Itemized Deductions Practice Questions

Upon the death of her mother, Janice inherited a home. At the time of her mother's death, the fair market value of the home was $100,000. Her mother had purchased the home as a primary residence in 2004 at a cost of $35,000. What is the basis in the inherited property by Janice? $35,000 $65,000 $100,000 Some other number

$100,000 Publication 551, pages 9 and 10, states that a taxpayer's basis in property inherited from a decedent is generally one of the following: the FMV of the property at the date of the individual's death, the FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation, the value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes, or the decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. As a result, Janice's basis in the inherited property from her mother is $100,000, which is the FMV of the home at the time of her mother's death. This question is somewhat tricky; it assumes that an estate tax return was not or did not need to be filed because no information is given to that effect. If an estate tax return was necessary, then Janice (or the personal representative) would have the option to elect the FMV on the alternate valuation date. Publication 551, pages 9-10

Ed purchased a house on an acre of land from Ruth on June 30, 2022. Prior to the purchase, Ed had been renting the house from Ruth for $500 per month. Ed paid the following amounts: $100,000 in loan proceeds to Ruth $2,000 in points to the bank $1,000 in real estate taxes Ruth owed to the town $1,000 in past due rent to Ruth $1,000 in closing costs to the bank for legal, recording, title insurance, and survey fees $1,000 in escrowed real estate taxes to the bank What is Ed's basis in the house and land purchased from Ruth? $100,000 $102,000 $104,000 $106,000

$102,000 Given the information above, Ed has a basis of $102,000 from the purchase of the property. This basis is the sum of the property cost ($100,000), closing costs of $1,000 to the bank for legal, recording, title insurance, and survey fees (these are closing costs, which are not deductible) and $1,000 in real estate taxes Ruth owed to the town. Publication 551, pages 2-3

Beth and Donnie purchased a house to use as rental property. They paid the following amounts: $100,000 cash, assumption of an existing $25,000 mortgage, title search $500, recording fees of $100, points for their new loan of $1,000, and the seller's part of the property taxes of $1,500. The seller did not reimburse them for the property taxes. What is their cost basis in the house? $100,000 $125,000 $127,100 $128,100

$127,100 The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services (see Publication 551, pages 2 and 3). In addition, some settlement fees or closing costs can be included in the basis of the property, which includes the following: Abstract fees (abstract of title fees) Charges for installing utility services Legal fees (including title search and preparation of the sales contract and deed) Recording fees Surveys Transfer taxes Owner's title insurance Any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions Casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before settlement, fees for refinancing a mortgage, and points are a few of the settlement fees and closing costs that a taxpayer cannot include in the basis of property (see Publication 551, page 3). Given the information above, the taxpayer in this problem has a basis of $127,100 from the purchase of the property. This basis is the sum of the property cost ($100,000), assumption of an existing mortgage ($25,000), title search ($500), recording fees ($100), and the seller's part of the property taxes ($1,500). The points can be deducted as interest in the current year. See Publication 551, pages 2 and 3, for more information on this calculation. Publication 551, pages 2-3

Joan and Jim had income from investments in 2022. They also earned a substantial amount in wages. Most of their dividends and interest are reinvested. The reinvested income included $2,000 in dividends from mutual funds, interest from savings account of $3,000, and interest from certificates of deposit of $4,000. Dividends from stocks of $5,000 were received and spent. Interest of $1,000 earned in 2022 on a loan from a friend was not received until the following year. How much interest and dividend income must Joan and Jim report on their tax return for 2022? $6,000 $13,000 $14,000 $5,000

$14,000 In general, any interest that a taxpayer receives or that is credited to his or her account and can be withdrawn is taxable income. It does not have to be entered in the taxpayer's passbook or bankbook. (Publication 17, pages 54-55) One exception to the general rule is interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. This type of interest is known as municipal bond interest and is excludable. (Publication 17, page 58) Publication 550, page 20, states that dividend reinvestment plans permit taxpayers to use the dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. In such cases, if the taxpayer reinvests the dividends to buy more stock at a price equal to its fair market value, the taxpayer still must report the dividends as income. If, on the other hand, the taxpayer is a member of a dividend reinvestment plan that lets the person buy more stock at a price less than its fair market value, the taxpayer must report as dividend income the fair market value of the additional stock on the dividend payment date. Ordinary (taxable) dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation and are ordinary income to the taxpayer. (Publication 550, page 19) Joan and Jim would report interest and dividend income of $14,000, which is the sum of reinvested dividend income ($2,000), interest from savings account ($3,000), interest from a CD ($4,000), and dividend income spent ($5,000). The interest earned on a loan from a friend is taxable in the year received and not the year earned since the couple are cash basis taxpayers (refer to the example on page 16 of Publication 550, "When To Report Interest Income").

Cindy and James have an AGI amount in 2022 of $125,000. They adopt a U.S. child with special needs by year-end. What is the maximum adoption credit that the couple can claim in 2022 as a result of the following expenses that they paid in adopting the child? Attorney fees $2,500Adoption fees 2,200Court costs 500Travel expense 750Meals and lodging during their travels 150 $14,440 $5,950 $6,100 $14,890

$14,890 Pursuant to Publication 17, page 2, a taxpayer may be able to take a tax credit of up to $14,890 for qualified expenses paid to adopt an eligible child in 2022. The credit may be allowed for the adoption of a child with special needs even if the taxpayer does not have any qualified expenses. First, a taxpayer's credit is reduced if modified AGI is greater than $223,410 and less than $263,410 and is zero if the modified AGI is or is greater than $263,410. Second, adoption expenses must be reasonable and necessary expenses directly related to, and whose principal purpose is for, the legal adoption for an eligible child. Examples of qualifying expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging while away from home), and re-adoption expense to adopt a foreign child. Examples of nonqualifying expenses include those that violate state or federal law, are for carrying out any surrogate parenting arrangement, are for adopting a taxpayer's spouse's child, or are paid or reimbursed by the taxpayer's employer or any other person or organization. Third, if a taxpayer adopts a U.S. child with special needs, they may be able to exclude up to $14,890 and claim a credit for additional expenses up to $14,890 (minus any qualified adoption expenses claimed for the same child in a prior year). The exclusion may be available even if the taxpayer or their employer did not pay any qualified adoption expenses, provided the employer has a written qualified adoption assistance program. (See Form 8839 Instructions, page 3.) As a result, the couple can claim the entire $14,890 credit in 2022 because the adoption is of a special-needs child. If the couple had adopted a child without special needs, they could claim a credit of $6,100, which is the sum of the expenses ($2,500, $2,200, $500, $750, and $150). In addition, if the eligible child is a foreign child, the taxpayer cannot take the adoption credit or exclusion unless the adoption becomes final. A child is a foreign child if he or she was not a citizen or resident of the United States (including U.S. possessions) at the time the adoption effort began. The taxpayer should take the credit or exclusion as

A taxpayer purchases real estate rental property for $150,000. She pays $25,000 cash and obtains a mortgage for $125,000. She pays closing costs of $8,000, which includes $4,000 in points on the mortgage and $4,000 for bank fees and title costs. The basis in the property is: $33,000 depreciation, $125,000 amortization. $158,000, depreciation only. $154,000 depreciation, $4,000 amortization. $150,000 depreciation, $8,000 amortization.

$154,000 depreciation, $4,000 amortization. A taxpayer's basis is the amount of a taxpayer's investment in property for tax purposes. In determining the basis for property that is purchased, the settlement fees and closing costs for buying the property are included. Conversely, fees and costs for getting a loan on the property are not part of the basis calculation. A list of settlement costs that are included in basis is given in Publication 551, page 3, and a list of settlement costs that are not included in basis is given on that same page. The amount that a taxpayer pays for points in order to secure a loan is deducted over the term of the loan, i.e., amortized. (For more information on how to deduct points, see pages 2 and 3 of Publication 551 or pages 6 through 8 of Publication 936.) Therefore, the basis in the property in the above question is: $154,000 depreciation, which is the sum of the purchase price ($150,000) and title costs ($4,000), and $4,000 amortization (ratably over the life (term) of the mortgage), which is the payment for points. Publication 551, pages 2-3 Publication 936, pages 6-8

Vera and Jack (wife and husband) contributed $18,000 in cash to their synagogue during 2022. They also donated $3,000 to a private foundation that is a nonprofit cemetery organization. They knew a 30% limit applies to contributions to such foundations. Their adjusted gross income for the year 2022 was $30,000. Vera and Jack's deductible contribution for the year 2022 and any carryover to next year is: $18,000 with $0 carryover to next year. $15,000 with $2,100 carryover to next year. $15,000 with $6,000 carryover to next year. $18,000 with $3,000 carryover to next year.

