Tax 1 Exam 4 (Final Exam)

Investment income includes gross income from interest, annuities, and royalties not derived in the ordinary course of a trade or business, as well as any income taken into account when calculating income or loss from a passive activity. True False

False

Tyler earns a salary of $150,000 and invests $60,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Tyler's share is $60,000. Of these amounts, $60,000 is suspended under the at-risk rules and $30,000 is suspended under the passive loss rules. True False

False $30,000 of Tyler's loss is suspended under the at-risk rules, leaving a potential deduction of $60,000. However, the $60,000 loss is suspended under the passive loss rules.

Federal income taxes are deductible as an itemized deduction. True False

False A deduction is allowed for certain state and local income taxes, but Federal income tax is not deductible.

In a limited partnership, a limited partner is not considered a material participant unless he or she qualifies by meeting any of the seven tests of material participation. True False

False A limited partner is not considered a material participant unless he or she participated in the activity for more than 500 hours during the year; participated in the activity for any five taxable years during the 10 taxable years that immediately precede the current taxable year; or, the activity is a personal service activity, and the individual materially participated in the activity for any three preceding taxable years.

Lori, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss, and Lori has no other passive activities. The suspended loss is not deductible. True False

False A suspended passive loss may be deducted when the activity is sold, even if the sale of the activity results in a loss. The suspended loss can offset Lori's active income from her job.

A taxpayer's choice of qualified residence is irrevocable. True False

False A taxpayer who has more than one second residence can choose the qualified second residence each year (i.e., the taxpayer can select a different second residence each year).

Allowable itemized deductions are deductible for AGI in arriving at taxable income. True False

False Allowable itemized deductions and the standard deduction are deductible from AGI in determining taxable income if the taxpayer elects to itemize.

Personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible. True False

False Although certain exceptions exist (e.g., alimony and traditional IRA contributions are deductible for AGI), personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible.

Taxes assessed for local benefits, such as a new sidewalk, may be deductible as real property taxes. True False

False As a general rule, real property taxes do not include taxes assessed for local benefits if the assessments increase the value of the property (e.g., special assessments for streets, sidewalks, curbing, and other similar improvements). Such taxes must be capitalized (added to the adjusted basis of the taxpayer's property).

The spouse's work is not taken into consideration in satisfying the material participation requirement, but the hours worked by a spouse are taken into account when evaluating whether a taxpayer has worked for more than 750 hours in real property trades or businesses during a year. True False

False As a result, taxpayers must take care when relying on their spouses to qualify for nonpassive treatment.

Automobile title and registration fees are deductible as itemized deductions. True False

False Automobile title and registration fees are not taxes and are not deductible.

To qualify for nonpassive treatment, a taxpayer must either ensure that more than half of the personal services that the taxpayer performs in trades or businesses are performed in real property trades or businesses in which the taxpayer materially participates, or perform more than 750 hours of service in these real property trades or businesses as a material participant. True False

False Both requirements must be met in order to qualify for nonpassive treatment.

Cherry realized a long-term capital gain of $7,000. In calculating his net investment income, Cherry may not elect to include the gain in investment income. True False

False Cherry may elect to include the gain in investment income if he agrees to reduce the amount qualifying for the alternative capital gains rate by the same amount.

Congress has not limited the deductibility of investment interest allowed during the tax year. True False

False Congress has limited the deductibility of investment interest, which is interest paid on debt borrowed for the purpose of purchasing or continuing to hold investment property. The deduction for investment interest allowed during the tax year is limited to the lesser of the investment interest paid or net investment income.

When making noncash donations, the type of property contributed does not make a difference in the amount, if any, of the deduction. True False

False Contribution of capital gain property will provide a deduction equal to fair market value rather than the adjusted basis.

State and local excise taxes are deductible as itemized deductions. True False

False Federal, state, and local excise taxes are not deductible.

Unreimbursed employee business expenses are deductible as a miscellaneous itemized deduction to the extent they exceed 2% of AGI. True False

False From 2018 through 2025, these expenses are not deductible per the TCJA of 2017.

If a taxpayer does not materially participate in a nonrental trade or business activity, the loss is treated as a passive activity loss, which can offset portfolio income. True False

False If a taxpayer does not materially participate in a nonrental trade or business activity, the loss is treated as a passive activity loss, which can only offset passive activity income. If an individual taxpayer materially participates in a nonrental trade or business activity, any loss from that activity is treated as an active loss that can offset active or portfolio income. If a taxpayer does not materially participate, the loss is treated as a passive activity loss, which can only offset passive activity income.

Most personal expenses like medical expenses, certain taxes, mortgage interest, investment interest, and charitable contributions are deductible for AGI. True False

False In general, personal expenses such as medical expenses, certain taxes, mortgage interest, investment interest, and charitable contributions are deductible from AGI as itemized deductions. There are some exceptions to this general rule of thumb, such as IRAs and HSAs.

Individuals can elect to deduct their state income taxes, their local income taxes, and their sales/use taxes paid as an itemized deduction. True False

False Individuals can elect to deduct either their state and local income taxes or their sales/use taxes paid as an itemized deduction. This election is intended to provide equity to taxpayers living in states that do not impose a state income tax (but do have sales taxes).

If an annuity or royalty is not derived in the ordinary course of a trade or business, it is considered passive activity income. True False

False Interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business are included in portfolio income, not passive activity income.

Investment income always includes net capital gain and qualified dividend income. True False

False Investment income includes net capital gain and qualified dividend income only if the taxpayer elects to treat them as such.

Nonreimbursed employee expenses qualify as miscellaneous itemized deductions subject to the 2% floor, which are deductible. True False

False Nonreimbursed employee expenses qualify as itemized deductions subject to the 2% floor. However, under the TCJA of 2017 [Code § 67(g)], these miscellaneous itemized deductions are suspended from 2018 to 2025.

On the disposition of a passive activity, a taxpayer is allowed to offset suspended losses from the activity against other types of passive activities. True False

False On the disposition of a passive activity, a taxpayer is allowed to offset suspended losses from the activity against other types of income. Passive activity losses may be deducted only against passive activity income and gains. Losses not allowed are suspended and used in future years.

Miscellaneous itemized deductions may be deductible only if, in total, they exceed 2% of the taxpayer's AGI, in which case the entire amount is eligible as a deduction. True False

False Only the amount in excess of the 2%-of-AGI floor is allowed as a deduction. However, under the TCJA of 2017 [Code § 67(g)], these miscellaneous itemized deductions are suspended from 2018 to 2025.

Ordinary income property (for charitable contribution purposes) is any property that would have resulted in the recognition of ordinary income if the property had been sold by the donor. True False

False Ordinary income property is any property that, if sold, will result in the recognition of ordinary income. It also contains short-term capital gain assets.

From a tax planning perspective, passive losses of individuals can be used to offset active income. True False

False Passive activity losses may be deducted only against passive activity income and gains. Losses not allowed are suspended and used in future years. Passive losses of individuals cannot be used to offset active income.

