed, three of which (the IRA contributions, alimony, and child support) should not be included.

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. Investment interest expense. b. Deductible personal interest. c. Deductible qualified residence interest. d. Nondeductible interest.

Choice "c" is correct. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction. The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home. Choice "b" is incorrect. Personal interest is not deductible. It is also called consumer interest. Choice "d" is incorrect. Interest paid on debt secured by a home mortgage is deductible. Choice "a" is incorrect. Interest paid on a debt secured by a home mortgage is not classified as investment interest.

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. $1,000 b. $300 c. $100 d. $800

Choice "c" is correct. Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S. Treasury bond interest. Choice "b" is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest. Choice "d" is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income. Choice "a" is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitation.

On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels' current year income tax return? a. $0 b. $12,000 c. $11,000 d. $1,000

Choice "c" is correct. Michaels may deduct $11,000 on her current year return. Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers. Term of loan = 12 months (December 1, prior year − November 30, current year) Interest paid − $12,000 on December 1 of the prior year. Allocated interest per month = $12,000 ÷ 12 = $1,000/month Interest deductible in current year = $1,000 × 11 = $11,000

Carter incurred the following expenses in the current year: $500 for the preparation of a personal income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000 for union dues. Carter's current year adjusted gross income is $75,000. Carter, who is not self-employed, itemizes deductions. What will Carter's deduction be for miscellaneous itemized deductions after any limitations in the current year? a. $0 b. $2,750 c. $1,250 d. $750

Choice "c" is correct. Miscellaneous itemized deductions are deductible to the extent that such miscellaneous itemized deductions exceed 2% of Adjusted Gross Income (AGI). AGI: $ 75,000 Tax preparation: $ 500 × 2% Custodial Fees: 100 2% of AGI: $ 1,500 Publications: 150 Union Dues: 2,000 Total Miscellaneous Deductions: 2,750 (1,500) 2% of AGI $ 1,250 Allowable Misc. Deductions

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein's current year income tax return? a. $21,000 b. $17,000 c. $24,000 d. $25,000

Choice "c" is correct. Stein may deduct $24,000 on Stein's current year income tax return. Rule: For 50%-type charities only (which include tax-exempt educational organizations), the taxpayer has the option to deduct long-term (i.e., held longer then 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30% of adjusted gross income (AGI). A 5-year carryforward period applies. Fair market value of appreciated long-term stock $ 25,000 Less: Limitation AGI $ 80,000 Times 30% × 0.30 Deduction limit (24,000) Carryforward $ 1,000 Note: Stein could have elected to deduct the cost of the stock instead of the appreciated amount, but the deduction would have been limited to 50% of AGI ($40,000) and then further limited by the cost basis of the stock ($17,000). In this case, this option would have given Stein a smaller deduction than that allowed under the above rule.

How may taxes paid by an individual to a foreign country be treated? a. As an itemized deduction subject to the 2% floor. b. As a nondeductible expense. c. As an adjustment to gross income. d. As a credit against federal income taxes due.

Choice "d" is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Note that the only correct response to this question is choice "d"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option. Choice "a" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are NOT subject to the 2% floor. Choice "c" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead. Choice "b" is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction (NOT subject to the 2% floor) instead.

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. $2,500 b. $1,600 c. $3,000 d. $2,600

Choice "d" is correct. Adjusted Gross Income (AGI) is gross income less adjustments or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment listed is $400 in student loan interest, resulting in an AGI of $2,600. Choice "c" is incorrect. Student loan interest is a deduction to arrive at AGI. Choice "a" is incorrect. Charitable contributions are itemized deductions subtracted from AGI. Choice "b" is incorrect. Unreimbursed employee business expense is an itemized deduction subtracted from AGI.

Which allowable deduction can be claimed in arriving at an individual's adjusted gross income? a. Charitable contribution. b. Personal casualty loss. c. Unreimbursed business expense of an outside salesperson. d. Alimony payment.

Choice "d" is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI). Charitable contributions, personal casualty losses, and unreimbursed business expenses of outside salespersons are all deductible from AGI as itemized deductions. Choice "a" is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions. Choice "b" is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions. Choice "c" is incorrect. Unreimbursed business expenses of outside salespersons are deductible from adjusted gross income as itemized deductions.

