Unit 6 MCQs

Which of the following statements about the Sec. 199A deduction is false?

The Sec. 199A deduction is taken on Schedule C. This answer is correct.The Sec. 199A deduction is taken at the top of page 2 of Form 1040, not on Schedule C or business returns; thus, it does not reduce self-employment income.

Kevin, a single taxpayer, has a taxable income of $320,000. His share of the income from a law firm LLC is $50,000, and his share of W-2 wages is $70,000. Under Sec. 199A, what is Kevin's deductible amount for the law firm LLC?

$0 This answer is correct.The law service is a specified service trade or business from which the taxpayer is not allowed to claim the deduction when taxable income exceeds the upper threshold. Because Kevin has a taxable income greater than $210,700, the disallowance rule applies. Thus, Kevin cannot take a Sec. 199A deduction.

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?

$100 This answer is correct.Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because the $100 from U.S. Treasury bond income is the only taxable investment income, only $100 of the investment interest expense may be deducted in the current year.

In 2019, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income?

$40,000 This answer is correct.In 2019, self-employed individuals can deduct 50% of FICA taxes paid and 100% of payments made for health insurance coverage for the individual and his or her family. Alimony is gross income to the recipient and deductible by the payor. Contributions of up to $6,000 to an individual retirement account are deductible. The taxpayer's AGI is $40,000 [$57,000 GI - $4,000 SE tax paid - $6,000 health insurance - $5,000 alimony (paid pursuant to a pre-2019 divorce) - $2,000 contribution to IRA].

Mr. and Mrs. Sloan incurred the following expenses on December 15, 2019, when they adopted a child: Child's medical expenses $5,000 Legal expenses 8,000 Agency fee 2,000 Before consideration of any "floor" or other limitation on deductibility, what amount of the above expenses may the Sloans deduct on their 2019 joint income tax return?

$5,000 This answer is correct.Medical expenses for medical care of the taxpayer, spouse, and dependents are deductible to the extent the expenses exceed 10% of AGI. A legally adopted child or one placed with the taxpayer for adoption has the same dependent status as a natural born child. Adoption expenses are personal in nature, and deduction for personal, family, and living expenses is disallowed.

A taxpayer may not claim the Sec. 199A deduction if (s)he has business income from which of the following entities?

C corporations. This answer is correct.The Sec. 199A deduction is available to noncorporate taxpayers who have qualified business income, which requires the income to be from qualified pass-through entities. Qualified pass-through entities include sole proprietorships, S corporations, partnerships, trusts, and estates.

Which one of the following expenditures qualifies as a deductible medical expense for tax purposes?

Transportation to physician's office for required medical care. This answer is correct.The IRC defines medical care as including transportation for needed medical care.

During 2019, William Clark was assessed a deficiency on his 2018 federal income tax return. As a result of this assessment, he was required to pay $1,120, determined as follows: Additional tax $900 Late filing penalty 60 Negligence penalty 90 Interest 70 What portion of the $1,120 qualifies as itemized deductions for 2019?

$0 This answer is correct.Federal income taxes and penalties are not deductible. The $70 of interest paid on the amounts owed to the IRS is considered personal interest and is not deductible. Therefore, none of the amount is deductible in 2019.

The Tax Cuts and Jobs Act added a new deduction for qualified business income (QBI) of pass-through entities that will be available for tax years beginning after December 31, 2017, and before January 1, 2026. Which of the following comments is not correct regarding the QBI deduction?

For the most part, the deduction is 21% of a taxpayer's QBI from a partnership, S corporation, or sole proprietorship. This answer is correct.Generally, the deduction is 20%, not 21%, of a taxpayer's QBI from a partnership, S corporation, or sole proprietorship. The deduction is intended to reduce the tax rate on QBI to a rate that is closer to the corporate tax rate of 21%.

Which of the following falls under the tax planning strategy of income shifting?

Hiring a family member in order to increase business expenses and increase family global net income. This answer is correct.Income shifting typically relates to moving income and therefore the accompanying tax liability from one family member to another who is subject to a lower marginal rate or moving income between entities and their owner(s). When a taxpayer hires a family member subject to a lower marginal rate (typically one of the taxpayer's children), the taxpayer, in essence, shifts income, reducing the overall (i.e., global) family tax liability.

Mr. C, a calendar-year taxpayer, uses the accrual method of accounting. He pays his employees on the third day of each month. As of December 31 of the current year, accrued wages for the month of December were $30,000. Wages paid October 3 totaled $20,000; November 3, $25,000; and December 3, $22,000. Mr. C's fourth-quarter return, Form 941, should show total wages of

$67,000 This answer is correct.Taxable wages and employment taxes are reported only when wages are actually paid. Employment taxes are imposed by a separate part of the Internal Revenue Code and have no relationship to the employer's method of accounting for income tax purposes. Therefore, accrued wages are not included on Form 941; only wages actually paid are included. Mr. C's fourth-quarter return should show total wages of

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?

