Chapter 6: Individual Deductions

Nancy donated an antique desk to her church that she paid $800 for six years ago. An appraisal indicates the current fair market value of the desk is $1,000. The church donated the desk to a family whose home was destroyed in a fire. As a result, Nancy will be able to deduct $______ for her contribution.

800

Which of the following statements are CORRECT when comparing For AGI deductions to From AGI deductions? (Choose all that apply.) Multiple select question. A. Deduction for AGI reduce AGI thus reducing the limitations on other tax benefits that are decreased or phased out for higher income taxpayers. B. Certain from AGI deductions may not have an effect on taxable income despite the taxpayer incurring the expense. C. From AGI deductions are generally preferred over deductions for AGI. D. For AGI deductions are subtracted directly from adjusted gross income. E. For AGI deductions are also called deductions "below the line" or "itemized deductions."

A. Deduction for AGI reduce AGI thus reducing the limitations on other tax benefits that are decreased or phased out for higher income taxpayers. B. Certain from AGI deductions may not have an effect on taxable income despite the taxpayer incurring the expense.

Which of the following characteristics are required for a business expense to be deductible? (Check all that apply.) Multiple select question. A. Directly related to business activity B. Repetitive C. Necessary D. Critical for business success E. Ordinary

A. Directly related to business activity C. Necessary E. Ordinary

Which one of the following medical payments would be deductible for the taxpayer in the current year? Multiple choice question. A. Doctor bills paid by the taxpayer for his dependent son who lives with the taxpayer's ex-wife B. Doctor bills incurred by the taxpayer, but paid by the taxpayer's health insurance company C. Doctor bills incurred by the taxpayer in the current year that will be paid next year D. Doctor bills incurred by the taxpayer and paid with the taxpayer's flexible spending account

A. Doctor bills paid by the taxpayer for his dependent son who lives with the taxpayer's ex-wife

Which of the following donations will qualify as a deductible charitable contribution? Multiple choice question. A. Land donated to a public university B. Volunteering at Habitat for Humanity for four hours C. Furniture given to a family whose home burned D. Cash contributions to a political campaign

A. Land donated to a public university

Horatio and Maria are married and have three children. Horatio is self-employed and pays health insurance premiums for himself and his family. Which of the following situations would disqualify part or all of the premium costs from being deductible for AGI? Multiple choice question. A. Maria has an employer-sponsored health insurance plan available at work, but they do not participate. B. One of Horatio's children is not a dependent because she is 25 and earns too much income. C. Horatio's net income from his business exceeds the cost of the health insurance premiums. D. Horatio and Maria's children are all dependents for tax purposes.

A. Maria has an employer-sponsored health insurance plan available at work, but they do not participate.

Which of the following descriptions BEST defines business activities? Multiple choice question. A. Profit-motivated and requiring a high level of effort from the taxpayer B. Profit-motivated, but not requiring a high level of effort from the taxpayer C. Motivated primarily by personal enjoyment and requires a high level of effort from the taxpayer D. Motivated primarily by personal enjoyment, but does not require a high level of effort from the taxpayer

A. Profit-motivated and requiring a high level of effort from the taxpayer

Andrew volunteered for the American Red Cross after a recent hurricane. He traveled 200 miles and helped the victims of the disaster in the clean up for five days. He also donated $1,500 to the American Red Cross, but charged the amount of the donation on his credit card. He plans to pay $300 plus interest each month on the credit card charge, so he will pay $900 of the $1,500 charge by the end of the year. What amounts will Andrew be able to deduct for his charitable contributions? (Check all that apply.) Multiple select question. A. The cost of lodging while he is volunteering B. Mileage for the 200 miles he drove to the ravaged area C. $900 that is actually paid toward the credit card bill during the year D. The value of his time for five days based on his current salary E. $1,500 charged to the credit card during the year

A. The cost of lodging while he is volunteering B. Mileage for the 200 miles he drove to the ravaged area E. $1,500 charged to the credit card during the year

Taxpayers have a choice of deducting the standard deduction or their itemized deductions. Therefore, ______ AGI deductions are considered to be beneficial to more taxpayers because: Multiple choice question. A. for; they are available to all eligible taxpayers, not just those that itemize deductions. B. from; they result in a lower AGI which reduces the limitations based on AGI that decrease some tax benefits. C. for; these deductions increase the amount of the standard deduction. D. from; these deductions reduce a taxpayer's tax liability dollar for dollar.