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim: a. Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers. b. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers. c. The excess as a credit against income tax, if that excess was withheld by one employer. d. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.

Choice "d" is correct. An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. Choice "a" is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax. Choice "b" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers. Choice "c" is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.

Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's hobby generated $2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper reporting of the income and expenses related to the activity? a. Sales of $2,000 are reported in gross income, and $3,000 of expenses is reported as an itemized deduction subject to the 2% limitation. b. Sales and expenses are netted, and the net loss of $1,000 is reported as an itemized deduction not subject to the 2% limitation. c. Sales and expenses are netted and deducted for AGI. d. Sales of $2,000 are reported in gross income, and $2,000 of expenses is reported as an itemized deduction subject to the 2% limitation.

Choice "d" is correct. Based upon the facts presented ("Brenda makes jewelry as a hobby..."), this activity is not a trade or business activity but is an activity not engaged in for profit. As such, the taxpayer can only deduct as itemized deductions on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local income taxes and property taxes, which would be allowed regardless of whether or not the activity were engaged in for profit and (ii) all other expenses that would be allowed if such activity were engaged in for profit. However, the amount of these "other expenses" cannot exceed gross income reduced by the expenses described in "(i)," above. Furthermore, the allowable "other expenses" are subject to the "2% of AGI" limitation. Because Brenda had only $2,000 of gross income, the most she can deduct is $2,000 of the $3,000 travel expenses she incurred. Because the travel expenses constitute "all other expenses" (see "(ii)," above), this amount is subject to the "2% of AGI" limitation. Note that the activity-is-engaged-in-for-profit statutory presumption does not apply. Reason: that presumption applies only if the activity shows a profit for at least three taxable years during the five consecutive taxable year period ending with the year in question (year 2 for this question). Because the facts do not state that during the five year period ending with year 2 Brenda had a profit in at least three of those five years, the presumption is not available to Brenda. If the presumption would have been available to her and if she had had a profit in at least three of the five consecutive, ending with year 2, then the sales and expenses would have been netted and deducted for AGI. Choices "a", "b", and "c" are incorrect per the above rules.

Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year: Doctor bills resulting from a serious fall $ 5,000 Cosmetic surgery that was necessary to correct a congenital deformity 15,000 Carroll had no medical insurance. For regular income tax purposes, what was Carroll's maximum allowable medical expense deduction, after the applicable threshold limitation, for the year? a. $0 b. $20,000 c. $15,000 d. $10,000

Choice "d" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, since it was necessary to correct a congenital deformity. Doctor Bills $ 5,000 Surgery 15,000 $ 20,000 AGI Limitation ($100,000 × 10%) (10,000) Deduction $ 10,000 Choices "a", "c", and "b" are incorrect, per the computation above.

Which of the following is a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor? a. Real estate tax. b. Medical expenses. c. Gambling losses up to the amount of gambling winnings. d. Employee business expenses.

Choice "d" is correct. Employee business expenses are a miscellaneous itemized deduction subject to the 2% of adjusted gross income (AGI) floor. Choice "c" is incorrect. Gambling losses up to the amount of gambling winnings are not a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Those losses may offset gambling winnings up to the amount of the winnings (without a further reduction of the item). Any additional gambling losses are not deductible at all and do not carry forward). Choice "b" is incorrect. Medical expenses are an itemized deduction not subject to the 2% of adjusted gross income floor (they are subject to a 10% floor). Choice "a" is incorrect. Real estate taxes are an itemized deduction not subject to the 2% of adjusted gross income floor.

Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year: Mortgage interest $5,000 Utilities $1,200 Hazard insurance $6,000 For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson's second residence in the current year? a. $6,200 in determining adjusted gross income. b. $11,000 in determining adjusted gross income. c. $12,200 as an itemized deduction. d. $5,000 as an itemized deduction.