A charitable contribution deduction is not allowed for the value of services rendered to a charity. This answer is correct.The costs of services rendered to a charity (such as legal advice, accounting assistance, or volunteering time) as a donation are not deductible as a charitable contribution. However, any expenses incurred in the rendering of those services (such as travel costs, mileage, supplies, etc.) are deductible.

Which of the following statements is correct regarding the deductibility of an individual's medical expenses?

A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. This answer is correct.To qualify for deduction, a medical expense must be paid, not necessarily incurred, during the taxable year for the taxpayer, the taxpayer's spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year.

Which of the following taxpayers must file a return for 2019?

A taxpayer who files as a head of household with one dependent child and who earns $19,350. This answer is correct.Generally, a taxpayer must file a tax return if the taxpayer's gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2019 are $24,400 for married filing jointly, $18,350 for heads of household, and $12,200 for unmarried individuals. A taxpayer who files as a head of household must file a return if his or her gross income equals or exceeds $18,350.

Which of the following expenditures incurred in the operation of a business is not required to be capitalized?

Cost of replacing small tools. This answer is correct.Small tools used in a business normally do not have to be capitalized under the theory that either they do not have a useful life substantially beyond the taxable year or their cost is so small as not to materially distort income. Items costing a small amount may normally be expensed as long as a consistent policy is followed. Expenditures for property having a useful life substantially beyond the taxable year should be capitalized [Reg. 1.263(a)-2].

Under Treasury Circular 230, which of the following actions of a CPA tax advisor is characteristic of a best practice in rendering tax advice?

Establishing relevant facts, evaluating the reasonableness of assumptions and representations, and arriving at a conclusion supported by the law and facts in a tax memorandum. This answer is correct.Best practices include establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts.

With regard to tax recognition of alimony paid in 2019 per a 2018 divorce, which one of the following statements is true?

Payments must terminate at the death of the payee spouse. This answer is correct.Only amounts that are required to be included as gross income of the recipient as alimony are deductible by the payor in calculating AGI. A component of the alimony definition is that the payor has no liability to make the payment for any period after the death of the payee spouse.

Nova owns a sole proprietorship and is also a one-third owner of a partnership. Both businesses are qualified businesses. Which of the following statements is correct in calculating W-2 wage limitation to determine Nova's deductible amount for each business under Sec. 199A?

When calculating the W-2 wages limitation, Nova should take into account all W-2 wages paid to employees by the sole proprietorship and the allocable share of W-2 wages paid by the partnership, respectively. This answer is correct.Because Nova is the sole owner of the sole proprietorship, she should take into account all W-2 wages paid to employees by the sole proprietorship. Because the partnership has multiple owners, Nova should take into account the allocable share of W-2 wages paid by the partnership.

Alan Curtis, who is single, had an adjusted gross income of $40,000 in 2019, and he used the standard deduction in his 2019 return. During 2019, Alan contributed $300 to the building fund of State University. What amount was deductible for contributions in Alan's 2019 return?

$0 This answer is correct.Charitable contributions are allowed as an itemized deduction. Itemized deductions are an election in lieu of the standard deduction.

Nikita is a 50-year-old, unmarried nonresident alien of the United States. She had income taxable by the United States during 2019 and was therefore required to file a 2019 U.S. tax return, due April 15, 2020. Nikita died June 30, 2019, of sudden heart failure. On her U.S. individual tax return for 2019, what is the amount of standard deduction that may be claimed on her behalf?

$0 This answer is correct.Once qualified, the standard deduction is allowed in full. It is not prorated if an individual dies during the tax year. Nonresident aliens, however, are ineligible for the standard deduction. Therefore, Nikita may not claim a standard deduction on the 2019 U.S. tax return that will be filed for her.

During 2019, Vincent Tally gave to the municipal art museum title to his private collection of rare books that was appraised and valued at $60,000. However, he reserved the right to the collection's use and possession during his lifetime. For 2019, he reported an adjusted gross income of $100,000. Assuming that this was his only contribution during the year and that there were no carryovers from prior years, what amount can he deduct as contributions for 2019?

$0 This answer is correct.Payment of a charitable contribution that consists of a future interest in tangible personal property is treated as made only when all intervening interests and rights to the actual possession and enjoyment of the property have expired or are held by persons other than the taxpayer or those related to the taxpayer. Therefore, the contribution of the rare books will be treated as made only when Tally's intervening lifetime right to use and possess the books has terminated, i.e., at his death.

Mark established a Roth IRA at age 40 and contributed $6,000 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark's gross income?