A. for; they are available to all eligible taxpayers, not just those that itemize deductions.

Rental activities______. Multiple choice question. A. may be classified as investment activities or business activities, but the expenses are always deducted for AGI B. may be classified as investment activities or business activities, but the expenses are always deducted from AGI C. are always classified as investment activities and the expenses are deducted from AGI D. are always classified as business activities and the expenses are deducted for AGI

A. may be classified as investment activities or business activities, but the expenses are always deducted for AGI

Holly files married filing jointly and reports income of $300,000 ($340,000 AGI - $40,000 itemized deductions) before the deduction for qualified business income. She has no capital gains or dividends included in taxable income. Holly's engineering consulting service generates $20,000 of qualified business income. She paid no wages during the current year. What is Holly's deduction for qualified business income? Multiple choice question. A. $68,000 B. $4,000 C. $0 D. $60,000

B. $4,000 Reason: $20,000 QBI x 20%

Mike sold equipment he is no longer using in his business at a loss of $4,000, and he sold investments at a loss of $8,000. Mike had no other sales of property in the current year. What are the tax implications of these losses to Mike? Multiple choice question. A. Deduct both losses in their entirety in the current year. B. Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward. C. Deduct $3,000 of the loss on equipment and $3,000 of the loss on investment in the current year. The remaining losses are carried forward. D. Deduct the $4,000 loss on equipment but not the $8,000 investment loss as this is considered a personal asset.

B. Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward. Reason: Business losses are fully deductible for AGI, but taxpayers are only allowed to deduct capital losses (investment) against capital gains. Any excess capital loss is allowed to reduce AGI by $3,000 in the current year. The remainder is carried forward.

Lucy is single and has $225,000 of taxable income from services outside her employment before the Qualified Business Income deduction. Which of the following types of services, if it were the service performed by Lucy, would qualify as Qualified Business Income? Multiple choice question. A. Legal B. Engineering C. Investment D. Accounting

B. Engineering Reason: Since Lucy's income from services is greater than $164,900 plus $50,000, none of the income is considered QBI.

Which of the following statements is accurate when referring to hobby expenses? Multiple choice question. A. Hobby expenses are deductible against the revenue generated by the hobby and will result in a deductible loss if they exceed revenues. B. Hobby expenses are NOT deductible, but revenues generated by the hobby are taxable. C. Hobby expenses are NOT deductible because revenues generated from hobbies are not taxable. D. Hobby expenses are deductible as itemized deductions but only to the extent of the revenue generated by the hobby. E. Hobby expenses are deductible FOR AGI, but only to the extent of the revenue generated by the hobby.

B. Hobby expenses are NOT deductible, but revenues generated by the hobby are taxable.

Which of the following types of donations would be deductible as charitable contributions? (Check all that apply) Multiple select question. A. Stocks and bonds donated to the Republican National Committee B. Land donated to a state university C. Cash donated to United Way D. Volunteering 4 hours (personal services) at a local Goodwill store E. Checks made payable to (and as a donation to) The Boy Scouts of America

B. Land donated to a state university C. Cash donated to United Way E. Checks made payable to (and as a donation to) The Boy Scouts of America

Which of the following terms describes business expenses that would be deductible by the taxpayer? (Check all that apply.) Multiple select question. A. Authorized B. Necessary C. Appropriate D. Helpful E. Crucial F. Repetitive in nature G. Ordinary

B. Necessary C. Appropriate D. Helpful G. Ordinary

Which of the following types of taxes may be considered when determining the itemized deduction for taxes? (Check all that apply.) Multiple select question. A. Federal estate taxes B. Real estate taxes on property held for investment C. Federal gift taxes D. Personal property tax on the value of a boat E. Social security tax withheld from pay

B. Real estate taxes on property held for investment D. Personal property tax on the value of a boat

Harli is taking her 6-month-old daughter to the doctor to receive vaccinations. Which of the following statements is correct regarding the deductibility of the vaccinations? Multiple choice question. A. The cost of vaccinations is NOT deductible because Harli's daughter is not receiving a cure or treatment for a current illness. B. The cost of vaccinations is deductible because it is for the prevention of a disease. C. The cost of vaccinations is NOT deductible because receiving vaccinations is not mandatory, but a choice by the parents. D. The cost of vaccinations is deductible for Harli's daughter, but not for Harli.

B. The cost of vaccinations is deductible because it is for the prevention of a disease.

Which of the following statements is correct? Multiple choice question. A. Businesses attach financial accounting income statements to tax returns and report the profit or loss reported directly on Form 1040. B. The revenues and expenses from a business are reported on Schedule C and the resulting profit or loss is transferred to Form 1040. C. A business calculates net income or loss for tax purposes. Details do NOT have to be reported on the tax return, but records must be retained by the company to present in the event of an audit.