Choice "d" is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. The deduction for interest on home equity indebtedness is limited to interest on $100,000 of indebtedness, but this is unlikely to be a problem here even if the interest relates solely to home equity indebtedness. This is because of the amount of interest and the fact that there is no debt associated with Jackson's other residence. The deduction for personal residence interest is an itemized deduction. Choice "a" is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction. Choice "b" is incorrect. The insurance cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction. Choice "c" is incorrect. For a personal residence, neither insurance costs nor utilities costs are deductible.

In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages and was covered by his employer's qualified pension plan. Jane was employed part-time and received $7,000 in wages. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is: a. $2,500 b. $5,000 c. $0 d. $10,000

Choice "d" is correct. In 2016, taxpayers can contribute and deduct up to $5,500 to an IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion is phased out. For a spouse who is an active participant, the phase-out range in 2016 begins at $98,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2016 begins at $184,000. The Smith's income is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total. Choices "c", "b", and "a" are incorrect, per the above explanation.

Wells paid the following expenses during the year: 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 the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells' current year income tax return for medical expenses? a. $500 b. $4,000 c. $3,500 d. $1,000

Choice "d" is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000). Choice "b" is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible. Choice "c" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Choice "a" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.

Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. Mills had no tax preferences. His itemized deductions were as follows: State and local income taxes $ 5,000 Home mortgage interest on loan to acquire residence 6,000 Miscellaneous deductions that exceed 2% of adjusted gross income 2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? a. $72,000 b. $75,000 c. $83,000 d. $77,000

Choice "d" is correct. Mills' alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and miscellaneous deductions that exceed 2% of adjusted gross income ($2,000) for a total of $77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not increase alternative minimum taxable income. Choice "a" is incorrect. State and local income taxes must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "b" is incorrect. Miscellaneous deductions that exceed 2% of AGI must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "c" is incorrect. Home mortgage interest is not added back to Mills' taxable income to calculate alternative minimum taxable income.

Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows: Medical expenses (before percentage limitations) $ 12,000 State income taxes 4,000 Real estate taxes 3,500 Qualified housing and residence mortgage interest 10,000 Home equity mortgage interest (used to consolidate personal debts) 4,500 Charitable contributions (cash) 5,000 What are Robert's itemized deductions for alternative minimum tax? a. $21,500 b. $25,500 c. $19,500 d. $17,000

Choice "d" is correct. Robert's itemized deductions for alternative minimum tax purposes are calculated as follows: Medical expenses (exceeding 10% of AGI) $ 2,000 State income taxes (not allowed) − Real estate taxes (not allowed) − Qualified housing and residence interest 10,000 Home equity mortgage interest (not used to buy, build, or improve the home-not allowed) − Charitable contributions (no difference) 5,000 Alternative Minimum Itemized deductions $ 17,000 Choices "c", "a", and "b" are incorrect, per the above calculation.

Which itemized deduction is included in the category of unreimbursed expenses that are deductible only to the extent that the aggregate amount of such expenses exceeds 2% of the taxpayer's adjusted gross income? a. Medical expense. b. Interest expense. c. Charitable contributions. d. Tax return preparation fee.

Choice "d" is correct. Tax return preparation fee is a miscellaneous itemized deduction subject to the 2% adjusted gross income (AGI) floor. Choice "a" is incorrect. Medical expenses are itemized deductions not subject to the 2% adjusted gross income (AGI) floor, but instead are subject to a 10% AGI floor. Choice "c" is incorrect. Charitable contributions are not subject to the 2% AGI floor. Choice "b" is incorrect. Interest expense on a home mortgage, second home, or on investments are deductible as an itemized deduction not subject to the 2% adjusted gross income (AGI) floor.