$0 This answer is correct.Qualified distributions from a Roth IRA are not included in the taxpayer's gross income and are not subject to the 10% early withdrawal tax. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be (1) made on or after the date an individual attains age 59 1/2; (2) made to a beneficiary (or the individual's estate) on or after the individual's death; (3) attributed to the individual being disabled; or (4) used to pay qualified first-time homebuyer expenses. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.

In 2019, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith's mother. Of this amount, $2,800 covered back taxes for 2018, and $3,200 covered 2019 taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith's itemized deductions on his 2019 return, what amount was Smith entitled to claim for realty taxes?

$0 This answer is correct.Taxes may be deducted only by the person on whom they are legally levied or by someone with a legally recognized interest in the property. Smith does not own the house, therefore none of the taxes paid can be deducted on his tax return and the payment is treated as a gift to Smith's mother. Smith's mother is entitled to the deduction only if she pays the taxes.

Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix-up the residence. What is the amount of Baker's recognized gain?

$0 This answer is correct.While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.

In 2019, Welch paid the following expenses: Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000 Physical therapy after spinal surgery 2,000 Premium on an insurance policy that covers reimbursement for the cost of prescription drugs 500 In 2019, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch's 2019 income tax return for medical expenses?

$1,000 This answer is correct.Medical expenses are deductible to the extent they exceed 10% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 - $1,500 reimbursement) + $500].

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their 2019 adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Burgs during 2019: State income tax $1,200 Self-employment tax 7,650 What amount should the Burgs deduct for taxes in their itemized deductions on Schedule A for 2019?

$1,200 This answer is correct.State income taxes are deductible as an itemized deduction and are reported on Schedule A. Self-employed individuals may deduct half of the self-employment taxes paid as an above-the-line business deduction, which is not on Schedule A.

John, a single taxpayer, has taxable income of $305,000. He owns a qualified sole proprietorship that generated $100,000 of qualified business income (QBI) and paid no wages. The sole proprietorship has a qualified property with an unadjusted basis of $50,000. Under Sec. 199A, what is the deductible amount John can claim for the sole proprietorship?

$1,250 This answer is correct.Because John's taxable income is greater than $210,700, the W-2/qualified property limit applies. Thus, for the sole proprietorship, the deductible amount is limited to the lesser of (1) 20% of QBI, $20,000 ($100,000 × 20%), or (2) 2.5% of the unadjusted basis of qualified property, $1,250 ($50,000 × 2.5%). Thus, John can claim $1,250 under the Sec.199A deduction for the sole proprietorship.

Jimet, an unmarried taxpayer, qualified to itemize 2019 deductions. Jimet's 2019 adjusted gross income was $30,000, and he made a $2,000 cash donation directly to a needy family. In 2019, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock 4 months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet's 2019 income tax return?

$1,500 This answer is correct.A deduction is allowed for contributions to a qualified organization. Therefore, no deduction is allowed for the contribution to the family. However, a deduction is available for the donation of stock in the amount of $1,500. Since the stock has not been held long term, it is ordinary income property, and the deduction is equal to the lesser of FMV or AB.

Matthews was a cash-basis taxpayer whose records showed the following: 2019 state and local income taxes withheld $1,500 2019 state estimated income taxes paid December 30, 2019 400 2019 federal income taxes withheld 2,500 2019 state and local income taxes paid April 15, 2020 300 What total amount was Matthews entitled to claim for taxes on her 2019 Schedule A of Form 1040?

$1,900 This answer is correct.For a cash-basis, calendar-year taxpayer, state and local income taxes paid or withheld during the year are fully deductible as itemized deductions. Federal income taxes are not deductible. State and local income taxes paid in the next calendar year are deductible in the next year.

Anna is a 22-year-old student with earned income of $10,000 from a summer job and dividend income of $1,100. Her parents claim her as a dependent on their tax return. What is Anna's basic standard deduction amount?

$10,350 This answer is correct.The basic standard deduction amount of a student under age 24 who is claimed as a dependent on another individual's income tax return is limited to the greater of either $1,100 or the dependent's earned income for the year plus $350 up to the otherwise applicable basic standard deduction amount. Earned income does not include either dividends or capital gains from the sale of stock. Since Anna's earned income of $10,000 exceeds $1,100 and is less than the otherwise applicable standard deduction amount of $12,200, Anna's applicable standard deduction is $10,350 ($10,000 earned income + $350).

On December 20, 2019, Mr. and Mrs. Garrison purchased four tickets for a New Year's Eve party at their church, a qualified charitable organization. Each ticket cost $75 and had a fair market value of $50. The Garrisons gave two of the tickets to a needy family in the community. Mr. Garrison tended bar at the party from 8 p.m. to 4 a.m. and was paid $40. The usual charge for such services is $80. Immediately before midnight, Mr. Garrison pledged $200 to the building fund and delivered a check for that amount on January 2, 2020. Of the amounts described above, the total amount that the Garrisons can include as a charitable contribution deduction for 2019 on a joint return is

$100 This answer is correct.The taxpayers may deduct as a charitable contribution the excess of what they gave over the probable fair market value of what they received, or $100. The taxpayers gave $300 ($75 purchase price × 4 tickets) to a qualified charitable organization in return for property with a fair market value of $200 ($50 FMV × 4 tickets). The donation of the two tickets to the needy family was not a donation to a qualified organization and therefore was not deductible. No deduction is allowable for a contribution of services, so the taxpayer may not deduct the value of his time. The pledge of $200 is not deductible until actually paid.