Monica owns Activity A, which produces active income, and Activity B, which produces losses. From a tax planning perspective, Monica will be better off if Activity B is a passive activity. True False

False Passive losses of individuals cannot be used to offset active income.

Weight reduction programs are considered deductible medical expenses so long as they provide a significant improvement to one's general health. True False

False Programs for the improvement of general health are nondeductible.

A rental activity is defined as any activity where payments are received principally for the use of intangible property. True False

False Rental activities involve tangible (real or personal) property only.

Crystal's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Crystal pays on the business net income must be deducted as a business expense rather than as an itemized deduction. True False

False State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer's sole source of income is from a business.

Gambling losses are deductible up to the amount of gambling winnings to the extent they exceed 2% of the taxpayer's AGI. True False

False Such losses are not subject to the 2%-of-AGI floor.

Taxpayers may not include premiums paid on qualified long-term care insurance contracts in medical expenses, subject to limitations based on the age of the insured. True False

False Taxpayers may include premiums paid on qualified long-term care insurance contracts in medical expenses, subject to limitations based on the age of the insured. For 2019, the per-person limits range from $420 for taxpayers age 40 and under to $5,270 for taxpayers over age 70.

In April 2020, Ellis, a calendar year cash basis taxpayer, paid the state of Kansas additional income tax for 2019. Since it relates to 2019, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2019. True False

False The amount is deductible in 2020 because Ellis is a cash basis taxpayer who paid the tax in 2020.

Deloris paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee is deductible, but not as a medical expense. True False

False The appraisal fee does not qualify as a medical expense; previously it qualified under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction. However, under the TCJA of 2017 [Code § 67(g)], these miscellaneous itemized deductions are suspended from 2018 to 2025.

The deduction for investment interest allowed during the tax year is limited to the greater of the investment interest paid or net investment income.

False The deduction for investment interest allowed during the tax year is limited to the lesser of the investment interest paid or net investment income. This limitation was Congress's solution to the use of investment interest as a tax shelter.

The deduction for investment interest allowed during the tax year is limited to the greater of the investment interest paid or net investment income. True False

False The deduction for investment interest allowed during the tax year is limited to the lesser of the investment interest paid or net investment income. This limitation was Congress's solution to the use of investment interest as a tax shelter.

During the year, Sonny earned investment income of $20,000, incurred investment interest expense of $12,500, and incurred other investment expenses of $9,000. Sonny may deduct $12,500 of investment interest this year. True False

False The deduction for investment interest expense may not exceed net investment income for the year. Sonny's net investment income is $11,000 ($20,000 - $9,000).

The deduction for real estate taxes was created to relieve the burden of multiple taxes on the same source of revenue. True False

False The deduction for state and local income taxes was created for this reason.

Taxpayers who pay interest on a qualified student loan may be able to deduct the interest as a deduction from AGI. True False

False The deduction is for AGI. Interest on qualified student loans, qualified residence (home mortgage) interest, and investment interest are deductible.

Reza's parents claim him as a dependent. This does not stop him from making a qualified student loan interest deduction. True False

False The deduction is not allowed for taxpayers who are claimed as dependents.

The determination of whether a loss is suspended under the passive activity loss rules is made before application of the at-risk rules. True False

False The determination of whether a loss is suspended under the passive activity loss rules is made after application of the at-risk rules, as well as other rules relating to the measurement of taxable income.

A loss that is not allowed for the year because of the at-risk rules is suspended under the passive activity loss rules. True False

False The determination of whether a loss is suspended under the passive activity loss rules is made after application of the at-risk rules, as well as other rules relating to the measurement of taxable income. A loss that is not allowed for the year because of the at-risk rules is suspended under those rules, not under the passive activity loss rules.

Active participation and material participation are the same thing. True False

False The difference between active participation and material participation is that the active participation threshold can be satisfied without regular, continuous, and substantial involvement in operations.

Obtaining a tax benefit by shifting itemized deductions from one year to another is not allowed. True False

False The individual could, for example, prepay a church pledge for a particular year to shift the deduction to the current year so itemized deductions exceed the standard deduction.

The maximum charitable contribution deduction may not exceed 20% of AGI for the tax year. True False

False The limit is 60% of AGI for the tax year.

The objective of the at-risk limitation is to allow the taxpayer to deduct losses in passive activities. True False

False The objective of the at-risk limitation is to limit a taxpayer's deductions to the amount "at risk," which is the amount the taxpayer stands to lose if the investment becomes worthless.

The passive activity loss rules require the taxpayer to segregate all income and losses into three categories: active, passive, and at-risk. True False

False The passive activity loss rules require the taxpayer to segregate all income and losses into three categories: active, passive, and portfolio. The at-risk limitation is to limit a taxpayer's deductions to the amount "at risk," which is the amount the taxpayer stands to lose if the investment becomes worthless. This doesn't count as a category of activity.

To determine if a taxpayer materially participates in an activity, the individual must currently participate more than 750 hours during the year. True False

False The requirement is that the individual must participate in the activity for more than 500 hours during the year.

Ordinary income property is any property that would have resulted in the recognition of long-term capital gain or § 1231 gain if the property had been sold by the donor. True False

False This is the definition of capital gain property. Ordinary income property is any property that, if sold, will result in the recognition of ordinary income.

Terry participates for 95 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity. True False

False To be considered a significant participation activity, the owner's participation in the activity must be for more than 100 hours per year.

From January through December 1, Forrest participated for 410 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Forrest spends 115 hours cleaning the store and painting the walls in order to meet the material participation standards. Forrest qualifies as a material participant. True False

False Work performed in an individual's capacity as an investor or in performance of duties not normally performed by owners does not count toward material participation if such work is performed primarily to meet the material participation requirements.

Barry owns a fleet of automobiles that are held for rent, and he spends an average of 50 hours a week in the activity. Assuming that the business is classified as a rental activity, it is subject to the passive activity rules even though Barry spends more than 500 hours a year in its operation. True False

True Because the business is classified as a rental activity, it is subject to the passive activity rules even though Barry spends more than 500 hours a year in its operation.

Fees are not deductible unless incurred as a business expense or as an expense in the production of income. True False

True For this reason, it's important to understand the difference between a tax and a fee, because fees are not deductible unless incurred as a business expense or as an expense in the production of income.

Several years ago, Samantha acquired a passive activity. Until 2017, the activity was profitable. Samantha's at-risk amount at the beginning of 2015 was $250,000. The activity produced losses of $100,000 in 2017, $80,000 in 2018, and $90,000 in 2019. During the same period, no passive income was recognized. The amount suspended under the at-risk rules at the beginning of 2020 is $20,000. True False

True $250,000 of the losses are reclassified as passive and suspended because no passive income was recognized during the period. $270,000 losses - $250,000 reclassified as passive = $20,000 losses suspended under the at-risk rules.

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence and one other residence. True False

True A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse. The principal residence meets the requirement for nonrecognition of gain upon sale under § 121. The one other residence, or second residence, is used as a residence if not rented or, if rented, meets the requirements for a personal residence under the rental of vacation home rules.