In the current year, Joan Frazer's residence was totally destroyed by fire. The property had an adjusted basis and a fair market value of $130,000 before the fire. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer's current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the fire loss was Frazer entitled to claim as an itemized deduction on her current year tax return? a. $10,000 b. $8,500 c. $8,600 d. $2,900

Choice "d" is correct. The casualty loss is measured by the difference in the property's value before ($130,000) and after (zero) the casualty, in other words, $130,000. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer's adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer's tax return is $9,900 - $7,000 = $2,900.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 13. During Year 13, 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 13? a. $11,000 b. $14,000 c. $0 d. $25,000

Choice "d" is correct. The charitable contribution deduction for contributions of property is normally the lesser of the property's basis or the fair market value of the property, on the date of the donation, or the lesser of $14,000 or $25,000 in this question. However, contributions of appreciated property, as in this question, are deducted at fair market value, provided the taxpayer held the property for over one year. That deduction might be limited to 50% of AGI ($45,000) or 30% of AGI for long-term appreciated property ($27,000), but the $25,000 is the maximum deduction in this case. The "lesser of" rule really applies to depreciated property and keeps a taxpayer from taking a fair market value deduction for such property. Choice "b" is incorrect. The $14,000 is the original cost of the asset. The maximum deduction for appreciated property is the fair market value of the property, not the original cost. Choice "a" is incorrect. The $11,000 is the difference between the $25,000 fair market value of the land and the $14,000 original cost. It is thus the appreciation of the land before the date of donation. The appreciation of appreciated property is not the amount of the charitable contribution deduction. Choice "c" is incorrect. Taylor has income in Year 13 of $90,000; therefore, at least a portion of a deduction for the land can be deducted, even if the fair market value of the land exceeded the defined limits for the year.

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. II only. b. Both I and II. c. Neither I nor II. d. I only.

Choice "d" is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner. Choices "a", "b", and "c" are incorrect, per the above discussion.

Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year? a. $10,000 b. $28,000 c. $18,000 d. $25,000

Choice "d" is correct. The contribution limit for a church is 50% of the contribution base (adjusted gross income in this case). Moore's contribution limit for the current year is 50% × $50,000 = $25,000. Against this limit she can take her current year contributions ($18,000) plus the prior year carry-over ($10,000) until she reaches the current year limit. Therefore, she can take all the current year contributions plus $7,000 of the carryover for a $25,000 total. Choice "a" is incorrect. Moore is not limited to her prior year charitable contribution carryover. Choice "c" is incorrect. Moore may use part of her prior year charitable contribution carryover. Choice "b" is incorrect per the explanation above.

The deduction by an individual taxpayer for interest on investment indebtedness is: a. Limited to the investment interest paid during the year. b. Not limited. c. Limited to the taxpayer's interest income for the year. d. Limited to the taxpayer's net investment income for the year.

Choice "d" is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses).

Davidson was transferred from Chicago to Atlanta. In connection with the transfer, Davidson incurred the following moving expenses: Moving the household goods $ 2,000 Temporary living expenses in Atlanta 400 Lodging on the way to Atlanta 100 Meals 40 What amount may Davidson deduct if the employer reimbursed Davidson $2,000 (not included in form W-2) for moving expenses? a. $520 b. $500 c. $120 d. $100

Choice "d" is correct. The moving expense deduction is allowable only for direct moving expenses: (i) travel and along-the-way lodging of the taxpayer and the taxpayer's family and (ii) transportation, to the new location, of the taxpayer's household goods and personal effects. Deductible expenses must be reduced by the amount of employer reimbursements not properly included on IRS form W-2. No longer is there a deduction for either (i) temporary living expenses at the new location or (ii) along-the-way meal expenses. Moving the household goods $ 2,000 Lodging on the way to Atlanta 100 Less: employer reimbursement not included on IRS form W-2 (2,000) Deduction (adjustment) for (towards) AGI $ 100 Choices "c", "b", and "a" are incorrect per the above rule: The $400 temporary living expenses in Atlanta and the $40 meal expense are not deductible.

In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane's Year 1 adjusted gross income was $100,000 and he did not have any casualty gains. What total amount can Kane deduct as a Year 1 itemized deduction for casualty loss, after the application of the threshold limitations? a. $50,000 b. $40,000 c. $49,900 d. $39,900

Choice "d" is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows: Smaller Loss $ 250,000 Insurance Recovery (200,000) Taxpayer's Loss 50,000 Less $100 (100) Eligible Loss 49,900 10% AGI Limitation (10,000) Deductible Loss $ 39,900 Choices "b", "c", and "a" are incorrect, per the above explanation.