B. The revenues and expenses from a business are reported on Schedule C and the resulting profit or loss is transferred to Form 1040.

Donations to ______ organizations are NOT deductible for federal income tax purposes. Multiple choice question. A. educational B. political C. religious D. scientific

B. political

Cash donations to public charities are limited to _____% of a taxpayer's AGI. Donations of capital gain property to public charities are generally limited to ______% of a taxpayer's AGI. And, donations of certain capital gain property to private nonoperating foundations are limited to ________% of AGI.

Blank 1: 60 or sixty Blank 2: 30 or thirty Blank 3: 20 or twenty

For mortgages obtained in 2021, MFJ homeowners may deduct interest on up to $____ of acquisition indebtedness.

Blank 1: 750,000 or 750000

Owen's adjusted gross income for the year will be $150,000 and he is planning to make only ONE of following charitable donations. If he contributes $100,000 cash to a public charity, he can deduct $____ . If he contributes property that is worth $80,000 to a public charity, he can deduct $_____ . Or, if he contributes publicly traded stock with a FMV of $60,000 and a basis of $40,000 to a private non-operating foundation, he can deduct $_____ .

Blank 1: 90,000 Blank 2: 45,000 Blank 3: 30,000

Owen's adjusted gross income for the year will be $150,000 and he is planning to make only ONE of following charitable donations. If he contributes $100,000 cash to a public charity, he can deduct $____ . If he contributes property that is worth $80,000 to a public charity, he can deduct $_____ . Or, if he contributes publicly traded stock with a FMV of $60,000 and a basis of $40,000 to a private non-operating foundation, he can deduct $______ .

Blank 1: 90,000 Blank 2: 45,000 Blank 3: 30,000

Activities that are profit-motivated and require a relatively high level of involvement from the taxpayer are referred to as _____ activities. (Enter only one word per blank.)

Blank 1: business or trade

In general, when contributing long-term property to charity, taxpayers are allowed to deduct the fair market value ______ _______ of property on the date of the donation.

Blank 1: capital Blank 2: gain or gains

A taxpayer may deduct interest expense paid on qualified _____ loans where the proceeds were used for tuition, fees, books, and other necessary expenses. The interest is deductible _____ (for/from) AGI.

Blank 1: education, student, educational, or higher education Blank 2: for

A loss from a sudden, unexpected, or unusual event such as a fire, storm, or shipwreck that occurs as part of a(n)_____ ______ disaster is a(n) ______ loss.

Blank 1: federally, federal, president, presidental, or providentially Blank 2: declared or declare Blank 3: casualty

Investment interest expense is deducted _____ AGI while self-employed business expenses are deducted ______ AGI.

Blank 1: from Blank 2: for

Activities which are profit-motivated, but do NOT require a relatively high level of involvement from the taxpayer are referred to as _________ activities.

Blank 1: investment, investing, or investments

Taxpayers can only deduct the lesser of (1) the property's fair market value or (2) the property's adjusted basis when making a charitable donation of ________ __________ property

Blank 1: ordinary Blank 2: income

The ________ _________ is a flat amount that most individuals can elect to deduct instead of deducting their itemized deductions.

Blank 1: standard Blank 2: deduction or deductions

Bruce is a CPA who operates his tax service business as a sole proprietorship. He files a joint tax return with his wife. Their tax return reported $364,800 in taxable income and $375,000 in profit from the tax service, before the deduction for qualified business income (QBI). How much of the income from Bruce's tax services is eligible for the QBI deduction? Multiple choice question. A. $0 B. $329,800 C. $243,750 D. $235,040

C. $243,750 Reason: Since their taxable income is above the $329,800 threshold for MFJ but below $429,800, the phase-out rules apply. $364,800 - $329,800 = $35,000 ÷ $100,000 phase out = 35% is not eligible for the QBI deduction. $243,750 is eligible ($375,000 × 65%).

Jenny and Jerry have a home with a fair market value of $625,000. They borrowed $400,000 ten years ago to purchase the home (home value at that time was $450,000). They currently owe $250,000 on the acquisition loan. They recently borrowed $110,000 on a home-equity loan. The proceeds were used to purchase a car and take a vacation. What is the maximum amount of their indebtedness that can generate deductible interest in the current year? Multiple choice question. A. $360,000 B. $350,000 C. $250,000 D. $260,000

C. $250,000 Reason: $250,000 acq. debt

In the current year, Ellen sold investment stock that she had owned for five years. The sale generated a loss of $5,000. Assuming she had no other asset sales during the year, how should Ellen handle the loss for the current tax year purposes? Multiple choice question. A. Ellen can deduct $3,000 from AGI. B. Ellen can deduct $5,000 from AGI. C. Ellen can deduct $3,000 for AGI. D. Ellen can deduct $5,000 for AGI.