A rental activity is defined as any activity where payments are received principally for the use of tangible (real or personal) property. True False

True A rental activity is defined as any activity where payments are received principally for the use of tangible (real or personal) property. This does not include intangible property.

A taxpayer's at-risk basis is reduced by the losses (but not below zero) even if the deductions are not currently usable. True False

True A taxpayer's at-risk basis is reduced by the losses (but not below zero) even if the deductions are not currently usable because of the passive activity loss rules.

Personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible. True False

True Although certain exceptions exist (e.g., alimony and traditional IRA contributions are deductible for AGI), personal expenses not specifically allowed as itemized deductions by the tax law are nondeductible.

In most cases, interest paid on a home mortgage is fully deductible. True False

True Although in most cases interest paid on a home mortgage is fully deductible, there are limitations. A deduction is allowed for interest paid or accrued during the tax year on aggregate acquisition indebtedness. Acquisition indebtedness refers to amounts incurred in acquiring, constructing, or substantially improving the taxpayer's qualified residence that serves as security for that indebtedness. The amount of acquisition indebtedness is limited based on when the debt was incurred.

The hours worked by a spouse are not taken into account when evaluating whether a taxpayer has worked for more than 750 hours in real property trades or businesses during a year, but the spouse's work is taken into consideration in satisfying the material participation requirement. True False

True As a result, taxpayers must take care when relying on their spouses to qualify for nonpassive treatment.

Since the tax benefits may be limited under the at-risk limits and the passive activity loss rules, investors must now consider the economics of the venture. True False

True Before Congress passed laws to reduce their effectiveness, tax shelters provided a popular way to avoid or defer taxes, as they could generate deductions and other benefits to offset income from other sources. Because of the tax avoidance potential of many tax shelters, they were attractive to wealthy taxpayers in high income tax brackets. Since the tax benefits may be limited under the at-risk limits and the passive activity loss rules, investors must now consider the economics of the venture.

Nikki incurred bridge tolls of $30, highway tolls of $50, automobile registration fees of $40, state income taxes of $200, and local income taxes of $100. Her total itemized deductible expenses are $300. True False

True Bridge and highway tolls and automobile registrations are fees, not taxes, and are not deductible as itemized deductions. The state and local income taxes are deductible when itemizing ($200 + $100 = $300).

Charles realized a long-term capital gain of $8,000. In calculating his net investment income, Charles may elect to include the gain in investment income. True False

True Charles may elect to include the gain in investment income if he agrees to reduce the amount qualifying for the alternative capital gains rate by the same amount.

Beatrice pays FICA (employer's share) on the wages she pays her maid to clean and maintain Beatrice's personal residence. The FICA payment is not deductible as an itemized deduction. True False

True Deductible personal property taxes must be assessed in relation to the value of the property. These are called ad valorem taxes.

Deductible personal property taxes must be assessed in relation to the value of the property. True False

True Deductible personal property taxes must be assessed in relation to the value of the property. These are called ad valorem taxes.

Erica owns a 25% interest in a partnership in which her at-risk amount was $15,000 at the beginning of the year. The partnership borrowed $45,000 on a recourse note and made a $30,000 profit during the year. Her at-risk amount at the end of the year is $33,750. True False

True Erica is considered at risk for amounts borrowed on a recourse note because she is personally liable for repayment of the debt. Therefore, her at-risk amount is increased by her share of the recourse debt incurred by the partnership. Erica's at-risk amount at the end of the year is $33,750 [$15,000 + (25% × $45,000 recourse note) + (25% × $30,000 profit)].

When a taxpayer desires to support a charitable cause and take a charitable contribution when itemizing deductions, the taxpayer should ensure that the charity is a qualified charitable organization. True False

True For a charitable contribution to be deductible, the recipient must be a qualified charitable organization.

During the year, Horace earned investment income of $13,500 and incurred investment interest expense of $7,700 and other investment expenses of $9,000. Horace may carry over $3,200 of investment interest and deduct it in the future. True False

True Horace's investment interest deduction is limited to $4,500 ($13,500 investment income - $9,000 other investment expenses). The disallowed amount ($7,700 investment interest incurred - $4,500 deduction allowed = $3,200) can be carried forward.

Landon resides in a nursing home primarily for medical reasons rather than personal reasons. Costs for meals and lodging can be included in determining his deductible medical expenses. True False

True If the primary reason for being in a nursing home is medical, the cost of meals and lodging can be included in medical expenses, along with the costs for medical or nursing care.

Active income includes profit from a trade or business in which the taxpayer is a material participant. True False

True Income classified as active includes profit from a trade or business in which the taxpayer is a material participant. If an individual taxpayer materially participates in a nonrental trade or business activity, any loss from that activity is treated as an active loss that can offset active or portfolio income. If a taxpayer does not materially participate, the loss is treated as a passive activity loss, which can only offset passive activity income.

Investment expenses are those deductible expenses directly connected with the production of investment income. True False

True Investment expenses are those deductible expenses directly connected with the production of investment income, such as property taxes on investment holdings, brokerage charges, and investment counsel fees. Investment expenses do not include interest expense.

Investment income includes gross income from interest, annuities, and royalties not derived in the ordinary course of a trade or business but does not include any income taken into account when calculating income or loss from a passive activity. True False

True Investment income does not include any income taken into account when calculating income or loss from a passive activity. Passive activity losses may be deducted only against passive activity income and gains. Investment income does not include these types of activities

Net investment income, which serves as the ceiling on the deductibility of investment interest, is the excess of investment income over investment expenses. True False

True Investment income includes gross income from interest, annuities, and royalties not derived in the ordinary course of a trade or business. However, investment income does not include any income taken into account when calculating income or loss from a passive activity.

Personal IRA deductions are deductible for AGI. True False

True Most personal expenses are itemized deductions which are from AGI; however, some exceptions exist and are for AGI, such as the IRA deduction.

Gabby participates for 405 hours in Activity A and 100 hours in Activity B, both of which are nonrental businesses. Both activities are passive. True False

True Only Activity A is a significant participation activity. Because Gabby has not participated for more than 500 hours in that activity, both of the activities are passive.

Lily participates for 450 hours in Activity A and 100 hours in Activity B, both of which are nonrental businesses. Both activities are passive. True False

True Only Activity A is a significant participation activity. Because Lily has not participated for more than 500 hours in that activity, both of the activities are passive.

Medical expenses are generally rare because the threshold percentage is significant. True False

True Only medical expenses in excess of the "7.5%-of-AGI floor" are deductible. For 2017 and 2018, the threshold was 7.5% for all individuals. For 2013 through 2016, the threshold was 7.5% for individuals age 65 or over and 10% for all other individuals.

Excise taxes are nondeductible. True False

True Only property, income, and sales taxes can be deductible. Other taxes are not deductible by individuals if they relate to personal activities (rather than business activities). An example is excise taxes included in the cost of purchasing gasoline.

Passive activity losses may be deducted only against passive activity income and gains. True False

True Passive activity losses may be deducted only against passive activity income and gains. Losses not allowed are suspended and used in future years.