Harold Thompson, a self-employed individual, had income transactions for Year 1 (duly reported on his return filed in April Year 2) as follows: Gross receipts $400,000 Less: Cost of goods sold and deductions (320,000) Net business income $ 80,000 Capital gains 36,000 Gross income $116,000 In March Year 5, Thompson discovers that he had inadvertently omitted some income on his Year 1 return. He retains Mann, CPA, to determine his position under the statute of limitations. Mann should advise Thompson that the 6-year statute of limitations would apply to his Year 1 return only if he omitted from gross income an amount in excess of

$109,000 This answer is correct.The normal statute of limitations is 3 years after the later of the due date of the return or when the return was filed. A 6-year statute of limitations applies if gross income omitted from the return exceeds 25% of gross income reported on the return. For a trade or business, gross income means the total of the amounts received from the sale of goods before deductions and cost of goods sold. (NOTE: There are other provisions in the tax laws where gross income includes a reduction for cost of goods sold.) The 6-year statute of limitations will apply if Thompson omitted from gross income an amount in excess of $109,000 [($400,000 + $36,000) × 25%].

Mr. T is age 21, is single, and cannot be claimed as a dependent by another taxpayer. For 2019, he must file a federal income tax return if he had gross income of at least

$12,200 This answer is correct.Generally, a taxpayer must file a return if his or her gross income equals or exceeds the standard deduction amount applicable to the taxpayer's filing status [Sec. 6012(a)(1)]. For a single taxpayer, the standard deduction is $12,200 in 2019 [Sec. 63(c)]. Mr. T must file a tax return if his gross income is at least $12,200.

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

$13,500 This answer is correct.IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if it is for reason of death or disability, use of medical expenses in excess of 10% limitation, or up to $10,000 use of purchase of a first home. None of these circumstances are applicable; therefore, tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.

In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

$165,000 This answer is correct.Gross profit equals the contract price minus the cost of goods sold. The contract price equals $250,000 ($200,000 for the property + $50,000 assumed mortgage), and the cost of goods sold equals $85,000 ($75,000 adjusted basis + $10,000 selling expenses). Therefore, the gross profit on the installment sale equals $165,000 ($250,000 - $85,000).

Mr. Todd, who is 43 years old, has lived apart from his wife since May 2019. For 2019, his two children, whom he can claim as dependents, lived with him the entire year, and he paid the entire cost of maintaining the household. Assuming that Mr. Todd cannot qualify to file a joint return for 2019, he must, nevertheless, file a return if his gross income is at least

$18,350 This answer is correct.Generally, a taxpayer must file a tax return if the taxpayer's gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2019 are $24,400 for married filing jointly, $18,350 for heads of household, and $12,200 for single individuals (Publication 501). A taxpayer who has two children and files as a head of household must file a return if his or her gross income equals or exceeds $18,350.

Jim and Carolyn, who are married, establish a Coverdell Education Savings Account to pay for the future college expenses of their infant son. They file jointly and have a modified AGI of $100,000. What is the maximum contribution they can make to a CESA in the current year?

$2,000 This answer is correct.Joint filers with modified AGI below $190,000 may contribute up to $2,000 per beneficiary (child) per year. The amount a taxpayer is able to contribute to a CESA is limited if modified AGI exceeds certain threshold amounts. In 2019, the limit is phased out for joint filers with modified AGI at or greater than $190,000 and less than $220,000, and for single filers with modified AGI at or greater than $95,000 and less than $110,000.

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?

$2,600 This answer is correct.Above-the-line deductions are subtracted from gross income to arrive at adjusted gross income. The $3,000 of wages is included in gross income, and the only above-the-line deduction is for the $400 student loan interest. Therefore, Cole's adjusted gross income is $2,600 ($3,000 wages - $400 student loan interest deduction).

Ruth Lewis has adjusted gross income of $100,000 for 2019 and itemizes her deductions. On September 1, 2019, she made a contribution to a private nonoperating foundation (not a 50% charity) of stock held for investment for 2 years that cost $25,000 and had a fair market value of $70,000. The foundation sold the stock for $70,000 on the same date. Assume that Lewis made no other contributions during 2019. How much should Lewis claim as a charitable contribution deduction for 2019?