$18,000 with $3,000 carryover to next year. As a result of TCJA of 2017, if a taxpayer makes cash contributions during the year to a 50% organization, their deduction for the cash contributions is limited to 60% of their AGI. (Publication 526, page 14) Publication 526, pages 15 and 16, provides the general rules when a taxpayer's contributions are subject to more than one of the contribution limits (i.e., 50%, 30%, and 20%). In general, the rules state that a taxpayer can deduct charitable contributions as follows: Cash contributions subject to the limit based on 60% of adjusted gross income (AGI). Deduct the contributions that don't exceed 60% of your adjusted gross income. Noncash contributions (other than qualified conservation contributions) subject on the limit based on 50% of AGI. Deduct the contributions that don't exceed 50% of your AGI minus your cash contributions falling under the 60% limit to a 50% organization. Cash and noncash contributions (other than capital gain property) subject to the limit based on 30% of AGI. Deduct the contributions that don't exceed the smaller of:30% of adjusted gross income or50% of adjusted gross income (minus the taxpayer's contributions to 50% limit organizations), including contributions of capital gain property subject to the special 30% limit In addition, a taxpayer can carry over any contribution amounts that he or she is unable to deduct in the current year because the contribution amount exceeds his or her AGI (adjusted gross income) limits. The taxpayer, in such cases, can deduct the excess in each of the next 5 years until it is used up, but not beyond that time per Publication 526, page 19. In this case, Vera and Jack would be able to deduct up to $18,000 in 2022, which is the maximum amount under the 60% cash limit (60% of $30,000) and the remaining $3,000 is carried over to 2023. Publication 526, pages 14-19

Mr. Rabbitt purchased a home for $200,000. He incurred the following additional expenses: $200 fire insurance premiums $500 mortgage insurance premiums $400 recording fees $250 owner's title insurance Compute his basis in the property. $201,350 $200,000 $200,650 $201,150

$200,650 200000+$400 recording fees+$250 owner's title insurance The basis of property that is purchased by a taxpayer is usually its cost, which includes the amount paid in cash, debt obligations, other property, or services. In addition, some settlement fees or closing costs can be included in the basis of the property, which includes: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including title search and preparation of the sales contract and deed), recording fees, surveys, transfer taxes, owner's title insurance, and any amounts the seller owes that the taxpayer agrees to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Other settlement costs that are not included in the basis of property include: casualty insurance premiums, rent for occupancy of the property before closing, charges for utilities or other services related to occupancy of the property before closing, charges connected with getting a loan such as points, mortgage insurance premiums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender, and fees for refinancing a mortgage. Points are one of the settlement fees and closing costs that a taxpayer cannot include in the basis of property (see Publication 551, pages 2-3). Given the information above, the taxpayer in this problem has a basis of $200,650 from the purchase of the property. This basis is the sum of the property cost ($200,000), recording fees ($400), and owner's title insurance ($250). Publication 551, page 2-3

Ms. Cross owns a house that she rents to non-related parties. She incurred the following costs during 2022: $400 to resurface a tub in the master bathroom $500 to paint the kitchen after installing new cabinets $2,000 to replace cabinets in the kitchen $600 to replace the built-in dishwasher How should these costs be characterized and in what amounts? $3,100 as improvements to be capitalized and $400 as repairs $400 as improvements to be capitalized and $3,100 as repairs $3,500 as improvements to be capitalized $2,000 as improvements to be capitalized and $1,500 as repairs

$3,100 as improvements to be capitalized and $400 as repairs An improvement, in general, adds to the value of property, prolongs its useful life, or adapts it to new uses. Table 1-1 on page 5 of Publication 527 shows examples of many improvements. In this case, Ms. Cross has $3,100 in improvements, which is the sum of $500 for painting, $2,000 for the cabinets, and $600 for the dishwasher. The $400 is currently deductible as repairs for the tub. Publication 527, pages 5-6

During the year 2022, Ted is self-employed and drives his car 5,000 miles to visit clients, 10,000 miles to get to his office, and 500 miles to attend business-related seminars. He also spent $300 for airfare to another business seminar and $200 for parking at his office. Using 58.5 cents per mile, what is his deductible transportation expense? $345 $3,517.50 $3,417.50 $9,067.50

$3,517.50 Ted would be able to deduct $3,517.50 in transportation expense for the year. This amount is equal to the sum of mileage expense for his car of $3,217.50 (5,500 miles × 0.585 per mile) and airfare to a business seminar of $300. The mileage to the office and his parking expense at the office are not deductible. Publication 463, pages 13 through 17, states that there are some expenses a taxpayer can deduct for business transportation when not traveling away from home. These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining the taxpayer's car. Transportation expenses include the ordinary and necessary costs of all of the following. Getting from one workplace to another in the course of your business or profession when you are traveling within the area of your tax home (Tax home is defined under the heading of "Travel Expenses" in chapter 1 of Publication 463.) Visiting clients or customers Going to a business meeting away from your regular workplace Getting from your home to a temporary workplace when you have one or more regular places of work (These temporary workplaces can be either within the area of the taxpayer's tax home or outside that area.) Ted would be able to deduct $3,517.50 in transportation expense for the year. This amount is equal to the sum of mileage expense for his car of $3,217.50 (5,500 miles × 0.585 per mile) and airfare to a business seminar of $300. The mileage to the office and his parking expense at the office are not deductible. Note: For 2022, the standard mileage rate for the cost of operating your car for business use is 58.5 cents (0.585) per mile from January 1 through June 30 and 62.5 cents (0.625) per mile from July 1 through December 31. (Publication 463, page 14) If the taxpayer was an employee with unreimbursed business expenses, he or she cannot deduct the expenses because TJCA suspended the 2% miscellaneous deductions for 2018 through 2026.

Sharon sold two collections during 2022. These were her only sales. Determine the amount and character of her gains/losses on these sales. Coin collection she began as a child with a basis of $1,000, sold for $5,000 Collection of original short stories she wrote in 2018, sold for $20,000 $20,000 long-term capital gain $24,000 long-term capital gain $4,000 long-term capital gain and $20,000 ordinary income $24,000 ordinary income

$4,000 long-term capital gain and $20,000 ordinary income Publication 550, pages 48 and 49, defines what is and is not a capital asset. Almost everything a taxpayer owns and uses for personal purposes or investment is a capital asset. There are a few exceptions, including but not limited to property sold in the normal course of business; copyright; a literary, musical, or artistic composition; a letter; a memorandum; or similar property (such as drafts of speeches, recordings, transcripts, manuscripts, drawings, or photographs), which were created by the taxpayer's personal efforts, or prepared or produced for the taxpayer (in the case of a letter, memorandum, or similar property). If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. Sharon sold two collections in the year. First, Sharon has a gain of $4,000 ($5,000 less $1,000) for the coin collection, which qualifies as a long-term capital gain transaction. Second, she has ordinary income of $20,000 on the sale of her original short stories because this asset is a literary composition and as such is not a capital asset. Publication 550, pages 48-49

When Lisa's husband died in 2019, he set up a qualified terminable interest property (QTIP) trust, naming Lisa as the beneficiary for her life. What is the value of Lisa's gross estate if she should die, given the following information? FMV on Date of DeathLisa's revocable grantor trust $3,750,000QTIP trust 1,000,000 $-0- $1,000,000 $3,750,000 $4,750,000

$4,750,000 The gross estate includes all property in which the decedent had an interest (including real property outside the United States). It also includes: certain transfers made during the decedent's life without an adequate and full consideration in money or money's worth; annuities; the includible portion of joint estates with right of survivorship; the includible portion of tenancies by the entirety; certain life insurance proceeds (even though payable to beneficiaries other than the estate); property over which the decedent possessed a general power of appointment; dower or curtesy (or statutory estate) of the surviving spouse; and community property to the extent of the decedent's interest as defined by applicable law. Additionally, any "QTIP" property received from a pre-deceased spouse must be included in the gross estate. Accordingly, Lisa's gross estate is $4,750,000, computed as follows: Gross estateRevocable grantor trust $3,750,000 QTIP trust 1,000,000 Lisa's gross estate $4,750,000 The estate of Lisa would not file an estate tax return because the gross estate is $12,060,000 or less. Instructions for Form 706, pages 2-3

Mr. and Mrs. Ramirez have adjusted gross income of $42,000 in 2022 and nontaxable combat pay of $8,500. The couple also has one qualifying child. What is the income amount used by the couple to qualify for the earned income tax credit? $8,500 $42,000 $41,500 The couple does not qualify for the EIC.