An installment sale of a taxpayer's entire interest in a passive activity triggers recognition of the suspended losses. True False

True Passive activity losses may be deducted only against passive activity income and gains. Losses not allowed are suspended and used in future years. An installment sale of a taxpayer's entire interest in a passive activity triggers recognition of the suspended losses.

Garnet Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Garnet cannot deduct the $23,000 loss if it is a personal service corporation. True False

True Personal service corporations may not offset passive losses against active income.

Employee business expenses for travel do not qualify as itemized deductions subject to the 2% floor if they are reimbursed. True False

True Prior to 2018, certain other personal expenses were deductible to the extent, in total, they exceeded 2% of the taxpayer's AGI (and only if the taxpayer itemized deductions instead of claiming the standard deduction). These miscellaneous itemized deductions included unreimbursed employee business expenses, certain investment expenses, tax return preparation fees (other than for portions of the return related to business), and expenses related to hobby income. From 2018 through 2025, these expenses are not deductible.

The deduction for investment interest allowed during the tax year is limited to the lesser of the investment interest paid or net investment income. True False

True Rental activities involve tangible (real or personal) property only.

Ricky owns a small apartment building that produces a $25,000 loss during the year. His AGI before considering the rental loss is $85,000. Ricky must be an active participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception. True False

True Ricky must actively participate in the rental activity in order to deduct the $25,000 loss.

Under the at-risk limits and the passive activity loss rules, investors must consider the economics of the venture instead of the tax benefits or tax avoidance possibilities that an investment may generate. True False

True Since the tax benefits may be limited under the at-risk limits and the passive activity loss rules, investors must now consider the economics of the venture.

Gambling losses are not subject to the 2%-of-AGI floor. True False

True Such losses up to the amount of gambling winnings are not subject to the 2%-of-AGI floor.

The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction. True False

True Taxpayers must make a choice between the standard deduction and itemizing deductions. If the itemized deduction total exceeds the standard deduction, the itemized deduction should be used.

During the year, Dena earned investment income of $20,000, incurred investment interest expense of $12,500, and incurred other investment expenses of $7,500. Dena may deduct $12,500 of investment interest this year. True False

True The deduction for investment interest expense may not exceed net investment income for the year. Dena's net investment income is $12,500 ($20,000 - $7,500).

The impairment-related work expenses of a handicapped person are not subject to the 2%-of-AGI floor. True False

True The impairment-related work expenses of a handicapped person are not subject to the 2%-of-AGI floor. These fall under the category of Other Miscellaneous Deductions on line 28 of Schedule A.

The maximum charitable contribution deduction may not exceed 60% of AGI for the tax year. True False

True The limit is 60%. If a taxpayer's contributions for the year exceed the limitations, the excess contributions may be carried forward and deducted during a five-year carryover period.

If the taxpayer isn't personally liable for repayment of a debt, then the taxpayer isn't considered at risk. True False

True The objective of the at-risk limitation rule's objective is to limit a taxpayer's deductions to the amount "at risk," which is the amount the taxpayer stands to lose if the investment becomes worthless.

A rental activity may be grouped with a trade or business activity only if one activity is insubstantial in relation to the other. True False

True The rental activity must be insubstantial in relation to the trade or business activity, or the trade or business activity must be insubstantial in relation to the rental activity.

The at-risk limits and the passive activity loss rules increased the attractiveness of investments in real estate from a tax perspective. True False

True The rules prevented wealthy people from using these investments as tax shelters

The election to itemize is not appropriate when the taxpayer's allowable itemized deductions are less than the allowable standard deduction. True False

True The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

When a taxpayer anticipates that medical expenses will be close to the percentage floor for a year, the taxpayer should consider maximizing medical expenses for the remainder of the year as an effective tax planning strategy. True False

True The taxpayer should consider accelerating other medical expenses into the current year. For example, consider scheduling more physician appointments to address medical conditions more quickly.

When a taxpayer anticipates that charitable contributions will allow itemizing deductions, the taxpayer should consider maximizing qualified contributions for the remainder of the year as an effective tax planning strategy. True False

True The taxpayer should consider accelerating other qualified contributions into the current year. For example, consider making donations this year instead of next year.

Cash basis taxpayers are entitled to deduct state income taxes in the year payment is made. True False

True This includes taxes withheld by the employer, amounts paid with the state income tax return when filed, and estimated state income tax payments.

The purchaser of a principal residence can deduct qualifying points in the year of payment. True False

True This is an exception to the general rule that points are capitalized and are amortized and deductible ratably over the life of the loan. However, the purchaser of a principal residence can deduct qualifying points in the year of payment.

Joe owns a bicycle rental business at a large hotel. Because the average period of customer use is seven days or less, Joe's business is not treated as a rental activity. If Joe is not a material participant in the activity, it is treated as a passive activity. True False

True This is an illustration of the exception to the definition of a rental activity. The person that rents property for seven days or less is generally required to provide significant services to the customer. Providing these services supports a conclusion that the person is engaged in a service business rather than a rental business.

Tax shelters used to be so effective that wealthy people could benefit from investing in ventures that had no chance of being profitable in the long run. True False

True This was the primary motivation behind the introduction of the passive activity loss limitations.

Sharon participates for 105 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity. True False

True To be considered a significant participation activity, the owner's participation in the activity must be for more than 100 hours per year.

Cartman and Kenny are equal owners in Mountain Corporation. On July 1, 2019, each loans the corporation $20,000 at annual interest of 10%. Both shareholders are on the cash method of accounting, while Mountain Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2020, Mountain repays the loans of $40,000 together with interest of $2,000 to Kenny and $2,000 to Cartman. How much of the interest can Mountain Corporation deduct in 2019? a. $0 b. $1,000 c. $500 d. $2,000 e. $4,000

a. $0 Mountain Corporation can deduct interest expense of $4,000 ($2,000 + $2,000) in 2020 and $0 in 2019. Under § 267, Cartman and Kenny are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2020).

Sofia made a gift to David of a passive activity (adjusted basis of $40,000, suspended losses of $10,000, and a fair market value of $60,000). No gift tax resulted from the transfer. Which of the following statements is true? a. David's adjusted basis is $50,000. b. David's adjusted basis is $40,000, and the suspended losses are lost. c. David's adjusted basis is $40,000, and David can deduct the $10,000 of suspended losses in the future. d. David's adjusted basis is $60,000, and the suspended losses are lost. e. David's adjusted basis is $60,000, and David can deduct the $10,000 of suspended losses in the future.

a. David's adjusted basis is $50,000. Since the $10,000 suspended loss is included in basis, David's basis in the property is $50,000 ($40,000 + $10,000).