$20,000 This answer is correct.Generally, contributions to private operating foundations are limited to 30% of the taxpayer's AGI. But contributions of long-term capital gain property to private nonoperating foundations are limited to 20% of the taxpayer's AGI. Lewis's charitable contribution deduction should be limited to $20,000 ($100,000 × 20%). The total charitable contribution is equal to $25,000 (lower of FMV or AB) because it is being made to a private nonoperating foundation. The amount of $20,000 can be deducted in 2018 because of the 20% limit. The remaining $5,000 can be carried forward for up to 5 years.

Under a written agreement between Mrs. Norma Lowe and an approved religious exempt organization, a 10-year-old girl from Vietnam came to live in Mrs. Lowe's home on August 1, 2019, in order to be able to start school in the U.S. on September 3, 2019. Mrs. Lowe actually spent $500 for food, clothing, and school supplies for the student during 2019, without receiving any compensation or reimbursement of costs. What portion of the $500 may Mrs. Lowe deduct on her 2019 income tax return as a charitable contribution?

$200 This answer is correct.Amounts paid by a taxpayer to maintain an individual other than a dependent as a member of his or her household under a written agreement between the taxpayer and a qualified organization to provide educational opportunity for pupils or students in private homes are deductible up to $50 per month. The student must attend full-time in the 12th or any lower grade of a qualified educational organization located in the United States. The deduction is only available for the months the child is a full-time student, which is 4 months in this case: September-December. Mrs. Lowe's expenditures qualify under this provision as a charitable contribution deduction of $200 ($50 × 4 months in 2019).

Mr. and Mrs. X plan to file a joint return for 2019. Neither is over 65 or blind, nor do they have any dependents. What is the amount of gross income required before they must file a return?

$24,400 This answer is correct.In general, a return must be filed if a taxpayer's gross income equals or exceeds the standard deduction amount applicable to the taxpayer's filing status [Sec. 6012(a)(1)]. For a joint return, the standard deduction is $24,400 in 2019, and no additional standard deductions are allowed for taxpayers who are not over age 65 or blind. The couple must file a return if their gross income equals or exceeds $24,400.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 12. During Year 12, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 12?

$25,000 This answer is correct.Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor's AGI. Therefore, Taylor's maximum deductible charitable contribution is equal to 100% of the FMV of the donated land.

An individual received $50,000 during the current (2019) year pursuant to a pre-2019 divorce decree. A check for $25,000 was identified as annual alimony, checks totaling $10,000 were identified as annual child support, and a check for $15,000 was identified as a property settlement. What amount should be included in the individual's gross income?

$25,000 This answer is correct.For divorces executed before 2019, alimony is gross income to the recipient and deductible by the payor. Alimony is payment in cash, paid pursuant to a written divorce decree, not designated as other than alimony (e.g., child support), terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. Child support and property settlement payments are not alimony. Thus, the $25,000 of alimony is included in gross income.

Mr. and Mrs. Jones, both over age 65, elect joint return status. They must file a return for 2019 if their combined gross income equals or exceeds

$27,000 This answer is correct.In general, a return must be filed if the taxpayer's gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. For a joint return, the basic standard deduction is $24,400 in 2019. In addition, Mr. and Mrs. Jones are allowed two additional standard deductions of $1,300 each for being age 65 or over [Sec. 63(f)]. The couple must file a return if their gross income equals or exceeds $27,000 ($24,400 + $1,300 + $1,300).

Tana's divorce decree (finalized in 2018) requires Tana to make the following transfers to her 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?

$3,000 This answer is correct.Alimony paid pursuant to a pre-2019 divorce is gross income to the recipient and deductible by the payor. Alimony is payment in cash, paid pursuant to a written divorce decree, not designated as other than alimony (e.g., child support), terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. The $3,000 alimony payment is the only amount included in Tana's alimony deduction.

Moore, a single taxpayer, had $50,000 in adjusted gross income for 2019. During 2019, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2018 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2019?

$30,000 This answer is correct.Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer's AGI, or $30,000 in this case. The carryover is deductible this year to the extent that the total deduction does not exceed the 60%-of-AGI limit, or $7,000 ($30,000 - $23,000).

During 2019, student D, who is single, was claimed as a dependent by his parents. D earned $1,500 from a part-time job at a gas station. How much interest or other unearned income would D have to receive at a minimum to require him to file an income tax return for 2019?

$351 This answer is correct.In general, an individual must file an income tax return if his or her gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. But in the case of an individual who is claimed as a dependent on another's tax return, (s)he must file if unearned income exceeds $1,100 or total income exceeds the standard deduction. For such a person, the standard deduction is limited to the greater of (1) $1,100 or (2) the individual's earned income plus $350 [Sec. 63(c)(5)]. Since D was claimed as a dependent by his parents, his standard deduction is limited to his earned income of $1,500 plus $350 ($1,850). Therefore, if D receives $351 of unearned income, his total income will exceed his standard deduction, and he must file a tax return.