C. Ellen can deduct $3,000 for AGI.

Certain charitable contributions of capital gain property do not qualify for a fair market value deduction. Which of the following characteristics of capital gain property will definitely cause it to qualify for a fair market value deduction? Multiple choice question. A. It has appreciated in value. B. It is tangible property. C. It is intangible property such as stocks and bonds. D. It is NOT used by the charity for a related purpose. E. It is personal property.

C. It is intangible property such as stocks and bonds.

Which of the following expenses are deductible FOR AGI? (Check all that apply.) Multiple select question. A. Most expenses generated by investment activities B. Unreimbursed employee business expenses C. Most expenses generated by business activities D. Expenses generated by rental and royalty activities

C. Most expenses generated by business activities D. Expenses generated by rental and royalty activities

Which of the following descriptions BEST defines investment activities? Multiple choice question. A. Motivated primarily by personal enjoyment, but does not require a high level of effort from the taxpayer B. Motivated primarily by personal enjoyment and requires a high level of effort from the taxpayer C. Profit-motivated, but not requiring a high level of effort from the taxpayer D. Profit-motivated and requiring a high level of effort from the taxpayer

C. Profit-motivated, but not requiring a high level of effort from the taxpayer

Which of the following types of taxes may be deducted from AGI as itemized deductions? (Check all that apply.) Multiple select question. A. Excise taxes paid on cigarette and alcohol purchases B. Federal income taxes C. Real estate taxes on a primary residence D. State and local income taxes E. Personal property tax on the value of a car

C. Real estate taxes on a primary residence D. State and local income taxes E. Personal property tax on the value of a car

Which of the following statements is NOT accurate regarding the deduction for qualified education loan interest? Multiple choice question. A. Loans used to provide room and board during college are considered qualifying educational expenses. B. The interest on educational loans for a taxpayer's dependents is deductible. C. The full amount of interest paid on qualified educational loans is deductible. D. The amount of the deduction is phased out depending on filing status and modified AGI.

C. The full amount of interest paid on qualified educational loans is deductible.

Certain contributions of capital gain property do NOT qualify for a fair market value deduction. Which of the following characteristics of the contribution will cause the asset to NOT qualify for a fair market value deduction? Multiple choice question. A. The asset is real property, such as land or a building. B. The asset is intangible, such as stock or bonds. C. The tangible personal property's use is unrelated to the charity's operations. D. The asset was held by the donor for a total of 367 days.

C. The tangible personal property's use is unrelated to the charity's operations.

Which one of the following types of charitable contributions is NOT deductible for federal income tax purposes? Multiple choice question. A. Travel costs incurred for charitable purposes B. Contributions made through payroll deduction C. Contributions made with credit cards where the charge is paid in a subsequent year D. Cash paid to purchase fundraising products where a portion of the proceeds go to fund a charitable cause

D. Cash paid to purchase fundraising products where a portion of the proceeds go to fund a charitable cause

Which of the following statements regarding the deduction for qualified business income is incorrect? Multiple choice question. A. For purposes of the wage-based limit, each partner is treated as having wages for the year equal to his or her allocable share from her partnership. B. The wage-based limit is phased in ratably over $100,000 for married filing joint returns. C. The wage-based limits only apply to taxpayers with taxable income in excess of $329,800 (in the case of a joint return). D. The deduction cannot be claimed unless the taxpayer also itemizes his or her deductions.

D. The deduction cannot be claimed unless the taxpayer also itemizes his or her deductions.

Which of the following is CORRECT concerning the deduction of qualified medical expenses for the 2021 tax year? Multiple choice question. A. The expenses must be increased by 7.5% of AGI. B. Most individuals are able to deduct medical expenses. C. The expense can be increased by 7.5% of AGI. D. The expenses must be reduced by 7.5% of AGI.

