Chapter 9 & 10 Practice Questions
Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2020. During the year, they paid the following medical-related expenses: 1. Over-the-counter medicines: $400 2. Prescription drugs: 300 3. Doctor fees: 830 4. Health club membership (recommended by the family doctor for general health care): 800 5. Medical care insurance: 280 How much may the Waltons use as medical expenses in calculating itemized deductions for 2020? A. $0 B. $110 C. $465 D. $1,410
A. $0 The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers' general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included. 1. Medical care insurance: $280 2. Doctor fees: 830 3. Prescription drugs: 300 Total expenses: $1,410 Less: 7.5% of AGI: (1,875) Allowable medical expense deduction: $0
Shirley, a single taxpayer, has taxable income of $160,000. She has qualified business income (QBI) of $50,000 and no qualified property. The qualified business paid a total of $15,000 in wages. Under Sec. 199A, what is Shirley's deductible amount for the qualified business? A. $10,000 B. $9,975 C. $15,000 D. $7,500
A. $10,000 Because Shirley's taxable income of $160,000 is less than $163,300, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.
On December 20, 2020, 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, 2021. Of the amounts described above, the total amount that the Garrisons can include as a charitable contribution deduction for 2020 on a joint return is: A. $100 B. $140 C. $200 D. $340
A. $100 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.
In 2020, 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 his church. What is Cole's minimum adjusted gross income? A. $2,500 B. $2,600 C. $3,000 D. $1,600
A. $2,500 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 $400 student loan interest and $100 cash contribution to the church are above-the-line deductions. Therefore, Cole's adjusted gross income is $2,500 ($3,000 wages - $400 student loan interest deduction - $100 cash contribution to the church).
Tana's divorce decree (finalized in 2018) requires Tana to make the following transfers to her former spouse during the current year: 1. Alimony payments of: $3,000. 2. Child support of: $2,000. 3. Property division of stock with a basis of $4,000 and a fair market value of: $6,500. What is the amount of Tana's alimony deduction? A. $3,000 B. $11,500 C. $9,500 D. $7,000
A. $3,000 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.
In the current year, Drake, a disabled taxpayer, made the following home improvements: 1. Pool installation, which qualified as a medical expense and increased the value of the home by $25,000: $100,000 2. Widening doorways to accommodate Drake's wheelchair. The improvement did not increase the value of his home: 10,000 For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum amount would be allowable as a medical expense deduction in the current year? A. $85,000 B. $75,000 C. $110,000 D. $10,000
A. $85,000 Amounts paid for qualified medical expenses that exceed 7.5% 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 (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.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes? A. As a $1,000 deduction to arrive at AGI for the year. B. As a $500 deduction to arrive at AGI for the year. C. As a $1,000 itemized deduction. D. As a nondeductible item of personal interest.
A. As a $1,000 deduction to arrive at AGI for the year. Taxpayers may deduct up to $2,500 of interest paid on qualified educational loans. The deduction is subject to income limits. The phaseout range begins when AGI exceeds $70,000 for unmarried individuals and ends at $85,000. The deduction is taken above-the-line to arrive at AGI for the year.
Which of the following requirements must be met in order for a single individual to qualify for an additional standard deduction?
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.
Fred and Rosanne Mott's divorce agreement was executed in February 2020. In accordance with the agreement, Rosanne transferred the title in their home to Fred in 2020. The home, which had a fair market value of $150,000, was subject to a $50,000 mortgage that had 20 more years to run. Monthly mortgage payments amount to $1,000. Under the terms of the settlement, Rosanne is obligated to make the mortgage payments on the home for the full remaining 20-year term of the indebtedness, or until Fred's death, whichever is sooner. Rosanne made 11 mortgage payments in 2020. What amount is taxable as alimony in Fred's 2020 return? A. $11,000 B. $0 C. $100,000 D. $111,000
B. $0 Regardless of the requirements to qualify as alimony, for divorces executed after 2018, maintenance and separation payments to a former spouse are not deductible by the payor or income to the payee. Therefore, Fred has no taxable alimony from Rosanne for 2020..
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? A. $11,100 B. $10,350 C. $12,400 D. $1,100
B. $10,350 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 $12,400, Anna's applicable standard deduction is $10,350 ($10,000 earned income + $350).