$42,000 Pursuant to Publication 596, page 2, the earned income credit (EIC) is a tax credit for those taxpayers who work and have earned income below a threshold amount as provided in Table 1 (Publication 596, page 2). Earned income includes wages, salaries, tips, and other taxable employee pay. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. Pursuant to Publication 596, page 18, a taxpayer may elect to include nontaxable combat pay in earned income when calculating the earned income credit in 2022. In the Ramirez's case, they would not qualify for the EIC if they included the $8,500 of nontaxable combat pay. The threshold amount for a couple filing married with one qualifying child is $49,622 for 2022 and they would have an AGI of $50,500 ($42,000 + $8,500). (Publication 596, Table 1, page 2) Publication 596, pages 2 and 18

Tim and Tina teach in the local high school. During 2022, Tina spent $425 on supplies that were used in her classes and Tim spent $150 on supplies that were used in his classes. What are the maximum educator expenses that the couple can claim on their tax return if the couple files jointly in 2022? $0 $450, which is $300 for Tina and $150 for Tim $400, which is $250 for Tina and $150 for Tim $575, which is $425 for Tina and $150 for Tim

$450, which is $300 for Tina and $150 for Tim Form 1040 Instructions, page 87, states, in part, that an eligible educator can deduct up to $300 of qualified expenses paid in the year as an adjustment to gross income on Form 1040 or 1040-SR, line 11. In the case where both spouses are eligible educators and are filing a joint return, the maximum deduction is $600. However, neither spouse can deduct more than $300 of his or her qualified expenses. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. In this case, the couple would be able to deduct up to $450. That is, Tina would be able to deduct up to $300 of her $425 expenses and Tim would be able to deduct up to $150 of his expenses. Instructions for Form 1040, page 87 IRC Section 62(a)(2)(D)

John, who is not married, made the following transfers during 2022: $11,000 to his son Bradley $17,000 to his daughter Alexandria $7,000 political contribution $5,000 charitable contribution Car to his son Bradley ($22,000 basis; $16,000 FMV) What is the gross amount of gifts that John will report on his 2022 Form 709 (before deductions)? $16,000 $44,000 $49,000 $56,000

$49,000 $11,000 to his son Bradley+ $16,000 FMV $16,000 FMV+ 17,000 to his daughter Alexandria+ $5,000 charitable contribution =49000 Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. Additionally, there are four types of transfers that are not subject to the gift tax. These are transfers to political organizations, transfers to certain exempt organizations, and payments that qualify for the educational and medical exclusions. More specific to this question, transfers to a political organization as defined in IRC Section 527(e)(1) for the use of the organization is not subject to the gift tax and are not reported on Form 709. (Form 709 Instructions, page 2) Furthermore, the value of a gift is the fair market value (FMV) of the property on the date the gift was made (valuation date). That is, the FMV is the price at which the property would change hands between a willing buyer and a willing seller, when neither is forced to buy or to sell, and when both have reasonable knowledge of all relevant facts. (Form 709 Instructions, page 10) If the taxpayer is required to file a return to report noncharitable gifts and the taxpayer made gifts to charities, the taxpayer must include all of his or her gifts to charities on the return. (Form 709 Instructions, page 2) Thus, John will report a gross amount of $49,000 of gifts on his 2022 Form 709, which is the sum of $27,000 to his son Bradley ($11,000 plus $16,000 (FMV of car)), $17,000 to his daughter Alexandria, and $5,000 to charities. Be aware: This question is somewhat tricky in that it gave two gifts to Bradley, where one is below the $15,000 threshold. When some gifts are below the $16,000 threshold and others are more than the threshold, all gifts have to be disclosed on the tax return. The $16,000 will be applied to each gift to determine the taxable portion of the gift. For instance, if the taxpayer gifts four gifts: $17,000, $5,000, $21,000, he/she will have taxable gifts of $6,000 calculated as follows: 17,000-16,000=$1,000, $5,000-$16,000 = no taxable gift, $21,000-16,000= $5,000. Total taxable gifts

Rudy purchased 100 shares of publicly traded stock January 2, 2022, for $1,000. He sold all his shares December 31, 2022, for $1,500. On January 4, 2023, the settlement date, the stocks were actually delivered, and payment received in Rudy's account. How and when should Rudy report this sale? $500 long-term capital gain on 2022 return $500 short-term capital gain on 2022 return $500 long-term capital gain on 2023 return $500 short-term capital gain on 2024 return

$500 short-term capital gain on 2022 return In this problem, Rudy recognizes a gain of $500, which is the difference between the cash received of $1,500 and the adjusted basis of $1,000. The next issue is whether the capital gain or loss was a short-term or long-term capital gain or loss. (See Publication 550, page 43.) If the taxpayer holds investment property for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the taxpayer holds the property 1 year or less, any capital gain or loss is a short-term capital gain or loss. (See Publication 550, page 43.) When stocks and bonds are bought on a securities market, the holding period begins on the day after the trading date that the taxpayer bought the security, and it ends on the trading date that the taxpayer sold the security. The settlement date is the date by which the stock must be delivered, and payment must be made. (See Publication 550, page 43.) In this case, the holding period for Rudy began on January 3 and ended on December 31, which is less than 1 year. Hence, Rudy has a short-term capital gain of $500.

Don and Joyce have adjusted gross income of $85,000. Both children (Mary, age 14, and David, age 20, who completed his education in the prior year) lived with them all year. Mary had interest income of $300. David had interest income of $600 and wages of $6,500. The parents provided over 50% of the support of both children. How many dependents, not including Don and Joyce, would they list on their Form 1040 as dependents? 2 3 4 1

1 For 2022, a taxpayer cannot claim a personal exemption deduction for themselves, their spouse, or their dependents. However, dependents are still listed on Form 1040 in order to claim appropriate tax credits. (Publication 17, page 26) Therefore, the following rules are provided: The term "dependent" means a qualifying child or a qualifying relative. There are four tests that must be met for a person to be a qualifying relative (see Table 3-1 on page 26 of Publication 17): Not a qualifying child Member of the household or satisfies the relationship test Gross income test (less than $4,400 in 2022) Support test (more than half of the person's total support for the year) To be a qualifying child, the individual must be under age 19 (24 if a full-time student) and must satisfy both tests 2 and 4 above. In addition, a qualifying child is exempt from all of the above tests except the gross income test, but be aware there are a number of exceptions to the above tests for a qualifying child as provided in Table 3-1 on page 26 of Publication 17. If a person is a qualifying relative or a qualifying child, the person still must satisfy three additional tests as provided on page 27 of Publication 17: Dependent taxpayer test Joint return test Citizen or resident test The exemption and dependency rules are covered in chapter 3 of Publication 17. In this case, one dependent would be listed on Don and Joyce's Form 1040. Their daughter (Mary, age 14) qualifies as a dependent as a qualifying child. David, on the other hand, is over the age of 19 and not a full-time student. As such, he does not meet the requirements for a qualifying child. He may still qualify as a qualified relative, but his gross income of $7,100 ($600 + $6,500), which exceeds the gross income test limit of $4,400 for 2022. Thus, David cannot be claimed under neither of the two categories of dependents. Publication 17, pages 26-27

Ralph gave his aunt an antique clock during tax year 2022. He had purchased the clock for $15,000 in 2018. The fair market value at the date of the transfer was $21,000. What amount should be recorded on Form 709 as the value of this gift? $15,000 $6,000 $21,000 $0

21000 Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee (Form 709 Instructions, page 2). Furthermore, the value of a gift is the fair market value of the property on the date the gift was made (valuation date) (Form 709 Instructions, page 10). Thus, Ralph will report an amount of $21,000 of gifts on his 2022 Form 709, which is the fair market value at the date of transfer (i.e., the value of the gift). The taxable portion of the gift is $5,000 ($21,000 − $16,000); you must be careful to answer the question being asked (i.e., gift amount) and not the one you think is being asked (i.e., taxable portion). Instructions for Form 709, pages 2 and 10

Virginia's earned income for 2022 was $14,000. She paid $3,000 to a qualifying child care center for the care of her 2-year-old son while she worked. She received $2,000 from Social Services to assist with her childcare expenses. How would Virginia's childcare credit for 2022 be computed? 35% of $1,000 50% of $1,000 50% of $3,000 31% of $1,000