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes? a. Mandatory employment taxes for basic coverage under Medicare A. b. Health club dues. c. Vitamins for general health not prescribed by a physician. d. Transportation to physician's office for required medical care.

Choice "d" is correct. Transportation to physician's office for required medical care is a deductible medical expense for tax purposes. Choice "c" is incorrect. Vitamins are not deductible. Choice "b" is incorrect. Health club dues paid on a membership for general health care are not deductible. In order for the dues to be deductible, the membership would need to be recommended by a physician for a specific illness. Choice "a" is incorrect. Premiums paid for insurance that covers the expenses of medical care are deductible as medical expenses, including Medicare B premium payments and any voluntary premiums for Medicare A.

Which of the following is not a deduction to arrive at adjusted gross income? a. Capital losses in excess of capital gains. b. Trade or business expenses. c. Alimony payments. d. Unreimbursed employee business expenses.

Choice "d" is correct. Unreimbursed employee business expenses are not a deduction to arrive at adjusted gross income. They are an itemized deduction from adjusted gross income. Choice "c" is incorrect. Alimony payments are an adjustment, which is a deduction to arrive at adjusted gross income. Choice "b" is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income. Choice "a" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.

Which of the following items are not allowable as adjustments for moving expenses without regard to employer provided benefits or other limitations? a. Cost of moving household goods. b. Cost of hotel during drive to new home. c. Expense of breaking lease. d. Transportation.

Explanation Choice "c" is correct. The costs associated with breaking an existing lease are not deductible as moving expenses. Choices "d", "a", and "b" are all allowable moving expenses. All moving expenses must be offset with employer reimbursement amounts prior to claiming any deduction. Additional requirements of length of employment apply and may require adjustment of a previously claimed adjustment if they are not met.

On December 1 of the current year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest's current year income tax return? a. $2,000 b. $22,000 c. $24,000 d. $0

Explanation Choice "a" is correct. $2,000 of interest is deductible on her current year tax return. Total interest $ 24,000 Divide by # of months of the loan ÷ 12 Monthly deduction $ 2,000 Times: Months in current year × 1 Total current year deduction $ 2,000 Rule: Prepaid interest must be allocated over the period of the loan, even for a cash basis taxpayer. Choices "d", "b", and "c" are incorrect, per the above rule.

Which of the following statements is correct regarding the deductibility of an individual's medical expenses? a. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. b. A medical expense paid by credit card is deductible in the year the credit card bill is paid. c. A medical expense deduction is not allowed for Medicare insurance premiums. d. Medical expenses, net of insurance reimbursements, are disregarded in the alternative minimum tax calculation.

Explanation Choice "a" is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. Choice "b" is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to credit card (rather than in a subsequent year when the credit card bill is paid). Choice "d" is incorrect. Medical expenses, net of insurance reimbursements, are not disregarded in the alternative minimum tax calculation. However, the allowable amount for AMT purposes is the net amount in excess of 10% of adjusted gross income (for regular tax purposes, the allowable amount is the net amount in excess of 10% of adjusted gross income or 7.5% of adjusted gross income for taxpayers age 65 and older). Choice "c" is incorrect. A medical expense deduction is allowed for Medicare insurance premiums.

When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? a. Casualty losses. b. Personal and dependency exemptions. c. Miscellaneous itemized deductions in excess of 2% of adjusted gross income floor. d. State income taxes.

Explanation Choice "a" is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction. Choice "d" is incorrect. State income taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "b" is incorrect. Personal and dependency exemptions are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "c" is incorrect. Miscellaneous itemized deductions in excess of 2% of AGI are added back in the AMT calculation. Therefore, they are not allowed as a deduction.

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child: Child's medical expenses $ 5,000 Legal expenses 8,000 Agency fee 3,000 Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit? a. $11,000 b. $16,000 c. $10,160 d. $5,000

Explanation Choice "a" is correct. The adoption fees would be qualifying expenses for the tax credit (medical expenses do not qualify). Choice "b" is incorrect. $5,000 of the $16,000 of total expenses are not eligible. Choice "c" is incorrect. The expenses ($8,000 + $3,000) are eligible. Choice "d" is incorrect. Medical expenses are not eligible for the credit.

