Study Unit 6- Adjustments and Deductions

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

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

Mark established a Roth IRA at age 40 and contributed $5,500 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark's gross income?

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

Shirley, a single taxpayer, has taxable income of $150,000. 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?

$10,000 This answer is correct. Because Shirley's taxable income of $150,000 is less than $157,500, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.

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

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

Robin and Monica are married and filing a joint return. They have a taxable income of $300,000. Robin owns a qualified sole proprietorship that generates qualified business income (QBI) of $50,000, and Monica is the sole owner of a qualified S corporation that generates a QBI of $75,000. How much is Robin and Monica's combined deductible amount for the year?

$25,000 This answer is correct. The combined QBI allowed amount is the sum of the amount for each qualified trade or business carried on by the taxpayer. Because Robin and Monica's income is less than $315,000, the W-2 wages/qualified property limit does not apply. Thus, their QBI allowed amount for the sole proprietorship is 20% of QBI, $10,000 ($50,000 × 20%), and their QBI allowed amount for the S corporation is 20% of QBI, $15,000 ($75,000 × 20%). Therefore, the combined qualified business income deduction is $25,000 ($10,000 + $15,000).

Moore, a single taxpayer, had $50,000 in adjusted gross income for 2018. During 2018, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2017 cash church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2018?

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

Poole, 45 years old and single, is in the 12% tax bracket. He had 2018 adjusted gross income of $50,000. The following information applies to Poole: Medical expenses $16,000 Standard deduction 12,000 The relevant tax brackets are Income Tax ≤ $9,525 10% $9,525 to $38,700 12% Poole wishes to minimize his income tax. What is Poole's 2018 total income tax rounded to the nearest dollar?

$4,340 This answer is correct. Taxable income is defined as adjusted gross income minus the standard deduction (or total itemized deductions, if greater). For a single taxpayer in 2018, the basic standard deduction is $12,000. Qualifying medical expenses in excess of 7.5% of AGI may be deducted as an itemized deduction. Poole's income tax is computed as follows: Medical expenses $16,000 Less: 7.5% of AGI ($50,000 × .075) (3,750) Allowable medical expenses $12,250 Use the greater of Allowable itemized deductions or $12,250 Standard deduction 12,000 AGI $50,000 Itemized deductions (12,250) Taxable income $37,750 Tax Computation: First: $9,525 × .10 $ 953 Balance: $28,225 × .12 3,387 Income tax $ 4,340

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

$40,000 This answer is correct. In 2018, 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 $5,500 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 - $2,000 contribution to IRA).

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2018, the rental apartment was fully occupied, and Gow received $7,200 in rent. During the year ended December 31, 2018, Gow paid the following: Real estate taxes $6,400 Painting of rental apartment 800 Annual fire insurance premium 600 In 2018, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2018?

$400 This answer is correct. Ordinary and necessary expenses paid or incurred during the tax year for the production of income are deductible for AGI. This includes deduction for depreciation on property held for production of income. Personal expenses are not deductible as rental expense. Insurance, taxes, and depreciation must be allocated between rental and personal expense. Gross rental income $7,200 Less: Rental expense Maintenance and repair $ 800 Depreciation ($5,000 × 1/2) 2,500 Real estate tax ($6,400 × 1/2) 3,200 Insurance ($600 × 1/2) 300 (6,800) Net rental income $ 400 The interest and taxes attributable to the apartment Emil occupies are deductible as an itemized deduction.

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

$5,500 This answer is correct. Medical expenses are deductible to the extent they exceed 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.

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

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

Lana and Luke are married and have a taxable income of $305,000. Their share of the income from an accounting partnership is $250,000. The accounting partnership pays a total of $90,000 in W-2 wages. Under Sec. 199A, what is their deductible amount for the partnership?

$50,000 This answer is correct. Lana and Luke's taxable income is less than $315,000, and they can simply deduct 20% of qualified business income, $50,000 ($250,000 × 20%). The limitations and disallowance do not apply at this taxable amount.

Tyler and Ross are married, have taxable income of $419,600, and own a partnership together. They have a qualified business income (QBI) of $334,600 from the partnership and do not have any qualified property. The partnership pays a total of $127,500 in W-2 wages. Under Sec. 199A, what is Tyler and Ross's QBI allowed amount for the partnership?

$63,750 This answer is correct. Because Tyler and Ross do not have any qualified property, the QBI allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer's QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $419,600 is greater than $415,000, the W-2 wages/qualified property limit needs to be considered. Thus, their deduction is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). Tyler and Ross can claim a deduction of $63,750.

Amy and Tyler are married and have taxable income of $350,000. Amy has a sole proprietorship that is a specified service trade or business. Under Sec. 199A, which of the following statements is correct based on the above information?

Amy and Tyler can claim the Sec. 199A deduction, but only the applicable percentage of qualified items of income, gain, deduction, or loss; the W-2 wages; and the unadjusted basis of qualified property allocable to the business should be taken into account in the calculations. This answer is correct. Because Amy and Tyler have taxable income of less than $415,000 and more than $315,000, the applicable percentage of qualified items of income, gain, deduction, or loss; the W-2 wages; and the unadjusted basis of qualified property of the taxpayer allocable to the business shall be taken into account.

How may taxes paid by an individual to a foreign country be treated?

As a credit against federal income taxes due. This answer is correct. A taxpayer may elect either a credit or an itemized deduction for taxes paid to other countries or U.S. possessions.

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

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

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

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

The 2018 deduction by an individual taxpayer for interest on investment indebtedness is

Limited to the taxpayer's 2018 net investment income. This answer is correct. 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

Must be used to buy, build, or significantly improve a qualified residence. This answer is correct. 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.

In 2018, 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

Nondeductible interest. This answer is correct. 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.

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?

The taxpayer may claim the Sec. 199A deduction if (s)he has taxable income of less than $415,000. This answer is correct. 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 $415,000 if married filing jointly ($207,500 for all other taxpayers).

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

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

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

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

Which of the following requirements must be met in order for a single individual to qualify for an additional standard deduction? Must be age 65 or older or blind Must support dependent child or aged parent

Yes No This answer is correct. An additional standard deduction is allowed for a taxpayer if, during the year, the taxpayer is age 65 or over or blind. The respective amounts are doubled if the taxpayer is both elderly and blind. Support of a dependent is a condition of an additional personal exemption amount, not an increase to the standard deduction.