In 2020, Rusty paid $5,000 of interest on a qualified education loan. Rusty is not claimed as a dependent by another taxpayer. What is the maximum deduction available to him for the education loan interest? A. $2,000 B. $2,500 C. $5,500 D. $0
B. $2,500 Individuals are allowed to deduct interest paid during the tax year on any qualified education loan. The maximum amount that may be deducted is $2,500.
Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for Year 12. During Year 12, Taylor donated land to a church and made no other contributions. Taylor purchased the land in Year 1 as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for Year 12? A. $11,000 B. $25,000 C. $0 D. $14,000
B. $25,000 Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor's AGI. Therefore, Taylor's maximum deductible charitable contribution is equal to 100% of the FMV of the donated land.
Sam and Ann Jefferson filed a joint federal income tax return for the calendar year 2020. Among their cash expenditures during 2020 were the following: 1. $3,000 real estate tax on residence; 2. $400 state and city sales taxes; 3. $900 state income tax. What is the maximum deduction for taxes on the Jeffersons' 2020 return? A. $3,000 B. $3,900 C. $4,300 D. $3,400
B. $3,900 State and local real property taxes and state and local personal property taxes are deductible. Also allowed is a deduction for state income taxes (even if the income is exempt from federal tax) and a deduction of state and local sales tax in lieu of state income tax. Since these taxes are not allowed as a deduction for AGI, they are itemized deductions, and are reported on Schedule A.
Justin Peter earned a salary of $30,000 during 2020. During the year, he was required by his employer to take several overnight business trips, and he received an expense allowance of $1,500 for travel and lodging. In the course of these trips, he incurred the following expenses which were either adjustments to income or deductions from adjusted gross income. 1. Travel: $1,100 2. Lodging: 500 3. Entertainment of customers: 400 What is Justin's adjusted gross income if he does not account to his employer for the expenses? A. $30,000 B. $31,500 C. $29,500 D. $29,900
B. $31,500 An employee's business expenses do not need to be included in and deducted from gross income in arriving at AGI if the employee accounts to his or her employer for the expenses and the expenses equal the reimbursement. All other business expenses incurred by employees (except those incurred by a qualified performing artist) are not deductible. Justin's gross income was $31,500 ($30,000 salary + $1,500 expense allowance). When the employee receives an allowance and does not account to the employer for the expenses, the expense allowance is included in gross income and not deductible by the employee. Therefore, Justin's adjusted gross income is $31,500, and his travel, lodging, and entertainment expenses are not deductible from adjusted gross income.
In 2020, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income? A. $46,000 B. $40,000 C. $55,000 D. $50,000
B. $40,000 In 2020, self-employed individuals can deduct 50% of FICA taxes paid and 100% of payments made for health insurance coverage for the individual and his or her family. Alimony is gross income to the recipient and deductible by the payor. Contributions of up to $6,000 to an individual retirement account are deductible. The taxpayer's AGI is $40,000 [$57,000 GI - $4,000 SE tax paid - $6,000 health insurance - $5,000 alimony (paid pursuant to a pre-2019 divorce) - $2,000 contribution to IRA].
Phil and Joan Crawley made the following payments during 2020: 1. Interest on bank loan (loan proceeds used to purchase U.S. Series HH savings bonds): $4,000 2. Credit card interest: 500 3. Interest on home mortgage for period April 1 to December 31, 2020: 2,700 4. Points paid to obtain conventional mortgage loan on April 1, 2020: 900 The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2020? A. $3,600 B. $6,600 C. $7,600 D. $7,100
B. $6,600 The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys' maximum interest deduction is: 1. Interest on bank loan: $3,000 2. Interest on home mortgage: 2,700 3. Points: 900 Total: Interest deduction: $6,600
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)? A. $99,000 B. $89,000 C. $159,000 D. $70,000
B. $89,000 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 of the following conditions must be present in a post-1984 but pre-2019 divorce agreement for a payment to qualify as deductible alimony? I. Payments must be in cash. II. The payments must end at the recipient's death. A. I only. B. Both I and II. C. II only. D. Neither I nor II.