Charles Wolfe purchased the following long-term investments at par during 2019: $20,000 general obligation bonds of Burlington County (wholly tax-exempt) $10,000 debentures of Arrow Corporation Wolfe financed these purchases by obtaining a $30,000 loan from Union National Bank. For 2019, Wolfe made the following interest payments: Union National Bank $3,600 Qualified residence interest on home mortgage 3,000 Credit card interest 500 Wolfe's net investment income for the year was $10,000. What amount can Wolfe utilize as interest expense in calculating itemized deductions for 2019?

$4,200 This answer is correct.The IRC allows a deduction for certain interest paid or accrued during the year on indebtednesses. Investment interest is deductible up to the taxpayer's net investment income for the year. Personal or consumer interest is disallowed beginning after 1990. Qualified residence interest is deductible. The IRC disallows a deduction for interest on debt incurred to purchase or carry tax-exempt securities. Since Wolfe used two-thirds of the loan from Union National Bank to purchase tax-exempt securities, two-thirds of the interest on this loan is disallowed as a deduction. Wolfe may deduct

Poole, 45 years old and single, is in the 12% tax bracket. He had 2019 adjusted gross income of $50,000. The following information applies to Poole: Medical expenses $18,000 Standard deduction 12,200 The relevant tax brackets are Income Tax ≤ $9,700 10% $9,700 to $39,475 12% Poole wishes to minimize his income tax. What is Poole's 2019 total income tax rounded to the nearest dollar?

$4,246 This answer is correct.Taxable income is defined as adjusted gross income minus the standard deduction (or total itemized deductions, if greater). For a single taxpayer in 2019, the basic standard deduction is $12,200. Qualifying medical expenses in excess of 10% of AGI may be deducted as an itemized deduction. Poole's income tax is computed as follows:

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2019, the rental apartment was fully occupied, and Gow received $7,200 in rent. During the year ended December 31, 2019, Gow paid the following: Real estate taxes $6,400 Painting of rental apartment 800 Annual fire insurance premium 600 In 2019, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2019?

$400 This answer is correct.Ordinary and necessary expenses paid or incurred during the tax year for the production of income are deductible for AGI. This includes deduction for depreciation on property held for production of income. Personal expenses are not deductible as rental expense. Insurance, taxes, and depreciation must be allocated between rental and personal expense.

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?

$5,500 This answer is correct.Medical expenses are deductible to the extent they exceed 10% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.

Lana and Luke are married and have a taxable income of $310,000. Their share of the income from an accounting partnership is $250,000. The accounting partnership pays a total of $90,000 in W-2 wages. Under Sec. 199A, what is their deductible amount for the partnership?

$50,000 This answer is correct.Lana and Luke's taxable income is less than $321,400, so they can simply deduct 20% of qualified business income, which is $50,000 ($250,000 × 20%). Though the partnership is an SSTB, the limitations and disallowance do not apply when taxable income is below $321,400 for MFJ. Therefore, at taxable income of only $310,000, the full 20% of QBI is allowed.

Tom owns a domestic sole proprietorship that allocates $55,000 of income to him and pays $30,000 of wages to employees. He also owns 30% of a foreign trust that allocates $60,000 of income to him and pays him $50,000 of wages. Neither the sole proprietorship nor the trust are specified service businesses. What is the total amount of qualified business income for Tom?

$55,000 This answer is correct.Qualified business income are items of income, gain, deduction, and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States; it does not include wages and foreign income. Thus, Tom has qualified business income of $55,000.

Tyler and Ross are married, have taxable income of $430,000, and own a partnership together. They have a qualified business income (QBI) of $334,600 from the partnership and do not have any qualified property. The partnership pays a total of $127,500 in W-2 wages. Under Sec. 199A, what is Tyler and Ross's QBI allowed amount for the partnership?

$63,750 This answer is correct.Because Tyler and Ross do not have any qualified property, the QBI allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer's QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $430,000 is greater than $421,400, the W-2 wages/qualified property limit needs to be considered. Thus, their deduction is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). Tyler and Ross can claim a deduction of $63,750.

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their 2019 adjusted gross income was $100,000. The Whites itemized their deductions on Schedule A for 2019. The following unreimbursed cash expenditures were among those made by the Whites during 2019: 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 2019 return as qualifying medical expenses?

$8,600 This answer is correct.The repair and maintenance of the wheelchair for a handicapped, dependent child is a qualifying medical expense. In addition, the expenses for tuition, meals, and lodging at a residence primarily for medical care for the child are qualifying medical expenses because the meals and lodging are necessary incidents to the medical care.

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?