Casey spends 32 hours a week, 50 weeks a year, operating a DVD rental store that she owns. She also owns a music store in another city that is operated by a full-time employee. Casey spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Which of the following statements is true? a. Neither store is a passive activity. b. Only the DVD rental store is a passive activity. c. Both stores are passive activities. d. Only the music store is a passive activity. e. The DVD rental store is treated as a rental activity

a. Neither store is a passive activity. A DVD rental store is not treated as a rental activity because the average period of customer use is seven days or less. Because Casey participates for more than 500 hours during the year, the DVD rental store is treated as an active business. Casey participates for more than 100 hours in the music store, which makes it a significant participation activity. Her total participation in the two significant participation activities is more than 500 hours, so neither business is treated as passive.

Is a deduction allowed for the contribution of one's services to a charitable organization? a. No b. Yes, as long as the services provided are not within one's usual line of work c. Yes, but the deduction is subject to a 10%-of-AGI threshold d. Yes, as long as the services provided are within one's usual line of work e. Yes, as long as the organization is a qualified charitable organization

a. No No deduction is allowed for a contribution of one's services to a qualified charitable organization. However, unreimbursed expenses related to the services rendered may be deductible (e.g., the cost of a uniform that is required to be worn while performing services). In addition, deductions are permitted for out-of-pocket transportation costs, reasonable expenses for lodging, and the cost of meals while away from home that are incurred in performing the donated services.

Norbert invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $25,000, and its fair market value is $35,000. The lease payments are $400 per year. Which of the following statements is true? a. The leasing activity will not be treated as a rental activity. b. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Norbert devotes more than 500 hours to the activity. c. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Norbert qualifies as a real estate professional. d. The leasing activity will be not be treated as a rental activity and will not be treated as a passive activity if Norbert devotes more than 500 hours to the activity. e. The leasing activity will be treated as a rental activity and will be treated as a passive activity, regardless of how many hours Norbert participates.

a. The leasing activity will not be treated as a rental activity This case illustrates an activity that is covered by one of the rental activity exceptions and, therefore, is not automatically treated as passive. The rental of such property is treated as incidental to the non-rental activity of the taxpayer.

Hugo has $80,000 of AGI before considering rental activities. Hugo also has $62,000 of losses from a real estate rental activity in which he actively participates. He actively participates in another real estate rental activity from which he has $10,000 of income. He has other passive activity income of $20,000. How much can Hugo deduct against his active income? a.$25,000 b.$32,000 c.$0 d.$20,000 e.$62,000

a.$25,000 Hugo's rental and passive activity income is $30,000 ($10,000 + $20,000). This leaves Hugo with a net loss of $32,000 ($62,000 - $30,000). This is greater than the $25,000 cap, and Hugo's AGI is not high enough to reduce the size of the cap. Thus, Hugo can deduct the full $25,000 against his active income.

Several years ago, Samantha acquired a passive activity. Until 2017, the activity was profitable. Samantha's at-risk amount at the beginning of 2015 was $250,000. The activity produced losses of $100,000 in 2017, $80,000 in 2018, and $90,000 in 2019. During the same period, no passive income was recognized. How much is suspended under the at-risk rules and the passive loss rules at the beginning of 2020? At-Risk Passive Loss a. $0 $270,000 b. $20,000 $250,000 c. $30,000 $240,000 d. $260,000 $10,000 e. $250,000 $20,000

b. $20,000 $250,000 $250,000 of the losses are reclassified as passive and suspended because no passive income was recognized during the period. $270,000 losses - $250,000 reclassified as passive = $20,000 losses suspended under the at-risk rules.

Jillian is employed as a systems analyst. For calendar year 2019, she had AGI of $120,000 and paid the following medical expenses: Medical insurance premiums $3,900 Doctor and dentist bills for Carl and Penny (Jillian's parents) 8,250 Doctor and dentist bills for Jillian 6,750 Prescribed medicines for Jillian 300 Nonprescribed insulin for Jillian 825 Carl and Penny would qualify as Jillian's dependents except that they file a joint return. Jillian's medical insurance policy does not cover them. Jillian filed a claim for $3,150 of her own expenses with her insurance company in December 2019 and received the reimbursement in January 2020. What is Jillian's maximum allowable medical expense deduction for 2019? a. $0 b. $11,025 c. $16,875 d. $8,025 e. $4,875

b. $11,025 Jillian's medical expense deduction is $11,025, determined as follows: Medical insurance premiums $3,900 Doctor and dentist bills for Carl and Penny 8,250 Doctor and dentist bills for Jillian 6,750 Prescribed medicines for Jillian 300 Nonprescribed insulin for Jillian 825 Total medical expenses $20,025 Less: 7.5% of $120,000 (AGI) (9,000) Deductible portion of medical expenses $11,025 Although Carl and Penny cannot be claimed as Jillian's dependents, they could have been had they not filed a joint return. Therefore, they qualify for the medical expense deduction. Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical expenses. The insurance recovery was not received until 2020. Therefore, it has no effect on the medical expense deduction for 2019.

Which of the following is allowed as a miscellaneous itemized deduction? a. Personal interest on credit cards b. Gambling losses up to the amount of winnings c. Personal entertainment expenses d. Personal travel expenses e. Personal meal expenses

b. Gambling losses up to the amount of winnings In general, no deduction is allowed for personal, living, or family expenses. Gambling losses up to the amount of gambling winnings are deductible.

Yasuke donates $150 to a local theater company. His intent in making the donation is purely altruistic, so he's surprised when the company sends him a free ticket to its next performance, normally worth $50. Which of the following statements is correct? a. Because Yasuke didn't make the donation with the intent of obtaining a free ticket, he can attend the performance and still deduct the full $150. b. In order to deduct the full $150, Yasuke would need to send the ticket back to the theater company. Otherwise, he can keep the ticket and deduct $100. c. Yasuke can deduct the full $150 regardless of his intention and regardless of whether or not he uses the ticket. d. If Yasuke attends the play, he forfeits the right to deduct anything as a charitable donation. e. Yasuke can deduct the full $150 as long as he doesn't use the ticket.

b. In order to deduct the full $150, Yasuke would need to send the ticket back to the theater company. Otherwise, he can keep the ticket and deduct $100. When a donor derives a tangible benefit from a contribution, he or she cannot deduct the value of the benefit. Yasuke's two options are as follows: keep the ticket and deduct $100 ($150 - $50), or return the ticket and deduct $150.

Carl invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $20,000, and its fair market value is $30,000. The lease payments are $350 per year. Which of the following statements is true? a. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Carl devotes more than 500 hours to the activity. b. The leasing activity will not be treated as a rental activity. c. The leasing activity will be treated as a rental activity and as a passive activity, regardless of how many hours Carl participates. d. The leasing activity will be treated as a rental activity because it generated more than $100 per year. e. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Carl qualifies as a real estate professional.

b. The leasing activity will not be treated as a rental activity. This case illustrates an activity that is covered by one of the rental activity exceptions and, therefore, is not automatically treated as passive. The rental of such property is treated as incidental to the non-rental activity of the taxpayer.

Chelsea, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible? a. $0 b. $26,000 c. $10,000 d. $16,000 e. $25,000

b.$10,000 A rental loss of $10,000 is deducted against the passive income from the limited partnership interest. None of the remaining $16,000 rental loss is deducted against Chelsea's salary, even though she actively participates in the activity. The special $25,000 offset for real estate rental activities is reduced to $0 [$25,000 - 50%($155,000 - $100,000)]. Therefore, of the remaining $16,000 loss, none can be deducted in the current year.