35% of $1,000 In general, a taxpayer may be able to claim the dependent care credit if the taxpayer pays someone to care for his or her dependent that is under age 13 or for the taxpayer's spouse or dependent that is not able to care for him or herself. For tax year 2022, the credit can be up to 35% of the taxpayer's expenses. To qualify for the credit, the taxpayer must pay these expenses so that they can work or look for work. (Publication 503, page 2) If a taxpayer receives dependent care benefits, the dollar limit for purposes of the credit may be reduced (Publication 503, page 13). Dependent care benefits include: amounts the taxpayer's employer pays directly to either the taxpayer or the taxpayer's care provider for the care of his or her qualifying person while at work, the fair market value of care in a day-care facility provided or sponsored by the taxpayer's employer, and pre-tax contributions the taxpayer made under a dependent care flexible spending arrangement. In this case, Virginia's adjusted gross income is $14,000, which corresponds to a credit rate of 35%, and her dependent care expenses are $1,000, which corresponds to the difference between the total cost of $3,000 and the assistance she received of $2,000. Thus, Virginia is able to claim a dependent care credit of $350, which is 35% of $1,000. Publication 503, pages 2-3 and 12-13

Richard collected baseball cards as a hobby. Richard had shared his interest in this hobby with his niece Susan, who was also an avid card collector. At the time of his death in 2022, Richard's collection had a fair market value of $10,000 and an adjusted basis of $2,000, while Susan's collection had a fair market value of $5,000 and an adjusted basis of $1,000. Upon his death, Richard's entire card collection went to Susan. With the death of her uncle, Susan lost interest in the hobby and sold all of the cards for $20,000. What is Susan's gain on the sale of these baseball cards? $5,000 $9,000 $13,000 $17,000

9000 The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. As provided in Publication 551, pages 9-10, the basis of property that is received from a decedent is generally one of the following: The FMV of the property at the date of the individual's death The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement If a federal estate tax return does not have to be filed, the taxpayer's basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. In this problem, the gain on the sale for Susan is $9,000, which is the selling price of $20,000 less the adjusted basis of $11,000 ($10,000 on the inherited cards and $1,000 on Susan's cards). Publication 551, pages 9-10

Julie made cash contributions to her local chapter of the Society for Prevention of Cruelty to Animals (SPCA) to care for stray dogs and cats. She donated several times a year but she paid less than $250 for the entire year. These are the only charitable contributions Julie makes during the year. What documentation must Julie keep and provide to the Internal Revenue Service upon request in order to substantiate her tax return charitable contribution deduction? No documentation is necessary since the contribution is less than $250. A receipt for each donation that shows the amount, date, and to whom paid An acknowledgment from the SPCA that she made contributions during the year A self-prepared statement or letter would be sufficient for contributions less than $250.

A receipt for each donation that shows the amount, date, and to whom paid In the case of a noncash contribution of less than $250, the taxpayer must get and keep a receipt (letter or other written communications) from the charitable organization showing (1) the name of the charitable organization, (2) the date and location of the charitable contribution, and (3) a reasonably detailed description of the property. (Publication 526, page 21) Given the above restrictions, the taxpayer needs to keep a receipt for each donation that shows the amount, date, and to whom paid. Publication 526, pages 20-21

All of the following are correct statements about the balance that is maintained in the Coverdell education savings account, except: it generally must be distributed within 30 days after the beneficiary reaches age 30. it generally must be distributed within 30 days after the beneficiary's death. it generally does not need to be distributed within 30 days after the special needs beneficiary reaches age 30. All of the answer choices are correct statements.

All of the answer choices are correct statements. According to Publication 970, page 48, the balance in the Coverdell education savings account generally must be distributed within 30 days after the earlier of the following events: The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary The beneficiary dies before reaching age 30 Publication 970, page 48

In general, which of the following items are allowable deductions against a decedent's estate (Form 706)? Funeral expenses Mortgages (decedent's liability) Charitable bequests All of the answer choices are correct.

All of the answer choices are correct. An estate will arrive at the taxable estate by subtracting related deductions from the gross estate. As applicable in this question, the following expenses as given in Part 5 of Form 706 are permitted as deductions for an estate: funeral expenses, mortgages (decedent's liability), and charitable bequests. Therefore, all of the above listed expenses are allowable deductions against a decedent's estate. Form 706, page 3 Instructions for Form 706, pages 33-34 and 38-39

Which of the following statements is correct about filing Form 8867 with a 2022 tax return concerning the paid preparer's earned income credit (EIC)? It is a tax preparer's checklist that is filed with the taxpayer's tax return. It contains a due diligence requirements section. It contains a checklist section for documents provided to the tax preparer. All of the answer choices are correct.

All of the answer choices are correct. Form 8867 is a paid preparer's (not a taxpayer's) due diligence checklist that should be completed by a tax preparer. It is required to be filed with tax returns for any taxpayer claiming the EIC, child tax credit (CTC), additional child tax credit, and American opportunity tax credit (AOTC). In addition, beginning with 2018 tax returns, this form must be filed for any taxpayer claiming Head of Household. The checklist for 2022 has six parts: The first part (Due Diligence Requirements) is applicable to all taxpayers claiming any of the four tax credits to determine whether the taxpayer satisfies the basic requirements for claiming the credit. The second part pertains to Due Diligence Questions pertaining to Returns Claiming EIC. The third part pertains to Due Diligence Questions pertaining to Returns Claiming CTC/ACTC/ODC. The fourth part pertains to Due Diligence Questions pertaining to Returns Claiming the AOTC. The fifth part pertains to Head of Household. The sixth part certifies the credit eligibility by the tax preparer. As a result, all three responses are correct. The form must be filed with the tax return and it is a tax preparer's due diligence checklist. Form 8867, pages 1-2

You incurred the following expenditures in connection with your rental property. Which of them should be capitalized? New roof Install new cabinets Pave driveway All of the answer choices are correct.

All of the answer choices are correct. Page 5 of Publication 527 states, in part, improvements add to the value of the property, prolong its useful life, or adapt it to new uses. (See also page 5 of Publication 527 for examples of increases to basis.) Improvements include: putting a recreation room in an unfinished basement, adding a bathroom or bedroom, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, and paving an unpaved driveway. If a taxpayer makes improvements to the property, the cost of the improvement must be capitalized and depreciated as if the improvement were separate property. Publication 527, page 5

Which of the following mandatory employee contributions are deductible as a state income tax on Schedule A of Form 1040 in 2022? Alaska Unemployment Compensation Fund New York Nonoccupational Disability Benefit Fund Rhode Island Temporary Disability Benefit Fund Washington State Supplemental Workmen's Compensation Fund 1 and 2 only 1, 2, and 3 only All of the contributions listed are deductible. None of the contributions listed are deductible.

All of the contributions listed are deductible. Pursuant to Publication 17, pages 93 and 94, mandatory contributions made to state benefit funds withheld from a taxpayer's wages and that provide protection against loss of wages are deductible as state income taxes on Schedule A. Included in this category are payments such as the: Unemployment Compensation Fund of Alaska, New Jersey, and Pennsylvania; Nonoccupational Disability Benefit Fund of California, New Jersey, and New York; Rhode Island Temporary Disability Benefit Fund; and Washington State Supplemental Workmen's Compensation Fund. Employee contributions to private or voluntary disability plans are not deductible. Publication 17, pages 93-94

Question #3 Organizations that qualify for the 60% cash contribution limit include: A. Churches and conventions or associations of churches B. Educational organizations with regular faculty and curriculum and regularly enrolled students C. Hospitals and certain medical research organizations associated with these hospitals D. All of the organizations listed

All of the organizations listed in this question would qualify as 60% charities. Organizations that qualify for the 60% cash contribution limit include: A. Churches and conventions or associations of churches B. Educational organizations with regular faculty and curriculum and regularly enrolled students C. Hospitals and certain medical research organizations associated with these hospitals D. All of the organizations listed

Which of the following is NOT a reportable event for purposes of Form 3520? Peter Johnson, a U.S. resident, contributes $10,000 to fund Peter Johnson Marital Offshore Trust - a foreign trust located in the Bahamas. Cindy Krauss' grandmother from Denmark gifts Cindy, who is a U.S. resident, $50,000 to help her with the down payment for Cindy's first residence. Olivia Ricardo received a $25,000 trust distribution from a Swiss trust account. Jane Moneypenny who is U.S. resident receives a lumpsum distribution of $500,000 from her UK pension account. Her UK pension is deemed to be a foreign trust that does not meet the reporting exemption as described in Rev. Proc. 2020-17, 2020-12, I.R.B 539.