Four years ago, an individual taxpayer purchased silver coins at face value for $200. The coins were stolen in the current year, when their fair market value was $1,000. The coins were not covered by insurance. Without considering the limit based on AGI, what is the maximum amount of loss that the taxpayer can deduct on the current year's tax return? a. $100 b. $900 c. $1,000 d. $200

Explanation Choice "a" is correct. This is a casualty and theft loss. The loss starts at the lesser of decrease in FMV or adjusted basis. That is $200. There is no insurance recovery by which to reduce the loss. However, the tax code requires a reduction of $100 per event. This brings the $200 loss down to $100. Choice "d" is incorrect. $200 is the full amount of the loss before the reduction of $100 per event. Choice "b" is incorrect. $900 incorrectly uses the FMV of $1,000 and then reduces it by the $100 per event. Choice "c" is incorrect. $1,000 is the FMV of the coins, which is not relevant.

The credit for prior year alternative minimum tax liability may be carried: a. Back to the 3 preceding years. b. Forward indefinitely. c. Forward for a maximum of 5 years. d. Back to the 3 preceding years or carried forward for a maximum of 5 years.

Explanation Choice "b" is correct. Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial accounting purposes. The credit is carried forward indefinitely.

An individual's losses on transactions entered into for personal purposes are deductible only if: a. No part of the transactions was entered into for profit. b. The losses qualify as casualty or theft losses. c. The losses do not exceed $3,000 ($6,000 on a joint return). d. The losses can be characterized as hobby losses.

Explanation Choice "b" is correct. An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus $100 per casualty. Choice "d" is incorrect. If the losses can be characterized as hobby losses, none of the loss is deductible. Choice "c" is incorrect. Losses entered into for personal purposes other than casualty losses are not deductible in any amount. Choice "a" is incorrect. If no part of the transaction was entered into for profit, none of the related loss is deductible.

Pat's divorce decree requires Pat to make the following transfers to Pat's former spouse during the current year: •Alimony payments of $9,000 to be reduced to $7,000 when their child attains the age of 18. •Property division of stock with a basis of $2,000 and a fair market value of $3,500. What is the amount of Pat's alimony deduction? a. $9,000 b. $7,000 c. $1,500 d. $10,500

Explanation Choice "b" is correct. Any amount of "alimony" that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony. Choice "a" is incorrect as it includes the amount deemed to be child support. Choices "c" and "d" are incorrect. The property division is considered to be a property settlement and is not considered to be alimony. Accordingly, neither the basis, fair market value, nor realized gain has any effect on the alimony deduction.

Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible? a. $0 b. $3,000 c. $5,800 d. $7,000

Explanation Choice "b" is correct. Gambling losses are miscellaneous itemized deductions not subject to the 2% AGI limitation. The deduction for gambling losses are, however, limited to gambling winnings. Choice "a" is incorrect. Gambling losses are deductible up to gambling winnings. Choice "c" is incorrect. Gambling losses are not subject to the 2% limitation. Choice "d" is incorrect. The deduction for gambling losses cannot exceed gambling winnings.

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan. The following information pertains to interest paid in Year 4: Mortgage interest on first loan $19,000 Interest on home equity line of credit 2,500 Auto loan interest 500 For Year 4, how much interest is deductible? a. $22,000 b. $21,500 c. $19,000 d. $19,500

Explanation Choice "b" is correct. Interest on mortgages of up to $1,000,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans of up to $100,000 in principal are fully deductible. Note, provided the loan is secured by the home, it does not matter what the proceeds are used for. Interest on auto loans is not deductible. Note that if the money borrowed for the auto had been borrowed from a home equity line of credit and the total principal of that revolving credit line had been less than $100,000, the related interest for the auto purchase could have qualified for a deduction; however, in this case, the auto loan was a separate loan. The total deduction is $21,500 ($19,000 + $2,500) Choices "c", "a", and "d" are incorrect, per the above explanation.