Teresa spends 36 hours a week, 49 weeks a year, operating a hotel that she owns. She also owns a shoe store that is operated by a full-time employee. Teresa spends 160 hours per year working at the shoe store. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Which of the following statements is true? a.Only the hotel is a passive activity. b.Neither store is a passive activity. c.Both stores are passive activities. d.Teresa can offset any losses from the shoe store against income from the hotel. e.Only the shoe store is a passive activity.

b.Neither store is a passive activity. A hotel is not treated as a rental activity because the average period of customer use is seven days or less. Because Teresa participates for more than 500 hours during the year, the hotel is treated as an active business. Teresa participates for more than 100 hours in the shoe store, which makes it a significant participation activity. Her total participation in the two significant participation activities is more than 500 hours, so neither business is treated as passive.

Cartman and Kenny are equal owners in Mountain Corporation. On July 1, 2019, each loans the corporation $20,000 at annual interest of 10%. Both shareholders are on the cash method of accounting, while Mountain Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2020, Mountain repays the loans of $40,000 together with interest of $2,000 to Kenny and $2,000 to Cartman. How much of the interest can Mountain Corporation deduct in 2019? a. $4,000 b. $500 c. $0 d. $2,000 e. $1,000

c. $0 Mountain Corporation can deduct interest expense of $4,000 ($2,000 + $2,000) in 2020 and $0 in 2019. Under § 267, Cartman and Kenny are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2020).

Ophelia donates $3,000 to Canada University's athletic department. The payment guarantees that she will have preferred seating at every curling match. Subsequently, Ophelia buys a hundred $30 curling match tickets. What deduction is Ophelia allowed for the current taxable year? a. $6,000 b. $2,970 c. $0 d. $3,000 e. $2,400

c. $0 Previously, under the athletic ticket exception to the benefit received rule, 80% of the amount paid to or for the benefit of the institution qualified as a charitable contribution deduction. Eighty percent of $3,000 is $3,000 × 0.80 = $2,400. However, Code § 170(l) now makes this nondeductible, effective 2018.

Dave and Jan had $1,000 in home mortgage interest, $500 qualified student loan interest, $50 interest paid on car loan, and $500 in credit card interest. How much of the interest is deductible? a. $1,550 b. $0 c. $1,500 d. $2,050 e. $2,000

c. $1,500 Personal (consumer) interest for credit cards and car loans is not deductible. Deductible interest is mortgage interest and qualified student loans ($1,000 + $500 = $1,500).

A taxpayer's deductible loss from an activity for any taxable year is limited to the amount the taxpayer could actually lose in the activity. True False

c. $10,000 A rental loss of $10,000 is deducted against the passive income from the limited partnership interest. None of the remaining $16,000 rental loss is deducted against Chelsea's salary, even though she actively participates in the activity. The special $25,000 offset for real estate rental activities is reduced to $0 [$25,000 - 50%($155,000 - $100,000)]. Therefore, of the remaining $16,000 loss, none can be deducted in the current year.

Marley has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $30,000. Activity B, acquired last year, produces a loss of $50,000 in the current year. At the beginning of this year, Marley's at-risk amounts in Activities A and B are $5,000 and $50,000, respectively. What is the amount of Marley's suspended passive loss with respect to these activities at the end of the current year? a. $18,000 b. $30,000 c. $20,000 d. $0 e. $50,000

c. $20,000 The $30,000 of passive income from Activity A is offset by $50,000 of the passive loss from Activity B, leaving a net passive loss of $20,000. None of the $20,000 net passive loss is deductible in the current year. The $20,000 net passive loss is suspended.

Juan was permanently disabled in a car accident and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $28,000. The increase in the value of the residence as a result of the room addition was determined to be $12,000. In addition, Juan paid the contractor $5,000 to construct an entrance ramp to his home and $7,000 to widen the hallways to accommodate his wheelchair. Juan's AGI for the year was $80,000. How much of these expenditures can Juan deduct as a medical expense? a. $10,000 b. $16,000 c. $22,000 d. $20,000 e. $0

c. $22,000 A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and a car specially designed for a wheelchair-bound taxpayer. Juan's medical expense related to the room addition is $16,000 ($28,000 - $12,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the 7.5% floor only, and the increase in the home's value is deemed to be zero. Juan's medical expense related to the ramp and hallways is $12,000 ($5,000 + $7,000). Therefore, Juan's medical expense deduction is as follows: Qualifying medical expenses ($16,000 + $12,000) $28,000 Less: 7.5% × $80,000 (6,000) Deductible medical expenses $22,000

During the year, Alexander earned investment income of $13,500 and incurred investment interest expense of $7,700 and other investment expenses of $9,000. How much investment interest can Alexander carry over and deduct in the future? a. $0 b. $9,000 c. $3,200 d. $7,700 e. $4,500

c. $3,200 Alexander's investment interest deduction is limited to $4,500 ($13,500 investment income - $9,000 other investment expenses). The disallowed amount ($7,700 investment interest incurred - $4,500 deduction allowed = $3,200) can be carried forward.

During 2019, Jasmine paid the following amounts to qualified charities: Ten separate $200 contributions to her church (no receipts) $2,000 Donated furniture (with contemporaneous written acknowledgment) 400 One donation (with a receipt and contemporaneous written acknowledgment) 5,000 What amount can Jasmine claim as charitable contributions in itemizing deductions? a. $5,000 b. $7,000 c. $7,400 d. $0 e. $2,400

c. $7,400 Ten separate contributions of $200, the donated furniture of $400, and the one-time donation of $5,000 with a receipt and contemporaneous written acknowledgement are deductible for a total of $7,400 [($200 × 10) + $400 + $5,000].

Gloria owns a candy store and a jewelry store. Both businesses are operated in a mall. She also owns a restaurant across the street and a book store several blocks away. Which of the following statements is true? a. The candy store and jewelry store can be treated as a single activity; the restaurant must be treated as a separate activity, and the book store must be treated as a separate activity. b. The candy store, jewelry store, and restaurant can be treated as a single activity, and the book store must be treated as a separate activity. c. All four businesses can be treated as a single activity if Gloria elects to do so. d. The candy store, jewelry store, and book store can be treated as a single activity, and the restaurant must be treated as a separate activity. e. All four businesses must be treated as separate activities.

c. All four businesses can be treated as a single activity if Gloria elects to do so. All four businesses may be treated as a single activity because of common ownership.

Jake owns a business with two separate departments. Department A produces $100,000 of income, and Department B incurs a $60,000 loss. Jake participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments. Which of the following statements is true? a. Jake may not offset the $60,000 loss against the $100,000 income because he did not participate more than 120 hours in Department B. b. Jake may not treat Department A and Department B as separate activities because they are parts of one business. c. If Jake elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. d. If Jake elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income. e. If Jake elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.

c. If Jake elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. Jake may choose to treat the two departments as either a single activity or as separate activities. If the two departments are treated as a single activity, Jake is a material participant and the loss can be offset against the income. If the two departments are treated as separate activities, Jake is a material participant with respect to Department A (the more-than-500-hour test is met) and the income from Department A is active. However, the loss from Department B would be passive because none of the material participation tests would be met. Passive losses cannot be offset against active income.