Cindy Krauss' grandmother from Denmark gifts Cindy, who is a U.S. resident, $50,000 to help her with the down payment for Cindy's first residence Cindy Krauss is not required to report a direct, outright gift from a foreign person (Danish grandmother) in an amount less than $100,000. All the other instances are examples of reportable event on Form 3520: setting up an offshore trust, receiving a distribution from a foreign trust, receiving a distribution from a foreign pension account deemed to be a trust that does not meet the exemption tests from reporting as described in Rev. Proc. 2020-17. Reportable events and responsible parties are described in the instructions to Form 3520, under Section "Who Must File". IRS Code Section 6039F of the Internal Revenue defines non-US persons and the filing thresholds. Form 3520

Debra, age 30, had established a traditional IRA at her local bank several years earlier. In September 2022, Debra told the custodian to use the amount in her account to buy an annuity contract. The bank sent the annuity contract payment to her in October. Which of the following statements is correct? Debra will be taxed on the annuity contract beginning in 2022. Debra will be taxed on the annuity amount received in 2022. Debra will be excluded from tax because she has opted for an annuity distribution. None of the answer choices are correct.

Debra will be taxed on the annuity amount received in 2022. Publication 590-B, page 35, provides the rules for a distribution of an annuity contract from a taxpayer's IRA. In general, a taxpayer can tell the trustee or custodian of his or her traditional IRA account to use the amount in the account to buy an annuity contract for the taxpayer. The taxpayer, however, is not taxed when the annuity contract is received. Rather, the taxpayer is taxed when he or she starts receiving payments under that annuity contract. If only deductible contributions were made to the traditional IRA, then the entire annuity payments would be included in gross income. If, on the other hand, any of the contributions included both deductible and nondeductible contributions to the traditional IRA, then only part of the annuity payments would be included in gross income. Publication 590-B, page 35

Which of the following items could be subject to the Net Investment Income Tax? Alimony income Distribution from a taxable mutual fund Interest from a tax-exempt municipal bond Distribution from a traditional IRA

Distribution from a taxable mutual fund Generally, net investment income includes gross income from interest, dividends, annuities, royalties, and rents, unless they are derived from the ordinary course of a trade or business that is not (a) a passive activity or (b) a trade or business of trading in financial instruments or commodities, or unless it is specifically excluded. Excluded income includes but is not limited to the following: Income excluded from gross income in Chapter 1 of the Internal Revenue Code (IRC) Income not included in net investment income Gross income and net gain specifically excluded by IRC Section 1411, related regulations, or other guidance published in the Internal Revenue Bulletin Examples of excluded items are: wages, unemployment compensation, Alaska Permanent Fund Dividends, alimony, Social Security benefits, tax-exempt interest income, income from certain qualified retirement plan distributions, and income subject to self-employment taxes. Instructions for Form 8960, page 1 error_outline First Time Score

If a traditional IRA invests in collectibles, the amount invested is considered distributed to the taxpayer in the year invested. The taxpayer may be required to pay a 10% additional tax on "early" distribution. Collectibles for this purpose include stamps, coins, artworks, rugs, antiques, metals, gems, alcoholic beverages, and certain other tangible personal property. There is an exception to this rule. A traditional IRA can invest in one, one-half, one-quarter, or 1/10th ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department, without the investment being a distribution. It also can invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Therefore, a traditional IRA could invest in one-ounce silver coins minted by the U.S. Treasury Department without the investment being a distribution.

Donn purchased his 100 shares of stock for $5.00 per share. As a result of the stock dividend, he must adjust the basis of the 125 shares to $4.00 a share. The basis of stocks or bonds generally is the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. The basis of the stock is adjusted for certain events that occur after purchase. For example, if the person receives additional stock from nontaxable stock dividends or stock splits, divide the adjusted basis of the old stock by the number of shares of old and new stock. This rule applies only when the additional stock received is identical to the stock held. Likewise, the basis is reduced when nontaxable distributions are received because they are a return of capital (Publication 551, page 2). Example A taxpayer bought 100 shares of XYZ stock for $1,000 or $10 a share. At another time, a taxpayer bought an additional 100 shares of XYZ stock for $1,600 or $16 a share. Now assume that XYZ declares a 2-for-1 stock split. The taxpayer now has 200 shares of XYZ stock with a basis of $1,000 or $5 a share and an additional 200 shares of XYZ stock with a basis of $1,600 or $8 a share. This problem is somewhat tricky, but there is only one possible correct response. The basis in the stock prior to the stock dividend is $500 (100 shares × $5 per share) per the information given in the response. As a result of the stock dividend, the basis is adjusted to $4 per share, which is the original basis of $500 divided by the number of shares after the dividend of 125 shares.

When figuring compensation for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following is an incorrect statement? Pension or annuity income is not considered as compensation for an IRA plan. Earnings and profits from property, such as rental income, are considered compensation. Interest and dividend income are not considered as compensation for an IRA plan. Generally, any amount you exclude from income is not considered as compensation for an IRA plan.

Earnings and profits from property, such as rental income, are considered compensation Compensation, for the purposes of determining the amount of allowable contributions to an individual retirement account, includes wages, salaries, commissions, self-employment income, and alimony and separate maintenance payments. Compensation does not include any of the following items: Earnings and profits from property, such as rental income, interest income, and dividend income Pension or annuity income Deferred compensation received (compensation payments postponed from a past year) Income from a partnership for which you do not provide services that are a material income-producing factor Generally, any amounts you exclude from income, such as foreign earned income and housing costs (For example, combat pay is nontaxable and thus excluded; however, it is considered compensation for purposes of determining the amount of allowable contributions to an individual retirement account.) Therefore, earnings and profits from property, such as rental income, are not considered compensation. Publication 590-A, page 6

Which of the following earnings are not subject to self-employment tax? Gains and losses, by a dealer in options or commodities, from dealing or trading in foreign currency contracts and elects to report gains/losses on Schedule C Fees earned by a professional fiduciary who administers a deceased person's estate Fees received for services performed as a notary public All of the answer choices are correct.

Fees received for services performed as a notary public Publication 334, pages 40 and 41, provides, in part, that taxpayers generally must pay self-employment (SE) tax and file Schedule SE (Form 1040) if their net earnings from self-employment are $400 or more. Schedule SE is used to figure net earnings from self-employment. Publication 334, page 41, also provides that fees received by a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax. The instructions for Schedule SE and Publication 334 list other types of income that are subject to and excluded from self-employment tax (e.g., child employed by parent). Hence, the correct response is that fees for notary public service are not subject to SE tax. Publication 334, pages 40-41 Instructions for Schedule SE (Form 1040), page SE-5

George and Helen are husband and wife. During 2022, George gave $40,000 to his brother and Helen gave $32,000 to her niece. George and Helen both agree to split the gifts they made during the year. What is the taxable amount of gifts, after the annual exclusion, each must report on Form 709? George and Helen each have taxable gifts of $20,000. George has a taxable gift of $23,000 and Helen has a taxable gift of $16,000. George and Helen each have taxable gifts of $4,000. George has a taxable gift of $8,000 and Helen has a taxable gift of zero.

George and Helen each have taxable gifts of $4,000. Generally, the federal gift tax applies to any transfer by gift of real or personal property, whether tangible or intangible, that is made directly or indirectly, in trust, or by any other means to a donee. An exclusion is allowed for a gift of a present interest. The annual exclusion is $16,000 for 2022. Additionally, married couples may not file a joint gift tax return, but IRC Section 2513 does permit spouses to split gifts. If both spouses agree, all gifts during the calendar year will be considered as made one-half by each spouse. As such, George and Helen have a taxable gift of $8,000 that is split between them. The taxable gift amount is computed as follows: George's brother $40,000 Helen's niece 32,000 Gross gifts $72,000 Exclusions 64,000 (($16,000 x 2) + ($16,000 x 2)) Taxable gifts $ 8,000 ($4,000 to each)

After many years as a bachelor, Buddy, age 50, married Penny, age 63. Penny's only income was $10,800 of Social Security. They filed a joint return for tax year 2022 with a modified adjusted gross income of $132,000. Buddy is covered by a retirement plan at work where he receives compensation of $120,000. He wishes to contribute to an IRA for himself and Penny. Which of the following will provide them the greatest allowable tax benefit? He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to his IRA. He may contribute $6,000 to each IRA, but take no deduction for either IRA. He may contribute $6,000 to each IRA, and take a deduction of $6,000 for each IRA. He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to Penny's IRA.