$85,000 This answer is correct.Amounts paid for qualified medical expenses that exceed 10% of AGI may be deducted. The deduction must be paid during the taxable year for the taxpayer, the taxpayer's spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. Deductible medical expenses are amounts paid for (1) diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body; (2) transportation primarily for and essential to medical care; (3) medical insurance; and (4) qualified long-term care premiums and services. Expenditures for new building construction or for permanent improvements to existing structures may also be deductible in part. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense. Therefore, $75,000 ($100,000 - $25,000 increase in FMV) is deductible. Construction of handicap entrance/exit ramps, installation of elevators, or widening of doorways also qualify.

Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition, the following two transactions between Logan and Argon occurred in Year 2: Logan received a bonus of 100 shares of publicly-traded stock worth $13,000 with a basis to Argon of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share. What amount of compensation should Argon report in Logan's Form W-2 for Year 2?

$88,000 This answer is correct.Income reported should include all amounts provided as compensation. First, the $60,000 is included as the base salary. Next, the bonus of publicly-traded stock is taken at the fair market value of $13,000. Finally, the nonqualified stock option will result in compensation equal to the difference between the FMV of the stock and the exercise price, or $15,000 [($25 FMV - $10 exercise price) × 1,000 shares]. This is a total of $88,000 ($60,000 + $13,000 + $15,000).

Zachary owns 40% of an S corporation that pays him $70,000 of wages, $10,000 of dividends, and allocates to him $89,000 of income. What is Zachary's qualified business income (QBI)?

$89,000 This answer is correct.QBI is the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer conducted within the United States and included or allowed in determining taxable income for the taxable year.

Which allowable deduction can be claimed in arriving at an individual's adjusted gross income?

Alimony paid pursuant to a pre-2019 divorce. This answer is correct.Adjusted gross income (AGI) determines the allowable amount of several deductions from AGI. AGI equals gross income minus only those deductions named in Sec. 62(a). Alimony paid pursuant to a pre-2019 divorce decree is an above-the-line deduction.

Forrest, a single taxpayer, has a taxable income of $318,200. He considers investing in some entities to earn extra income. In which of the following entities should Forrest invest so that he may be able to claim the Sec. 199A deduction?

An S corporation that performs architecture services. This answer is correct.Because Forrest has a taxable income greater than $210,700, only investing in qualified businesses enables him to claim a Sec. 199A deduction (i.e., non-SSTB). A qualified trade or business is any trade or business other than a specified service trade or business and other than the trade or business of performing services as an employee. A "specified service trade or business" under Sec. 199A includes any trade or business that involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. "Specified service activity" is modified to exclude engineering and architecture services under Sec. 199A. In addition, an S corporation is a qualified pass-through entity. Thus, Forrest should invest in an S corporation that performs architecture services so that he may be able to claim the Sec. 199A deduction.

The reporting requirements of the Securities Exchange Act of 1934 and its rules

Apply to a corporation that registered under the Securities Act of 1933 but that did not register under the Securities Exchange Act of 1934. This answer is correct.The following must file periodic reports under the 1934 act: (1) national securities exchanges, (2) an issuer with more than $10 million in total gross assets and a class of equity securities with (a) at least 2,000 shareholders or (b) 500 who are not accredited investors, (3) an issuer whose securities are listed on a national exchange, and (4) an issuer that has registered under the 1933 act. These issuers must file annual (10-K), quarterly (10-Q), and material events (8-K) reports and send similar reports to shareholders.

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?

As a $1,000 deduction to arrive at AGI for the year. This answer is correct.Taxpayer may deduct up to $2,500 of interest paid on qualified educational loans. The deduction is subject to income limits. The phaseout range begins when AGI exceeds $65,000 for unmarried individuals and ends at $80,000. The deduction is taken above-the-line to arrive at AGI for the year.

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed?

As ordinary income. This answer is correct.Distributions received from a traditional IRA are taxed as ordinary income.

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons: Amount of Percent Support of Total Alma (an unrelated friend) $2,400 48 Ben (Sara's brother) 2,150 43 Carl (Sara's son) 450 9 Total $5,000 100 Under a multiple support agreement, Sara can be claimed as a dependent by

Ben. This answer is correct.The taxpayer must provide over one-half of the support of a dependent. An exception to the support test permits one of a group of taxpayers, who are otherwise eligible to claim the dependent and who together furnish more than one-half of the support of a dependent, to claim the dependent even when no one person provides more than 50% of the support. Any such individual who contributed more than 10% of the support is entitled to claim the dependent if each of the other persons in the group who contributed more than 10% signs a written consent filed with the return of the claiming taxpayer.

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 15% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the

Deductible Keogh contribution and the employer's portion of self-employment tax. This answer is correct.The deduction for contributions on behalf of a self-employed individual is the same as for corporate contributions to an employee plan. The contribution limit is 25% of the earned income derived by the self-employed individual from the trade or business or $56,000, whichever is less. The earned income must be reduced by the amount of the contribution and the employer's portion of self-employment tax.