On their joint tax return, Sam and Joann, who are both over age 65, had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions: Interest of $15,000 on a $100,000 home equity loan to purchase a motor home Real estate tax and state income taxes of $18,000 Unreimbursed medical expenses of $15,000 (prior to AGI limitation) Miscellaneous itemized deductions of $5,000 (prior to AGI limitation) Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income? a. $23,750 b. $38,750 c. $35,000 d. $21,750

Explanation Choice "b" is correct. Per the mnemonic "PANIC TIMME," for purposes of calculating alterative minimum taxable income, the taxpayer must add back, among other things, the following itemized deductions: •Taxes reduced by taxable refunds, •Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or improve the taxpayer's qualified dwelling (house, condominium, apartment, or mobile home not used on a transient basis), •Medical expenses not exceeding 10% of AGI, and •Miscellaneous deductions subject to the 2% of AGI floor. The "PANIC TIMME" add-back is as follows: Taxes $ 18,000 Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor home is not a qualified dwelling) 15,000 Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI (7.5% AGI is still used for taxpayers age 65 and over) 3,750 Deductible miscellaneous expenses in excess of 2% of AGI 2,000 Total "PANIC TIMME" add-back $ 38,750 Choices "d", "a", and "c" are incorrect per the above rule and per the above calculations.

The alternative minimum tax (AMT) is computed as the: a. Lesser of the tentative AMT or the regular tax. b. Excess of the tentative AMT over the regular tax. c. Excess of the regular tax over the tentative AMT. d. The tentative AMT plus the regular tax.

Explanation Choice "b" is correct. The alternative minimum tax (AMT) is computed as the excess of tentative AMT over the regular tax. Choice "c" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the other way around. Choice "d" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the sum of the tentative AMT plus the regular tax. Choice "a" is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the lesser of AMT or regular tax.

In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb's favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns. Which of the following statements is correct regarding the deductibility of the property taxes? a. Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11. b. Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return. c. Farb should deduct $3,000 in his Year 10 income tax return. d. Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return.

Explanation Choice "b" is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10. Choice "d" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11. Choice "c" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10. Choice "a" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.

Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes: Home mortgage interest on a loan to acquire a principal residence $ 11,000 Miscellaneous itemized deductions above the threshold limitation 2,000 What are Farr's total allowable itemized deductions for computing alternative minimum taxable income? a. $0 b. $13,000 c. $11,000 d. $2,000

Explanation Choice "c" is correct. Both mortgage interest and miscellaneous itemized deductions are deductible for regular (schedule A) tax purposes. However, miscellaneous itemized deductions are "adjustments" and, therefore, are not allowed as deductions for alternative minimum tax (AMT) purposes. Choice "a" is incorrect. Mortgage interest is allowed as a deduction for AMT purposes. Choice "d" is incorrect. Miscellaneous itemized deductions are not allowed for AMT purposes Choice "b" is incorrect. The $2,000 miscellaneous itemized deductions are an add back for AMT purposes.

Alternative minimum tax preferences include: Tax exempt interest from private activity bonds Charitable contributions of appreciated capital gain property a. No No b. No Yes c. Yes No d. Yes Yes

Explanation Choice "c" is correct. Tax exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.

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. $5,000 b. $0 c. $2,000 d. $3,000

Explanation Choice "c" is correct. The deduction for investment interest expenses is limited to net taxable investment income which is defined as taxable investment income minus all related investment expenses (other than investment interest expense). If the investment expense is an itemized deduction, then only those expenses exceeding 2% of AGI are considered. Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate. Calculation: Investment income $ 10,000 Less: Related investment expenses other than investment interest expenses (8,000) Net investment income $ 2,000 The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i) $2,000 net investment income or (ii) $5,000 investment interest expense. Choices "b", "d", and "a" are incorrect per the above rule and per the above computations.

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year: 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 current year return as qualifying medical expenses? a. $0 b. $600 c. $8,000 d. $8,600

Explanation Choice "d" is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense. Choice "c" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. Choice "b" is incorrect. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is a deductible medical expense. Choice "a" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is also a deductible medical expense.