B. Both I and II. In order for payments to qualify as deductible alimony, they must meet all of the following requirements: 1. Paid in cash 2. Paid pursuant to a written divorce or separation instrument 3. Not designated as other than alimony 4. Terminated at death of recipient 5. Not paid to a member of the same household 6. Not paid to a spouse with whom the taxpayer is filing a joint return
The 2020 deduction by an individual taxpayer for interest on investment indebtedness is: A. Not limited. B. Limited to the taxpayer's 2020 net investment income. C. Limited to investment interest paid in 2020. D. Limited to the taxpayer's 2020 interest income.
B. Limited to the taxpayer's 2020 net investment income. The deduction for interest on investment indebtedness is limited to the amount of net investment income for the taxable year. Any disallowed investment interest may be carried over and treated as investment interest paid or accrued in the succeeding taxable year.
For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred: A. Must exceed the taxpayer's net equity in the residence. B. Must be used to buy, build, or significantly improve a qualified residence. C. Includes acquisition indebtedness secured by a qualified residence. D. May exceed the fair market value of the residence.
B. Must be used to buy, build, or significantly improve a qualified residence. Qualified residence interest is deductible in full, subject to limitations. There are two categories of qualified residence interest. Acquisition indebtedness is debt used to purchase, build, or substantially improve the residence. The combined limit on acquisition and home equity indebtedness is $750,000. Home equity indebtedness is any debt secured by the residence other than acquisition indebtedness. Home equity indebtedness is limited to the lesser of the $750,000 or the excess FMV of the residence over any acquisition indebtedness. For years 2018-2025, the home equity indebtedness must be used to buy, build, or improve the residence.
Under Sec. 199A, when taxable income exceeds the upper threshold for each qualified trade or business, the deductible amount with respect to the qualified trade or business is limited to the lesser of 20% of the taxpayer's qualified business income (QBI) or: A. The lesser of 50% of the W-2 wages with respect to the specified service trade or business or 20% of the W-2 wages with respect to the specified service trade or business plus 5% of the unadjusted basis immediately after acquisition of all qualified property. B. The greater of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. C. The lesser of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the adjusted basis of all qualified property. D. The greater of 50% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property or 25% of the W-2 wages with respect to the qualified trade or business.
B. The greater of 50% of the W-2 wages with respect to the qualified trade or business or 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. For each qualified trade or business of a taxpayer, the deductible amount is limited to the lesser of (1) 20% of the taxpayer's QBI with respect to the qualified trade or business or (2) the W-2 wages/qualified property limit, which is the greater of (a) 50% of the W-2 wages with respect to the qualified trade or business or (b) 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
Ruth and Mark Cline are married and will file a joint 2020 income tax return. Among their expenditures during 2020 were the following discretionary costs that they incurred for the sole purpose of improving their physical appearance and self-esteem: 1. Face lift for Ruth, performed by a licensed surgeon: $5,000 2. Hair transplant for Mark, performed by a licensed surgeon: 3,600 Disregarding the adjusted gross income percentage threshold, what total amount of the aforementioned doctors' bills may be claimed by the Clines in their 2020 return as qualifying medical expenses? A. $5,000 B. $3,600 C. $0 D. $8,600
C. $0 To be a medical deduction, expenses must be primarily to alleviate or prevent a physical or mental disability or illness. Cosmetic surgery is defined as any procedure that is "directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease." The cost of cosmetic surgery is not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.
In 2020, Welch paid the following expenses: - Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000 - Physical therapy after spinal surgery 2,000 - Premium on an insurance policy that covers reimbursement for the cost of prescription drugs 500 In 2020, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch's 2020 income tax return for medical expenses? A. $3,500 B. $500 C. $1,000 D. $4,000
C. $1,000 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 - $1,500 reimbursement) + $500].
On January 2, 2015, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2020, they borrowed $15,000 secured by their home and used the cash to add a new room to their residence. That same year, they took out a $5,000 auto loan. The following pertains to interest paid in 2020: 1. Mortgage interest: $17,000 2. Interest on room construction loan: 1,500 3. Auto loan interest: 500 For 2020, how much interest is deductible prior to any itemized deduction limitations? A. $17,000 B. $19,000 C. $18,500 D. $17,500
C. $18,500 The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence secured by a qualified residence to the extent it does not exceed the fair market value of the residence. Thus, the interest on the room construction loan is deductible. This is based on the assumption that the fair market value of the home is at least $215,000.