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit? a. Interdependencies between the activities b. Geographical location c. Tax benefit d. Extent of common control e. Extent of common ownership

c. Tax benefit Each of the listed factors except "Tax benefit" is relevant. Treasury Regulations state to use all the relevant facts and circumstances in making the decision of an appropriate economic unit.

Rafael owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business. Which of the following statements is true? a.Both the apartment building and the computer consulting business are passive activities. b.The computer consulting business is a passive activity, but the apartment building is not. c.Neither the apartment building nor the computer consulting business is a passive activity. d.The apartment building is a passive activity, but the computer consulting business is not. e.Rafael can offset any losses from the computer consulting business against income from the apartment building.

c.Neither the apartment building nor the computer consulting business is a passive activity. More than half of Rafael's personal services are spent in a real property trade or business in which he materially participates, and the time spent exceeds 750 hours. Thus, the apartment building is not a passive activity. Because Rafael participates for more than 500 hours in the computer consulting business, it also is not a passive activity.

Riley had an accident while rock climbing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000, and the surgery to reshape her nose cost $5,000. How much of Riley's surgical fees will qualify as a deductible medical expense (before application of the 7.5% limitation)? a. $17,000 b. $7,000 c. $0 d. $12,000 e. $5,000

d. $12,000 Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $12,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($5,000 for reshaping the nose) are not deductible as a medical expense.

In Adelaide County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year, 2019. The tax is payable on June 1, 2019. On April 30, 2019, Julio sells his house to Victoria for $230,000. On June 1, 2019, Victoria pays the entire real estate tax of $7,300 for the year ending December 31, 2019. How much of the property taxes may Julio deduct? a. $4,920 b. $0 c. $7,300 d. $2,380 e. $2,400

d. $2,380 Julio may deduct $2,380. Under § 164(d), 119/365 (January 1-April 29, 2019) × $7,300 = $2,380 is apportioned to Julio.

In 2019, Penelope makes the following donations to qualified charitable organizations: Basis Fair Market Value Inventory held for resale in Penelope's business (a sole proprietorship) $4,000 $ 3,600 Stock in Sparrow, Inc., held as an investment (acquired two years ago) 8,000 20,000 Comic book collection held as an investment (acquired six years ago) 2,000 10,000 The Sparrow stock and the inventory were given to Penelope's church, and the comic book collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Penelope's charitable contribution deduction for 2019 is: a. $14,000. b. $26,000. c. $0. d. $25,600. e. $33,600.

d. $25,600. Inventory is ordinary income property, but the fair market value ($3,600) must be used if lower than the basis ($4,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the Sparrow stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($20,000). The comic book collection comes under the exception relating to tangible property put to an unrelated use, and the adjusted basis ($2,000) must be used. Thus, $3,600 + $20,000 + $2,000 = $25,600.

Lorraine, James's daughter who would otherwise qualify as his dependent, filed a joint return with her husband Larry. James, who is age 66 and had AGI of $100,000, paid the following medical expenses: Laser surgery to correct Lorraine's vision problem $ 2,600 Lorraine's prescribed medicines 800 James's doctor and dentist bills 7,400 Prescription drugs for James 1,200 Contact lenses for James 500 Total $12,500 James has a medical expense deduction of: a. $12,500. b. $0. c. $1,600. d. $5,000. e. $2,500.

d. $5,000. James may claim the medical expenses he paid on behalf of Lorraine, even though Lorraine cannot be claimed as his dependent. This exception applies if the gross income and/or joint return tests are the only reasons why a person cannot be otherwise claimed as a dependent. The contact lenses qualify. His deduction is $5,000 [$12,500 - ($100,000 × 7.5%)].

Sonia paid the following taxes during the year: Taxes on residence (for the period from March 1 through August 31) $5,250 State motor vehicle tax (based on the value of the personal use automobile) 430 State income tax 3,050 State and local sales taxes 3,500 Sonia sold her personal residence on June 30, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Sonia? a. $9,180 b. $0 c. $5,382 d. $7,382 e. $9,130

d. $7,382 [(121 days/184 days × $5,250) + $430 + $3,500] = $7,382. State and local sales taxes ($3,500) are more than the state income tax ($3,050). Therefore, assuming that Sonia may choose to deduct the higher of her state and local sales taxes or her state income tax, her deduction will include $3,500 rather than $3,050.

Amy paid the following taxes during the year: Taxes on residence (for the period from March 1 through August 31) $6,250 State motor vehicle tax (based on the value of the personal use automobile) 630 State income tax 4,050 State and local sales taxes 4,500 Amy sold her personal residence on June 30, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Amy? a. $4.680 b. $0 c. $6,250 d. $9,240 e. $8,050

d. $9,240 [(121 days/184 days × $6,250) + $630 + $4,500] = $9,240. State and local sales taxes ($4,500) are more than the state income tax ($4,050). Therefore, assuming that Amy may choose to deduct the higher of her state and local sales taxes or her state income tax, her deduction will include $4,500 rather than $4,050.

Which of the following is not a miscellaneous itemized deduction? a. Federal estate tax on income in respect of a decedent b. Gambling losses up to the amount of gambling winnings c. Impairment-related work expenses of a handicapped person d. Personal meals while moving e. Repayment of amounts under a claim of right

d. Personal meals while moving In general, no deduction is allowed for personal, living, or family expenses. Personal meals are not an allowable miscellaneous deduction.

Rachel acquired a passive activity several years ago. Until 2016, the activity was profitable, and Rachel's at-risk amount at the beginning of 2015 was $300,000. The activity produced losses for Rachel of $80,000 in 2016, $50,000 in 2017, and $70,000 in 2018. In 2019, the activity produced income of $90,000. What is Rachel's at-risk amount at the beginning of 2020? a.$60,000 b.$110,000 c.$0 d.$190,000 e.$80,000

d.$190,000 $80,000 suspended loss from 2016 + $50,000 suspended loss from 2017 + $70,000 suspended loss from 2018 = $200,000 suspended losses at end of 2018 - $90,000 passive income in 2019 = $110,000 suspended passive loss at beginning of 2020. The at-risk amount at the beginning of 2020 is $190,000 ($300,000 - $80,000 - $50,000 - $70,000 + $90,000).

Betty, a single taxpayer, has $80,000 in salary, $10,000 in income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Betty may deduct: a.$25,000. b.$10,000. c.$20,000. d.$30,000. e.$0.

d.$30,000. The entire loss may be deducted: $10,000 is deducted against the income from the limited partnership (i.e., passive income), and the remaining $20,000 is deducted against Betty's salary because she actively participates in the real estate rental activity.