During the current year, Tarbet's residence was destroyed by a hurricane. Tarbet's basis in the property was $150,000. The fair market value determined by an appraiser shortly before the hurricane was $450,000. In November of the current year, Tarbet received $300,000 from the insurance company. Tarbet's adjusted gross income was $75,000 and she did not have any casualty gains during the year. What total amount can Tarbet deduct as a current year casualty loss itemized deduction, after the application of the threshold limitations? a. $142,400 b. $75,000 c. $450,000 d. $0

Explanation Choice "d" is correct. The calculation for the deduction is as follows: Smaller loss (lesser of cost or decrease in FMV) $ 150,000 Less: Insurance Recovery (300,000) Taxpayer's Loss (150,000) negative, thus it is treated as zero Less: Floor Amount of $100 (100) Eligible Loss 0 Less: 10% of AGI $ (7,500) Deductible Loss 0

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel's gross income for the year? a. $0 b. $3,600 c. $1,200 d. $4,800

Explanation Choice "d" is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel's gross income for the year (in fact, the $4,800 will be included as part of Mel's taxable wages on Mel's W-2). Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee's W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income. Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation. Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable. Choices "a", "c", and "b" are incorrect, per the above rules.

Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse during the current year: Alimony payments of $3,000. Child support of $2,000. Property division of stock with a basis of $4,000 and a fair market value of $6,500. What is the amount of Tana's alimony deduction? a. $7,000 b. $3,000 c. $9,500 d. $11,500

RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child support payments are NOT alimony and are NOT deductible. Property settlements are NOT alimony and are NOT deductible. Choice "b" is correct. Only the amount of alimony ($3,000) is allowed as Tana's alimony deduction. Choice "a" is incorrect. The basis of property division of stock ($4,000) is NOT alimony and is NOT deductible, but the $3,000 in alimony paid is deductible. Choice "c" is incorrect. The fair market value of property division of stock ($6,500) is NOT alimony and is NOT deductible, but the $3,000 in alimony paid is deductible. Choice "d" is incorrect. The fair market value of property division of stock ($6,500) and the child support ($2,000) are NOT alimony and are NOT deductible, but the $3,000 in alimony paid is deductible.

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest? a. Five years. b. Duration of time that interest is paid. c. Ten years. d. Current year only.

Rule: IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction in 2016, and there are other minor restrictions, such as a married couple must file joint returns to take the deduction. Choice "b" is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid. Choices "d", "a", and "c" are incorrect, based on the above rule.

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 $1,000 deduction to arrive at AGI for the year. b. As a nondeductible item of personal interest. c. As a $1,000 itemized deduction. d. As a $500 deduction to arrive at AGI for the year.

Rule: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $65,000 and $80,000 (2016) and married filing jointly between $130,000 and $160,000 (2016). Choice "a" is correct. Per the above rule, the $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. Choice "d" is incorrect. The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. Therefore, the total amount paid of $1,000 is an allowable adjustment. (The $500 limit likely refers to an older education tax law that is no longer in effect.) Choice "c" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported as the less-advantageous itemized deduction. Choice "b" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this case there is no disallowed portion) is a nondeductible item of personal interest.

Which of the following disqualifies an individual from the earned income credit? a. The taxpayer has earned income of $5,000. b. The taxpayer has a filing status of married filing separately. c. The taxpayer's five-year-old child lived in the taxpayer's home for only eight months. d. The taxpayer's qualifying child is a 17-year-old grandchild.

Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further: •The taxpayer must meet certain earned low-income thresholds. •The taxpayer must not have more than the specified amount of disqualified income. •The taxpayer must be over age 25 and less than 65 if there are no qualifying children. •If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit). •A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more. •The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law. •The child must be either in the same generation or a later generation of the taxpayer. •A foster child qualifies if officially placed with the taxpayer by an agency. Choice "b" is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit. Choice "d" is incorrect. If the taxpayer's qualifying child is a 17-year-old grandchild, the requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC. Choice "a" is incorrect. The taxpayer earning an income of $5,000 meets the earned low-income requirements; thus, it does not disqualify him or her from claiming the EIC. Choice "c" is incorrect. The taxpayer's five year old child lived in the taxpayer's home for eight months. The above rules indicate that the otherwise qualifying child must live with the taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from claiming the EIC.