The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes: 1. Real estate tax on personal residence: $2,000 2. Ad valorem tax on personal automobile: 500 3. Current-year state and city income taxes withheld from paycheck: 1,000 What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return? A. $2,500 B. $1,000 C. $3,500 D. $3,000
C. $3,500 Under the IRC, only nonbusiness related taxes may be claimed as itemized deductions (up to a $10,000 cap, $5,000 if MFS). Itemized deductible taxes include taxes on real property, personal property, income (except for federal), excess profits, generation-skipping transfer (imposed on income distributions), and general sales (deductible in lieu of income taxes). Three requirements exist for claiming a deduction for personal property tax. The first is an ad valorem requirement, meaning the tax must be in proportion to the value of the property. Secondly, the tax is deductible if imposed on an annual basis. The final requirement is that the tax be imposed on personal property. All three taxes paid by the Rites are deductible as itemized deductions for a total itemized deduction of $3,500 ($2,000 + $500 + $1,000).
In 2020, Moore, a single taxpayer, had $50,000 in adjusted gross income. During 2020, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2019 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2020? A. $10,000 B. $33,000 C. $30,000 D. $23,000
C. $30,000 The limitation for certain cash contributions paid in 2020 has been suspended for taxpayers who itemize deductions. Taxpayers may deduct up to the amount by which their contribution base (AGI without regard to NOL carrybacks) exceeds the deduction for other charitable contributions. Moore's charitable cash contribution deduction in 2020 is limited to 100% of AGI ($50,000), less deductions for other noncash contributions made. As there are no other contributions in 2020, the $23,000 cash contribution to the church may be deducted. The 2019 carryover of $10,000 is limited to 60% of AGI, or $30,000. Only $7,000 ($30,000 - $23,000) of the carryover may be deducted in 2020. The remaining $3,000 is carried over to 2021.
Jackson owns two residences. The second residence, which has never been used for rental purposes, is the only residence that is subject to a mortgage. The following expenses were incurred for the second residence in the current year: 1. Mortgage interest: $5,000 2. Utilities: 1,200 3. Insurance: 6,000 For regular income tax purposes, what is the maximum amount allowable as a deduction for Jackson's second residence in the current year? A. $6,200 in determining adjusted gross income. B. $12,200 as an itemized deduction. C. $5,000 as an itemized deduction. D. $11,000 in determining adjusted gross income.
C. $5,000 as an itemized deduction. Mortgage interest (qualified residence interest) is deductible in full from adjusted gross income (AGI) as an itemized deduction. A qualified residence is the principal residence of the taxpayer and any one other residence owned by the taxpayer. Insurance is allowable as a deduction only if it is a business expense, as long as it is ordinary and necessary. Here, however, the expense is for a second residence. The utilities are not deductible as well. Therefore, only the $5,000 mortgage interest is allowed as an itemized deduction.
Which allowable deduction can be claimed in arriving at an individual's adjusted gross income? A. Federal disaster casualty loss. B. Medical expenses. C. Alimony paid pursuant to a pre-2019 divorce. D. Unreimbursed business expense of an outside salesperson.
C. Alimony paid pursuant to a pre-2019 divorce. Adjusted gross income (AGI) determines the allowable amount of several deductions from AGI. AGI equals gross income minus only those deductions named in Sec. 62(a). Alimony paid pursuant to a pre-2019 divorce decree is an above-the-line deduction.
Which one of the following is not a qualifying person for purposes of the Child and Dependent Care Credit? A. Dependent who was mentally unable to care for himself or herself and for whom the taxpayer can claim an exemption. B. Spouse who was physically unable to care for himself or herself. C. Child who was under age 13 when the care was provided, but who lived with the taxpayer's former spouse all year. D. Dependent who was age 12 when the care was provided and for whom the taxpayer can claim an exemption.
C. Child who was under age 13 when the care was provided, but who lived with the taxpayer's former spouse all year. The IRC allows a credit for employment-related expenses for an individual who maintains a household that includes as a member one or more qualifying individuals. A qualifying individual is a dependent of the taxpayer who is under the age of 13, a dependent who is physically handicapped, or a spouse who is incapable of caring for himself or herself. The credit is available to a former spouse who has custody of a child who is under age 13. However, the child will not be a qualifying individual for the other parent.