He may contribute $6,000 to each IRA, but only take a deduction for the $6,000 to Penny's IRA. Deductible contributions to a traditional IRA are reduced or eliminated depending on the taxpayer's filing status, participation in a qualified plan, and modified AGI (MAGI) amounts. Publication 590-A, pages 13 and 14, provides the general rules for taxpayers with a married filing joint status. Traditional IRA deductible contribution limits are as follows for a wage earner that is covered by an employer's qualified plan: If MAGI is $109,000 or less, a full deduction is permitted. If MAGI is between $109,000 and $129,000, a partial deduction is permitted. If MAGI is $129,000 or more, no deduction is permitted. Traditional IRA deductible contribution limits are as follows for the spouse that is not covered by an employer's qualified plan: If MAGI is $204,000 or less, a full deduction is permitted. If MAGI is between $204,000 and $214,000, a partial deduction is permitted. If MAGI is $214,000 or more, no deduction is permitted. Coverage under Social Security or railroad retirement is not coverage under an employer retirement plan. In light of the couple's MAGI amount and Buddy's coverage by an employer-sponsored plan, the best situation is for Buddy to make a $6,000 contribution to both IRAs, but only take a deduction for Penny's contribution. Note: Of course, since both spouses are 50 or older, they could contribute up to $7,000 each instead of only $6,000 (Publication 590-A, page 8). Publication 590-A, pages 8-14

Holly and Harp Oaks were divorced in 2021. The divorce decree was silent regarding the exemption for their 12-year-old daughter, June, as a dependent on their 2022 tax return. Holly has legal custody of her daughter and did not sign a statement releasing the exemption. Holly earned $8,000 and Harp earned $80,000. June had a paper route and earned $3,000. June lived with Harp 4 months of the year and with Holly 8 months. Who may claim June as a dependent in 2022? June may, since she had gross income over $3,000 and files her own return. Since June lived with both Holly and Harp during the year, they both may claim her as a dependent. Holly may, since she has legal custody and physical custody for more than half the year. Harp may, since he earned more than Holly and, therefore, is presumed to have provided more than 50% of June's support.

Holly may, since she has legal custody and physical custody for more than half the year. As a result of the general rule, Holly may claim June as a dependent because she had legal custody and physical custody for more than half of the year, and she did not provide Form 8332 or similar documentation to Harp releasing her claim to the exemption.

John and Mary, a married couple, have a wide variety of investments and are cash basis taxpayers. Because their self-employment earnings are considerable, they reinvested the following: $4,000 of mutual fund dividends and $5,000 of certificate of deposit interest. They also earned dividends on corporate stock of $12,000 that they received and spent. Interest of $2,000 that had accrued on a loan to a friend was not paid until the following year. What is the amount of interest and dividends currently taxable to them? $21,000 $14,000 $16,000 $23,000

In general, any interest that is received or that is credited to an account and can be withdrawn is taxable income. (For exceptions to this, see chapter 6 in Publication 17.) If a taxpayer uses the cash method, interest income is reported in the year in which it was actually or constructively received. (Publication 17, pages 53 and 59) As provided on page 20 of Publication 550, a number of corporations have a dividend reinvestment plan, whereby the taxpayer may choose to use his or her dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. If the taxpayer makes this election and stock is bought at a price equal to its fair market value, the taxpayer must report the dividends as income. Given that John and Mary are cash basis taxpayers they are not required to report the accrued loan interest income of $2,000 until the year of actual receipt. Therefore, the amount of interest and dividends taxable to them is $21,000, computed as follows: Mutual fund dividends $ 4,000 Certificate of deposit interest 5,000 Corporate stock dividends 12,000 Taxable interest and dividends $21,000 Caution The inclusion of mutual fund interest, which is taxable, is oftentimes mistaken for municipal fund interest, which is tax exempt.

Jennifer expects to owe $1,500 in tax for 2023. Her tax liability for 2022 was $0. Which of the following statements is correct concerning Jennifer's requirement to pay estimated tax for 2023? Jennifer is required to pay estimated tax for 2023. Jennifer should pay estimated taxes for 2023. Jennifer is not required to pay estimated tax for 2023. There is insufficient information to respond to the question.

Jennifer is not required to pay estimated tax for 2023. Publication 17 (pages 39 and 40) provides the general rule regarding when a taxpayer is not required to pay estimated taxes for the coming year. In general, a taxpayer must satisfy all three of the following conditions to be excluded from paying estimated tax for 2023: the taxpayer had no tax liability for 2022, the taxpayer was a U.S. citizen or resident for the whole year, and the taxpayer's 2022 tax year covered a 12-month period. In this case, the first exception applies (i.e., no tax liability in 2022), and one must assume that the second and third exceptions apply. Publication 17, pages 39-40

Matt has a certified statement from his optometrist on December 1, 2022, that confirms he can see no better than 20/250. For tax year 2022, which of the following is correct? Matt is not eligible for the higher standard deduction for blindness as he is only partially blind. Matt is eligible for the higher standard deduction for blindness in 2022. Matt is eligible for the higher standard deduction for blindness in 2023, the first full year of his blindness. Matt is not eligible for the higher standard deduction for blindness as he can see better than 20/300.

Matt is eligible for the higher standard deduction for blindness in 2022. Publication 17, page 90, provides that if a taxpayer is blind on the last day of the year and the taxpayer does not itemize deductions, the taxpayer is entitled to a higher standard deduction. Be aware that a taxpayer can qualify for this benefit if he or she is totally or partly blind. If a taxpayer is partly blind, the taxpayer must get a certified statement from an eye doctor or registered optometrist that: the taxpayer cannot see better than 20/200 in the better eye with glasses or contact lenses, or the taxpayer's field of vision is not more than 20 degrees (see Publication 17, page 90). If the taxpayer's eye condition will never improve beyond these limits, the statement should include this fact. The taxpayer must keep the statement in his or her records. If, on the other hand, the taxpayer's vision can be corrected beyond these limits only by contact lenses that the taxpayer can wear only briefly because of pain, infection, or ulcers, the taxpayer is still eligible to take the higher standard deduction for blindness if he or she otherwise qualifies. Since Matt's vision is 20/250, which is worse than 20/200, he is eligible for the higher standard deduction for blindness in 2022. Publication 17, page 90

George had the following income and expenses: Interest and ordinary dividend income of $8,000 Gross wages of $100,000 Margin interest of $10,000 Mortgage interest of $6,000 Interest of $3,000 on a mobile home used as a second home Credit card interest of $2,000 How much interest can George deduct on Schedule A for 2022? $21,000 $18,000 $17,000 $19,000

Mortgage interest of $6,000+Interest of $3,000+Interest and ordinary dividend income of $8,000 Instructions to Schedule A, Form 1040, page 8 indicate a taxpayer cannot deduct personal interest. Examples of personal interest include car loans, credit card interest, etc. The instructions also indicate the taxpayer is entitled to deduct qualified home mortgage interest and interest on student loans (on Schedule 1). Publication 936, page 2, states, in general, that home mortgage interest includes any interest that is paid on a loan secured by the taxpayer's home (main home or a second home). The loan may be a mortgage to buy the taxpayer's home, a second mortgage, a line of credit, or a home equity loan (provided that the equity loan is used to buy, build, or improve the residence). Deductibility of interest associated with a mortgage loan is limited to $750,000 for loans originating after December 15, 2017 (Publication 936, page 2). In the case where a taxpayer borrows money to buy property that is held for investment, the interest that the taxpayer pays is investment interest and it can be deducted up to the amount of investment income. However, a person cannot deduct interest incurred to produce tax-exempt income. Investment income generally includes items such as interest, ordinary dividends, annuities, and royalties (Publication 550, page 32). George is able to deduct $17,000 of interest expenses, which is the sum of his mortgage interest of $6,000, interest on his second home (i.e., mobile home) loan of $3,000, and interest on his margin account of $8,000, which equals his investment income for the year (interest and dividend income of $8,000). The remaining margin interest of $2,000 ($10,000 − $8,000) cannot be deducted; however, George can carry over this amount to the next tax year. The interest carried over is treated as investment interest paid or accrued in that next year. Publication 550, page 32 Publication 936, page 2 Instructions for Schedule A (Form 1040), page A-8

Each month Betsy's employer gives her $600 for her business expenses. Sometimes Betsy spends more than the $600. Once a year, she negotiates the amount of expense money with her employer but she is not required to submit any proof of how she spends the $600 per month. How should Betsy report her expenses on her return? No reporting required Deduct all of her expenses on Schedule C, Profit or Loss From Business Deduct all of her expenses on Form 2106, Employee Business Expenses Deduct her expenses in excess of $600 per month on Form 2106