Dale received $1,000 in 2019 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2019. In Dale's 2019 income tax return, the $1,000 jury duty fee should be

Deducted from gross income in arriving at adjusted gross income. This answer is correct.Pay for jury duty is compensation gross income. Jury duty pay remitted to an employer (in return for being paid during the duty) is deductible for AGI.

Which of the following statements about qualified business income (loss) is correct under Sec. 199A?

If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year. This answer is correct.If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried over to the next year, allocated proportionately among that year's QBI per entity.

Robbie, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,150, consisting of $10,000 of state income taxes and $3,150 of investment interest, paid last year. Robbie'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, Robbie received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

Include $1,150 in income in the current year. This answer is correct.Gross income includes items received for which the taxpayer received a tax benefit in a prior year, but amounts recovered during the tax year that did not provide a tax benefit in the prior year are excluded. Since Robbie's itemized deduction amount for the previous year exceeded the standard deduction available to him by $1,150, Robbie only received a tax benefit for that amount and therefore must only include $1,150 of the tax refund in income for the current year.

Which of the following statements is false with respect to the United States Tax Court?

It has jurisdiction over all federal taxes. This answer is correct.The Tax Court's jurisdiction is defined under Sec. 7442. In general, the Tax Court's jurisdiction covers income, estate, gift, excise, and private foundation taxes. The Tax Court does not have jurisdiction over employment taxes except for the self-employment tax, which has been classified by the Court as an income tax.

If an ethics complaint is filed against a CPA, the matter

May be handled, in most cases, by either the AICPA or a state CPA society. This answer is correct.Under the Joint Ethics Enforcement Program (JEEP), the AICPA and most state societies have agreements that permit referral of an ethics complaint either to the AICPA or to a state society. However, the AICPA handles matters of national concern, those involving two or more states, and those in litigation.

Which of the following requirements must be met in order for a single individual to qualify for an additional standard deduction?

Must Support Must Be Age 65 Dependent Child or Older or Blind or Aged Parent Yes No This answer is correct.An additional standard deduction is allowed for a taxpayer if, during the year, the taxpayer is age 65 or over or blind. The respective amounts are doubled if the taxpayer is both elderly and blind. Support of a dependent is not a condition for an increase to the standard deduction.

Robin, Monica, and Rose have a partnership that is a qualified business. In the partnership agreement, each partner has a one-third share in income and expenses. The partnership generated qualified business income (QBI) of $150,000, paid total W-2 wages of $120,000, and purchased qualified property with an unadjusted basis of $60,000. There are no special allocations to partners. Under Sec. 199A, what is Robin's allocable share of QBI, W-2 wages, and qualified property, respectively?

QBI W-2 Wages Qualified Property $50,000 $40,000 $20,000 This answer is correct.Under Sec. 199A, the taxpayer should take into account his or her allocable share of each qualified item of income, gain, deduction, and loss; only allocable share of the taxpayer's wages and qualified property should be taken into account to calculate the W-2 wages/qualified property limit. Because Robin is a one-third owner, his allocable share of QBI is $50,000 ($150,000 ÷ 3), his allocable share of W-2 wages is $40,000 ($120,000 ÷ 3), and his allocable share of qualified property is $20,000 ($60,000 ÷ 3).

Which of the following situations describes a disclosure of tax information by an income tax preparer that would subject the preparer to a penalty?

Ron died after furnishing tax return information to his tax return preparer. Ron's tax return preparer disclosed the information to Jerry, Ron's nephew, who is not the fiduciary of Ron's estate. This answer is correct.Section 6713 imposes a $250 penalty on an income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare, or assist in preparation of, the return. This answer is such a disclosure described in Sec. 6713 to which no exception applies. Section 7216 imposes criminal penalties for knowingly or recklessly making such disclosure.

Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2018 income tax return. Harvey plans to itemize again in 2019, and the following information relating to his state income taxes is available: Taxes withheld in 2019 $2,500 Refund received in 2019 of 2018 tax 500 Assessment paid in 2019 of 2017 tax 700 The above information should be reported by Harvey in his 2019 tax return as

State and local income taxes of $3,200 and gross income from state and local income tax refund of $500. This answer is correct.State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her employer in the year such amounts are withheld. Assessments of state income taxes are deductible in the year of payment by a cash-basis taxpayer even if the payments relate to prior years. A refund of a prior year's tax payment must be included in the taxpayer's gross income in the year received if the taxpayer deducted the taxes in an earlier year. In 2019, Harvey should deduct the taxes withheld of $2,500 and the assessment paid of $700. He should include the $500 refund he received in gross income.

Phil and Joan Crawley made the following payments during 2019: Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds) $4,000 Credit card interest 500 Interest on home mortgage for period April 1 to December 31, 2019 2,700 Points paid to obtain conventional mortgage loan on April 1, 2019 900 The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2019?

This answer is correct. The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys' maximum interest deduction is