With regard to tax recognition of alimony paid in 2020 per a 2018 divorce, which one of the following statements is true? A. Payments may be made in cash or property. B. If the payor spouse pays premiums for insurance on his life as a requirement under the divorce agreement, the premiums are alimony if the payor spouse owns the policy. C. Payments must terminate at the death of the payee spouse. D. The divorced couple may be members of the same household when payments are made.
C. Payments must terminate at the death of the payee spouse. 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.
Under what circumstances is a married filing jointly taxpayer who is engaged in a specified service trade or business allowed to claim the Sec. 199A deduction? A. Such a taxpayer can never claim the Sec. 199A deduction because the specified service trade or business is not a qualified service or business. B. The taxpayer may claim the Sec. 199A deduction if (s)he has a taxable income of more than $213,300. C. The taxpayer may claim the Sec. 199A deduction if (s)he has a taxable income of less than $426,600. D. The taxpayer may claim the Sec. 199A deduction if (s)he has a taxable income of more than $426,600.
C. The taxpayer may claim the Sec. 199A deduction if (s)he has taxable income of less than $426,600. The purpose of the disallowance of the deduction with respect to the specified service trade or business is to prevent the conversion of personal service income into qualified business income. However, the disallowance rule does not apply if the taxpayer has taxable income of less than $426,600 if married filing jointly ($213,300 for all other taxpayers).
Jimet, an unmarried taxpayer, qualified to itemize 2020 deductions. Jimet's 2020 adjusted gross income was $30,000, and he made a $2,000 cash donation directly to a needy family. In 2020, 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 2020 income tax return? A. $0 B. $5,000 C. $2,000 D. $1,500
D. $1,500 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: 1. 2020 state and local income taxes withheld: $1,500 2. 2020 state estimated income taxes paid December 30, 2020: 400 3. 2020 federal income taxes withheld: 2,500 4. 2020 state and local income taxes paid April 15, 2021: 300 What total amount was Matthews entitled to claim for taxes on her 2020 Schedule A of Form 1040? A. $1,500 B. $4,700 C. $2,200 D. $1,900
D. $1,900 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.
During 2020, Jack and Mary Bronson paid the following taxes: 1. Taxes on residence (for period January 1 to September 30, 2020): $2,700 2. State motor vehicle tax on value of the car: 360 The Bronsons sold their house on June 30, 2020, under an agreement in which the real estate taxes were not prorated between the buyer and sellers. What amount should the Bronsons deduct as taxes in calculating itemized deductions for 2020? A. $2,700 B. $1,800 C. $3,060 D. $2,160
D. $2,160 A deduction is allowed for state and local real property taxes and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 [$2,700 × (6 months ÷ 9 months)]. The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted. The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.
Christopher Scott is a self-employed computer consultant. He earned a net profit of $100,000 in 2020 from his business. During 2020, he paid $2,500 for health insurance coverage for himself and his wife. What is the amount and character of the deduction that the Scotts may claim on their 2020 individual tax return? A. $1,750 deduction from gross income to arrive at adjusted gross income and $750 itemized deduction subject to the medical expense limitations. B. $1,750 other itemized deduction and $750 itemized deduction subject to the medical expense limitations. C. $2,500 itemized deduction. D. $2,500 deduction to arrive at adjusted gross income.
D. $2,500 deduction to arrive at adjusted gross income. Self-employed individuals may deduct 100% of health insurance premiums from gross income to arrive at adjusted gross income.
Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year, Mel informs Easel that the only business expense incurred was for business mileage of 8,329 at a rate of 57.5 cents per mile, the IRS standard mileage rate at the time of travel. Mel encloses a check for $300 to refund the overpayment to Easel. What amount should be reported in Mel's gross income for the year? A. $0 B. $4,789 C. $300 D. $4,800
D. $4,800 In a nonaccountable plan, the reimbursements are included in the employee's gross income. These expenses are not deductible from 2018 to 2025. Since the employee accounted to the employer and returned the excess reimbursement, this could have qualified as an "accountable plan." Under an accountable plan, the employee would include nothing in income. However, the company uses a nonaccountable plan, and Mel must include $4,800 ($400 × 12 months) in his gross income.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 in 2020. The following additional information is available for 2020: 1. Cash contribution to church: $4,000 2. Purchase of art object at church bazaar (with afair market value of $800 on the date of purchase): 1,200 3. Donation of used clothing to Salvation Army (fair value evidenced by receipt received): 600 What is the maximum amount Spencer can claim as a deduction for charitable contributions in 2020? A. $5,400 B. $5,200 C. $4,400 D. $5,000
D. $5,000 The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.
Smith paid the following unreimbursed medical expenses: - Dentist and eye doctor fees: $ 5,000 - Contact lenses: 500 - Facial cosmetic surgery to improve Smith's personal appearance (surgery is unrelated to personal injury or congenital deformity):10,000 - Premium on disability insurance policy to pay him if he is injured and unable to work: 2,000 What is the total amount of Smith's tax-deductible medical expenses before the adjusted gross income limitation? A. $7,500 B. $15,500 C. $17,500 D. $5,500
D. $5,500 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.
Which of the following credits can result in a refund even if the individual had no income tax liability? A. Foreign Tax Credit. B. Elderly and Permanently and Totally Disabled Credit. C. Child and Dependent Care Credit. D. Earned Income Credit.
D. Earned Income Credit. A refundable credit is payable as a refund to the extent the credit amount exceeds tax otherwise due. Some of the refundable credits are credits for taxes withheld, overpayments of income tax, and the Earned Income Credit.
In 2020, the Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as: A. Deductible personal interest. B. Deductible qualified residence interest. C. Investment interest expense. D. Nondeductible interest.
D. Nondeductible interest. Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.
Kent qualified for the Earned Income Credit in 2020. This credit could result in a: A. Refund only if Kent had tax withheld from wages. B. Carryback or carryforward for any unused portion. C. Subtraction from adjusted gross income to arrive at taxable income. D. Refund even if Kent had no tax withheld from wages.
D. Refund even if Kent had no tax withheld from wages. The Earned Income Credit is a refundable credit for low-income taxpayers. Having taxes withheld from wages is not a requirement for using the Earned Income Credit.
Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2019 income tax return. Harvey plans to itemize again in 2020, and the following information relating to his state income taxes is available: 1. Taxes withheld in 2020: $2,500 2. Refund received in 2020 of 2019 tax: 500 3.Assessment paid in 2020 of 2018 tax: 700 The above information should be reported by Harvey in his 2020 tax return as: A. State and local income taxes of $2,700. B. State and local income taxes of $3,200. C. State and local income taxes of $2,500. D. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.
D. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500. State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her employer in the year such amounts are withheld. Assessments of state income taxes are deductible in the year of payment by a cash-basis taxpayer even if the payments relate to prior years. A refund of a prior year's tax payment must be included in the taxpayer's gross income in the year received if the taxpayer deducted the taxes in an earlier year. In 2020, Harvey should deduct the taxes withheld of $2,500 and the assessment paid of $700. He should include the $500 refund he received in gross income.
Which of the following statements about the Child and Dependent Care Credit is correct? A. The child must be a direct descendant of the taxpayer. B. The maximum credit is $600. C. The child must be under the age of 18 years. D. The credit is nonrefundable.
D. The credit is nonrefundable. A nonrefundable tax credit is allowed for child and dependent care expenses incurred to enable the taxpayer to be gainfully employed. To qualify, the taxpayer must provide more than half the cost of maintaining a household for a dependent under age 13 or an incapacitated spouse or dependent. The maximum credit is equal to 35% of up to $3,000 of child and dependent care expenses for one qualifying individual ($6,000 for two or more individuals).
To qualify for the Child Care Credit on a joint return, at least one spouse must:
The IRC allows a nonrefundable credit to a provider of care to dependents for a limited portion of expenses necessary to enable gainful employment. The credit claimant must have qualified child care expenses when the claimant is employed or actively seeking gainful employment. The credit amount is not eliminated when AGI exceeds $15,000, only phased down from 35% to 20% in increments of 1% for each $2,000 AGI exceeds $15,000.