Matthew pays $8,000 this year to become a charter member of Central University's Athletic Council. The membership ensures that Matthew will receive choice seating at all of Central's home basketball games. In addition, Matthew pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? a. $5,800 b. $6,400 c. $8,000 d. $0 e. $6,200

e. $0 Prior to 2018, 80% of the $8,000 payment Central University's Athletic Council ($6,400) was allowed as a charitable contribution under the exception to the tangible-benefit-received rule. However, it is currently not deductible [§ 107(l)]. The amount Matthew pays ($2,200) to purchase tickets at the regular price is not deductible as a charitable contribution.

During 2019, Bradley, a self-employed individual, paid the following amounts: State income tax $1,400 State sales taxes 1,950 State occupational license fee 250 Personal property tax on value of his automobile 200 What amount can Bradley claim as taxes in itemizing deductions from AGI? a. $450 b. $0 c. $1,600 d. $3,350 e. $2,150

e. $2,150. State sales taxes ($1,950) are more than the state income tax ($1,400) so Bradley will choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($250) is deductible for AGI as a business expense. The state sales taxes ($1,950) and the personal property tax on the auto ($200) are deductible as itemized deductions. The total itemized deductions are $2,150 ($1,950 + $200).

During 2019, Jasmine, a self-employed individual, paid the following amounts: State income tax $2,400 State sales taxes 2,950 State occupational license fee 450 Personal property tax on value of automobile 400 What amount can Jasmine claim as taxes in itemizing deductions from AGI? a. $2,400 b. $0 c. $2,800 d. $2,850 e. $3,350

e. $3,350 State sales taxes ($2,950) are more than the state income tax ($2,400) so Jasmine will choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($450) is deductible for AGI as a business expense. The state sales taxes ($2,950) and the personal property tax on the auto ($400) are deductible as itemized deductions. The total itemized deductions are $3,350 ($2,950 + $400 = $3,350).

Jacob has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Jacob's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Jacob's suspended passive loss with respect to these activities at the end of the current year? a. $0 b. $100,000 c. $36,000 d. $110,000 e. $40,000

e. $40,000 The $60,000 of passive income from Activity A is offset by $60,000 of the passive loss from Activity B, leaving a net passive loss of $40,000. None of the $40,000 net passive loss is deductible in the current year. The $40,000 net passive loss is suspended.

Gwen earns a salary of $150,000 and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Gwen's share is $50,000. How is her loss characterized? a. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive loss rules. b. $50,000 is suspended under the passive loss rules. c. $100,000 is suspended under the passive loss rules. d. $50,000 is suspended under the at-risk rules. e. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules.

e. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules. $10,000 of Gwen's loss is suspended under the at-risk rules, leaving a potential deduction of $40,000. However, the $40,000 loss is suspended under the passive loss rules.

Ten separate $200 contributions to her church (no receipts) $2,000 Donated furniture (without contemporaneous written acknowledgment) 400 One donation (with a receipt and contemporaneous written acknowledgment) 5,000 What amount can Jasmine claim as charitable contributions in itemizing deductions? a. $2,400 b. $0 c. $7,400 d. $5,000 e. $7,000

e. $7,000 Ten separate contributions of $200 and the one-time donation of $5,000 with a receipt and contemporaneous written acknowledgement are deductible for a total of $7,000 [($200 × 10) + $5,000]. The donated furniture of $400 is not deductible without contemporaneous written acknowledgement.

Jeremy and Alison, married taxpayers, took out a mortgage on their home for $350,000 in 1994. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $75,000. They used the funds to put an addition on the home. They paid interest of $5,600 on the mortgage, $2,000 on the home equity loan, and $1,000 interest on credit cards. How much of the interest is deductible? a. $3,000 b. $8,600 c. $5,600 d. $0 e. $7,600

e. $7,600 Interest is deductible only for the mortgage and the home equity loan ($5,600 + $2,000 = $7,600).

Alice owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away. Which of the following statements is true? a. The shoe store and bookstore can be treated as a single activity; the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity. b. The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity. c. All four businesses must be treated as separate activities. d. The shoe store and jewelry store can be treated as a single activity; the restaurant must be treated as a separate activity, and the book store must be treated as a separate activity. e. All four businesses can be treated as a single activity if Alice elects to do so.

e. All four businesses can be treated as a single activity if Alice elects to do so. All four businesses may be treated as a single activity because of common ownership.

During the year, Marcus earned investment income of $20,000, incurred investment interest expense of $15,500, and incurred other investment expenses of $7,000. How much investment interest can Marcus deduct this year? a.$0 b.$7,000 c.$15,500 d.$20,000 e.$13,000

e.$13,000 The deduction for investment interest expense may not exceed net investment income for the year. Marcus's net investment income is $13,000 ($20,000 - $7,000).

Krista earns a salary of $300,000 and invests $80,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $500,000, of which Krista's share is $100,000. How is her loss characterized? a.$100,000 is suspended under the at-risk rules. b.$300,000 is suspended under the passive loss rules. c.$80,000 is suspended under the at-risk rules, and $20,000 is suspended under the passive loss rules. d.$100,000 is suspended under the passive loss rules. e.$80,000 is suspended under the passive loss rules, and $20,000 is suspended under the at-risk rules.

e.$80,000 is suspended under the passive loss rules, and $20,000 is suspended under the at-risk rules. $20,000 of Gwen's loss is suspended under the at-risk rules, leaving a potential deduction of $80,000. However, the $80,000 loss is suspended under the passive loss rules.

Brandon owns an office building in which he is a material participant and a legal consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the office building and 45% of the time is spent in the legal consulting business. Which of the following statements is true? a.Both the office building and the legal consulting business are passive activities. b.The legal consulting business is a passive activity, but the office building is not. c.Brandon can offset any losses from the legal consulting business against income from the office building. d.The office building is a passive activity, but the legal consulting business is not. e.Neither the office building nor the legal consulting business is a passive activity.

e.Neither the office building nor the legal consulting business is a passive activity. More than half of Brandon's personal services are spent in a real property trade or business in which he materially participates, and the time spent exceeds 750 hours. Thus, the office building is not a passive activity. Because Brandon participates for more than 500 hours in the legal consulting business, it also is not a passive activity.

There is an exception that allows individuals to deduct up to $25,000 of losses from real estate rental activities against active and portfolio income each year. Which of the following is not a limitation on the use of this exception? a.If married individuals file separately, the $25,000 deduction is reduced to zero unless they lived apart for the entire year. b.Taxpayers with an AGI of $150,000 or more cannot benefit from this exception. c.The taxpayer must own 10% or more (in value) of all interests in the activity during the entire taxable year (or shorter period during which the taxpayer held an interest in the activity). d.The taxpayer must actively participate in the activity. e.The potential annual $25,000 deduction is reduced by 50% of the taxpayer's AGI in excess of $120,000.

e.The potential annual $25,000 deduction is reduced by 50% of the taxpayer's AGI in excess of $120,000. The potential annual $25,000 deduction is reduced by 50% of the taxpayer's AGI in excess of $100,000.