No reporting required The treatment of reimbursements depends on the type of plan maintained by the employer; there are two basic types of reimbursement arrangements: accountable plans and nonaccountable plans. Accountable plans are ones whereby the employer's reimbursement or allowance arrangement includes all three of the following rules (Publication 463, page 29): The employee's expenses must have a business connection—that is, the employee must have paid or incurred deductible expenses while performing services as an employee of the employer, The employee must adequately account to the employer for these expenses within a reasonable period of time, and The employee must return any excess reimbursement or allowance within a reasonable period of time. If the plan is not an accountable plan, then it is a nonaccountable plan by default. Employees generally must complete Form 2106 to deduct travel, transportation, and entertainment expenses incurred in a nonaccountable plan. However, for tax years beginning after 2017, the only taxpayers that can use Form 2106 are Armed Forces reservists, government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses. (Publication 17, page 98) In this case, Betsy's employer does not maintain an accountable plan and she doesn't fall into one of the taxpayer classes listed above. Hence, she cannot deduct her excess expenses on Form 2106. However, her W-2 wages at the end of year will be increased by the total amount of employer reimbursements she has received throughout the year. Not having an accountable plan is disadvantageous to Betsy since she has to report higher wages with no counterbalance in a deduction for the business related expenses. Publication 17, page 98 Publication 463, page 29

Generally, which of the following rules apply to both traditional IRAs and Roth IRAs in 2022? Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less. Contributions are always nondeductible. Contributions may not be made for the tax year in which you reach age 72 and for years thereafter. Contribution phaseout limits are the same for both traditional IRA and Roth IRAs.

Non-rollover contributions are generally limited to $6,000 each year or 100% of compensation, whichever is less. Publication 590-A, Table I-2, page 5, provides the contribution limits for both the traditional IRA and a Roth IRA. Unless a wage earner has reached age 50 by the end of 2022, the most that can be contributed to his or her traditional IRA, Roth IRA, or combination of both for 2021 is the smaller of $7,000 if the taxpayer is age 50 or older by the end of 2022 or the person's taxable compensation for the year. Contributions may be made for the tax year in which you reach age 72 and for years thereafter is correct for an IRA contribution in 2022. Contributions for the traditional IRA may be deductible or nondeductible; contributions to the Roth IRA are always nondeductible. In addition, the phaseout limits for the traditional IRA is lower than those for the Roth IRA. The correct response for this problem is the statement that the non-rollover contribution amount is the same for both IRAs. Publication 590-A, page 5

Which of the following are deductible as entertainment facilities expenses? Cost of yacht and hunting lodge Cost of bowling alley and tennis courts Cost of hotel suite and home in a vacation resort None of the answer choices are deductible costs.

None of the answer choices are deductible costs. For tax years 2018 through 2025, the treatment of certain meals and entertainment expenses changed. In general, entertainment, amusement, or recreation expenses are no longer deductible. The cost of business meals generally remains deductible, subject to the 50% limitation. The Consolidated Appropriations Act, 2021 (CAA) allows businesses to deduct 100% of business meals for years 2021 and 2022. The business meal expenses are required to be incurred for food and beverages provided by a restaurant. See Section 274 for additional information on the changes. Generally, a taxpayer cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection. An entertainment facility is any property that the taxpayer owns, rents, or uses for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort. Publication 463, pages 10-11

Which of the following situations exempts the earnings of a taxpayer that is a minister of a church for the services he performs as a minister, whether he is an employee of his church or a self-employed person under the common-law rules, from self-employment taxes? The taxpayer has requested an exemption from the IRS. The taxpayer has taken a vow of poverty. The taxpayer is subject to the social security laws of a foreign country. None of the answer choices exempt the earnings.

None of the answer choices exempt the earnings. Publication 517, page 3, states, in part, that the services performed in the exercise of one's ministry, of duties required by one's religious order, or of one's profession as a Christian Science practitioner or reader are covered by Social Security and Medicare under SECA. Hence, these earnings for ministerial services are subject to self-employment (SE) tax unless one of the following exceptions applies: The person is a member of a religious order who has taken a vow of poverty, the person has asked the IRS for an exemption from SE tax for one's services and the IRS approves the request, or the person is subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Publication 517, page 4 further provides that a member of a religious order who has taken a vow of poverty is already exempt from paying SE tax on earnings for ministerial services performed as a member of a church or its agencies. However, services performed outside the order are still subject to SE tax. The "fine print" here consists in the difference between a minister and a member of a religious order. As a result, none of the responses given in this question truly assure the exemption of a taxpayer, who is a minister, from incurring SE tax on his or her earnings for the services rendered as a minister. Publication 517, pages 3 and 4

Which of the following investments, if made by a traditional IRA, is not a distribution? Stamps that have been issued by the U.S. Postal Service An oil painting certified by an art expert as being an authentic original by a Dutch master artist One-ounce silver coins minted by the U.S. Treasury Department All of the answer choices are correct.

One-ounce silver coins minted by the U.S. Treasury Department If a traditional IRA invests in collectibles, the amount invested is considered distributed to the taxpayer in the year invested. The taxpayer may be required to pay a 10% additional tax on "early" distribution. Collectibles for this purpose include stamps, coins, artworks, rugs, antiques, metals, gems, alcoholic beverages, and certain other tangible personal property. There is an exception to this rule. A traditional IRA can invest in one, one-half, one-quarter, or 1/10th ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department, without the investment being a distribution. It also can invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Therefore, a traditional IRA could invest in one-ounce silver coins minted by the U.S. Treasury Department without the investment being a distribution.

A cash-basis taxpayer paid the following medical expenses for himself and his daughter, Joni, whom he claims as a dependent on his tax return during the year: $310 for glasses for Joni and $290 for himself $650 for dental root canal procedure for himself $900 for hospital emergency services, of which $700 was paid by insurance in the same year $1,250 for Joni's braces, which he put on his credit card in December 2022 and paid in January 2023 $500 for allergy prescriptions $2,200 cosmetic plastic surgery The taxpayer's medical expense deduction before limitation is: A. $6,100 B. $4,150 C. $3,200 D. $5,400

Question #1 -Solution The taxpayer's medical expense deduction before limitation is: $3,200 $310 for glasses for Joni and $290 for himself $650 for dental root canal procedure for himself $900 for hospital emergency services, of which $700 was paid by insurance in the same year $1,250 for Joni's braces, which he put on his credit card in December 2022 and paid in January 2023 $500 for allergy prescriptions $2,200 cosmetic plastic surgery The taxpayer is able to claim medical expenses of $3,200, which is the cost of glasses for Joni and the taxpayer ($600), dental cost ($650), hospital ER services ($900), Joni's braces ($1,250), and prescriptions ($500), less the insurance reimbursement of $700. Cosmetic surgery costs are not deductible medical expenses.

Question #2 Lisa decided to itemize on his 2022 return. He has the following receipts. Compute the amount of deduction for taxes he can take on her Schedule A, Itemized Deductions. State income tax: $9,000 Federal income tax: $12,000 County real estate tax: $4,000 Fee for his car inspection that he uses only personally: $50 Homeowners' association fees on her personal home: $500 Self-employment tax of $1,000 A. $14,000 B. $13,000 C. $10,000 D. $9,000

Question #2 -Solution C. $10,000 State income tax: $9,000 Federal income tax: $12,000 County real estate tax: $4,000 Fee for her car inspection that she uses only personally: $50 Homeowners' association fees on her personal home: $500 Self-employment tax of $1,000 Lisa would be able to claim up to $10,000 in taxes if she itemizes, which is the lesser of $13,000 ($9,000 in state income taxes and $4,000 in county real estate taxes) and $10,000. None of the other costs are deductible

Question #4 Julie made cash contributions to her local chapter of the Society for Prevention of Cruelty to Animals to care for stray dogs and cats. She donated several times a year, but she paid less than $250 for the entire year. These are the only charitable contributions she makes during the year. What documentation must Julie keep to substantiate her tax return charitable contribution deduction? A. No documentation is necessary since the contribution is less than $250 B. A receipt for each donation that shows the amount, date, and to whom paid C. An acknowledgement from the SPCA that she made contributions during the year D. A self-prepared statement or letter would be sufficient for contributions less than $250

Question #4 -Solution . A receipt for each donation that shows the amount, date, and to whom paid Because the contribution is cash and not a check, Julie must keep a receipt for each donation that shows the amount, date, and to whom paid

Question #5 Jack's antique car caught fire and was totally destroyed. The car was appraised for $22,500. Jack only had it insured for $15,000 since this was more than enough to cover his adjusted basis of $9,000. He decided not to replace the car. What should Jack report on his tax return? A. Deduct a loss of $7,500 B. Deduct a loss of $6,000 C. Report income of $6,000 D. None of the answer choices are correct

Question #5 -Solution Report income of $6,000 Jack's sustained loss is $9,000, which is the smaller of the adjusted basis of $9,000 and the decrease in the FMV of $22,500 ($22,500 −$0) Since Jack had insurance coverage of $15,000, which is greater than the $9,000 loss, he has income (not a loss) of $6,000 from the casualty, which he must claim on his return

Question #6 During the year, Ron paid $85 to have his tax return prepared. He also paid a lawyer $215 to prepare his will. At work, he paid union dues of $650, bought safety boots for $200, and contributed $75 to collections for sick co-workers. What is Ron's miscellaneous deduction on his Schedule A, before the 2% limitation? A. $0 B. $935 C. $1,010 D. $1,150

Question #6 -Solution A. $0 Ron does not fall into one of the qualified categories for deducting miscellaneous itemized deductions subject to the 2%-for-AGI limitation Moreover, none of the items listed are miscellaneous itemized deductions that are not subject to the 2%-of-AGI limitation Therefore, he is not able to claim any miscellaneous deductions

Which of the following filing statuses is correct if you did not live with your spouse at any time during the year and you file a separate return (being legally separated) for determining the deduction phaseout for a traditional IRA? Single Married filing jointly Married filing separate Head of household

Single Publication 590-A, page 13, provides, in part, that a taxpayer's filing status depends primarily on his or her marital status. For this purpose, a taxpayer needs to know if his or her filing status is single or head of household, married filing jointly or qualifying surviving spouse, or married filing separately. Publication 590-A, Table 1-2, footnote 2, page 13 provides that if a taxpayer does not live with his or her spouse at any time during the year and the taxpayer is qualified to file a separate return, the taxpayer's filing status, for this purpose, is single. Note If you have a same-gender spouse whom you legally married in a state (or foreign country), you and your spouse must use the married filing jointly or married filing separately filing status on your 2022 return.

Maggie trades stock in ABC Company with an adjusted basis of $7,000 for DEF Company stock with a fair market value of $10,000. She had no other transactions during the year. What is the amount realized and what is her gain or loss on this transaction? The amount realized is $10,000 and the amount of gain is $3,000. The amount realized is $10,000 and the amount of loss is $3,000. The amount realized is $7,000 and the amount of gain is $4,000. The amount realized is $17,000 and the amount of gain is $3,000.

The amount realized is $10,000 and the amount of gain is $3,000. The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. If the amount realized from a sale or trade is more than the adjusted basis of the property the taxpayer transferred, the difference is a gain, and If the adjusted basis of the property you transfer is more than the amount realized, the difference is a loss. The adjusted basis of property is the original cost or other original basis properly adjusted (increased or decreased) for certain items. Maggie has a gain of $3,000, which is the difference between the amount realized, which is the fair market value of the acquired stock (i.e., $10,000), and the adjusted basis of the traded stock (i.e., $7,000). Publication 550, page 43

For purposes of claiming the child tax credit, which of the following is not a requirement for a qualifying child? The child must be under age 18 at the end of the year. The child must be a citizen or resident of the United States. The child must be claimed as your dependent. The child must satisfy a relationship such as an eligible foster child.

The child must be under age 18 at the end of the year. publication 17, page 105, provides that a taxpayer is eligible for the child tax credit of $2,000 for each qualifying child. A qualifying child is defined as a child that is under age 17 at the end of 2022, is a citizen or resident of the United States, did not provide over half of his or her own support, lived with the taxpayer for more than half of 2022 (with limited exceptions), and satisfies the relationship test (taxpayer's son, daughter, adopted child, stepchild, or a descendent of any of them (e.g., grandchild); brother, sister, stepbrother, stepsister, or a descendent of any of them (e.g., niece or nephew) if the taxpayer cares for the individual as their own child; or eligible foster child). Under age 17 (not 18) at the end of the tax year, A U.S. citizen, U.S. national, or resident of the United States, Did not provide over half of his or her own support for 2022, Lived with the taxpayer for more than half of 2022 (with limited exceptions), and Must be the taxpayer's:Son, daughter, adopted child, stepchild, foster child, or a descendent of any of them (e.g., grandchild), orBrother, sister, stepbrother, stepsister, or a descendent of any of them (e.g., grandchild, niece, or nephew). Additionally, the credit is further reduced by modified adjusted gross income starting at the following amounts: Married filing jointly: $400,000 All other tax filers: $200,000 Under certain circumstances, a taxpayer may qualify for the additional child tax credit of up to $1,500 per qualifying dependent, which may give them a refund even if they do not owe any tax (i.e., all or part of the child tax credit may be refundable). (See Publication 17, page 105) In this case, the age requirement for a qualifying child is under age 17 (not 18). IRC Section 24 Publication 17, pages 105-107

You may receive a return of capital or a tax-free distribution in shares of stock or stock rights. Which of the following statements is correct? These distributions are treated the same as ordinary dividends or capital gain distributions. These distributions are treated the same as ordinary dividends but not treated the same as capital gain distributions. These distributions are not treated the same as capital gain distributions but are treated the same as ordinary dividends. These distributions are not treated the same as ordinary dividends or capital gain distributions.

These distributions are not treated the same as ordinary dividends or capital gain distributions As given on page 20 of Publication 550, a nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. When a taxpayer receives a nondividend (also known as a return of capital) or a tax-free distribution of more shares of stock or stock rights, these distributions are not treated the same as ordinary dividends or capital gain distributions. To begin with, amounts received as a return of capital are not included in gross income. It is treated as a reduction in the basis of the taxpayer's stock. Thus, it is not taxed until the taxpayer's basis is totally recovered. When the basis of the stock has been reduced to zero, any additional nondividend distribution received as a capital gain is reported. Whether the amount received is reported as a long-term or short-term capital gain depends on how long the stock has been held. Further, distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as "stock options") are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable to the taxpayer, and as such they are not reported on the taxpayer's return. Publication 550, pages 20-21

If you purchase stock of a small corporation meeting the requirements of Section 1244 (small business) stock, and you sell that stock at a loss, the loss from that stock will be reported as: long-term loss. ordinary loss. short-term loss. ordinary loss subject to limitations.

ordinary loss subject to limitations. A taxpayer can deduct as an ordinary loss, rather than as a capital loss, his or her loss on the sale, trade, or worthlessness of a small business investment company (also known as Section 1244 stock or a SBIC stock). The loss is reported on Form 4797, Part II, line 10. Any gain on this stock is capital gain and is reported on Form 8949 if the stock is a capital asset in the taxpayer's hands (Publication 550, page 53). For more information on losses on Section 1244 (small business) stock, see chapter 4 of Publication 550. Publication 550, page 53

In order to deduct a personal casualty and theft loss, the loss must be: related to a federally declared disaster area. reduced by the amount of your standard deduction. less than 10% of your adjusted gross income. deducted over a three-year consecutive period.

related to a federally declared disaster area. Personal casualty and theft losses of an individual sustained in tax years beginning after 2017 are deductible only to the extent they are attributable to a federally declared disaster. An exception to the rule above, limiting the personal casualty and theft loss deduction to losses attributable to a federally declared disaster, applies if you have personal casualty gains for the tax year. In this case, you can reduce your personal casualty gains by any casualty losses not attributable to a federally declared disaster. Any excess gain is used to reduce losses from a federally declared disaster. Personal casualty and theft losses not attributable to a federally declared disaster are subject to the $100 per casualty and 10% of your adjusted gross income (AGI) limitations. Publication 547, page 3

All of the following statements are correct if you have started taking equal periodic distributions from a traditional IRA and you convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments, except: the taxpayer has a failed conversion. the 10% additional tax on early distributions will not apply. the rule that conversion is permitted if the taxpayer is not a married individual filing a separate return will not apply. the rule that the taxpayer's modified AGI for Roth IRA purposes is not more than $100,000 will not apply.

the taxpayer has a failed conversion. According to Publication 590-A, page 29, if a taxpayer has started taking substantially equal periodic payments from a traditional IRA, the taxpayer may convert the amounts in the traditional IRA to a Roth IRA and then continue the periodic payments. The 10% additional tax on early distributions will not apply even if the distributions are not qualified distributions (as long as they are part of a series of substantially equal periodic payments). Furthermore, starting in 2010 the $100,000 modified AGI limit and filing status requirements were eliminated. Therefore, the taxpayer does not have a failed conversion. Publication 590-A, page 29