D. The expenses must be reduced by 7.5% of AGI.

Which of the following terms does NOT describe a casualty that could be deductible for tax purposes if it occurs in a federally-declared disaster area? Multiple choice question. A. Sudden B. Unexpected C. Unusual D. Weakened

D. Weakened

Lance paid $21,000 for seven acres of land six years ago. During the current year, Lance donated the land which now has a fair market value of $30,000 to his church. Lance will ______. Multiple choice question. A. can only deduct $21,000 for the land contribution, regardless of how the church uses the land B. need to include the appreciation of $9,000 in gross income in order to take the full deduction C. only be able to deduct $21,000 if the church doesn't use the land in its related use D. be able to deduct $30,000 as a charitable contribution

D. be able to deduct $30,000 as a charitable contribution

Markita donated stock that she has held for less than a year to a qualified charitable organization. Her basis in the stock is $1,000 and the fair market value of the stock is $1,200. In regards to the donation, the stock is ______. Multiple choice question. A. capital gain property and Markita can deduct $1,200 B. ordinary income property and Markita can deduct $1,200 C. capital gain property and Markita can deduct $1,000 D. ordinary income property and Markita can deduct $1,000

D. ordinary income property and Markita can deduct $1,000 Reason: Since the stock has been held for less than one year, it is ordinary income property and, therefore, limited to the lesser of the property's FMV or adjusted basis.

True or false: A self-employed individual may deduct the cost of his self-employed health insurance premiums even if his spouse's employer offers family coverage to him.

False

True or false: Hobby expenses are deductible to the extent of hobby income reported in AGI.

False

True or false: Business expenses are deducted for AGI and reported directly on Form 1040.

False Reason: The revenues and expenses of a business are reported on a separate schedule. The resulting profit or loss is transferred to the Form 1040.

Bruce is a CPA who operates his tax service business as a sole proprietorship. He files a joint tax return with his wife. Their tax return reported $445,000 in taxable income before any QBI deduction. Is Bruce eligible to claim the deduction for QBI for his tax service?

No Reason: Since their taxable income is above the $329,800 threshold for MFJ + $100,000, Bruce may not claim the QBI deduction.

Isabella, age 50, pays $500 each month for health insurance premiums with after-tax dollars. She is not self-employed. During 2021, she also incurred $200 in doctor bills and $50 in over-the-counter medications. Her AGI is $45,000. What amount will she be able to deduct as an itemized deduction after the AGI floor is applied? Multiple choice question. A. $0 B. $6,200 C. $2,825 D. $1,700

Reason: [($500 × 12) + $200] = $6,200 - ($45,000 × 7.5%) = $2,825

Bunching itemized deductions

a common planning strategy in which a taxpayer pays two years' worth of itemized expenses in one year to exceed the standard deduction in that year

Standard deduction

a fixed deduction offered in lieu of itemized deductions. The amount of the standard deduction depends on the taxpayer's filing status

Floor limitation

a minimum amount that an expenditure (or credit or other adjustment to taxable income) must meet before any amount is allowed

Trade or business

a profit-motivated activity characterized by a sustained, continuous, high level of individual involvement or effort

Business activity

a profit-motivated activity that requires a relatively high level of involvement or effort from the taxpayer to generate income

Investment activity

a profit-seeking activity that is intermittent or occasional in frequency, including the production or collection of income or the management, conservation, or maintenance of property held for the production of income

Ordinary and necessary

an expense that is normal or appropriate and that is helpful or conducive to the business activity

Traditional IRA

an individually managed retirement account with deductible contributions and taxable distributions

Capital gain property

any asset that would have generated a long-term capital gain if the taxpayer had sold the property for its fair market value

Specified service trade or business

any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. Architecture and engineering services (their services build things) are specifically excluded from the definition of specified service trade or business

Qualified education expenses

consist of tuition and related costs for enrolling the taxpayer, spouse, or a dependent at a postsecondary institution of higher education

Excess business loss

excess of aggregate business deductions for the year over aggregate business gross income or gain of an individual taxpayer plus a threshold amount depending on filing status

Qualified trade or business

for purposes of the deduction for qualified business income, any trade or business other than a specified trade or business

Rental and royalty endeavors are most commonly classified as _____ activities.

investment

Ceiling

limitation that is the maximum amount for adjustments to taxable income (or credits). The amounts in excess of the ceiling are either lost or carried to another tax year

Qualified education loans

loans whose proceeds are used to pay qualified education expenses

Qualified business income (QBI)

net business income from a qualified trade or business conducted in the United States. This is the tax base for the deduction for qualified business income

Private operating foundations

privately sponsored foundations that actually fund and conduct charitable activities

Private nonoperating foundations

privately sponsored foundations that disburse funds to other charities

Ordinary income property

property that if sold would generate income taxed at ordinary rates

Deduction for qualified business income

subject to limitations, equal to 20 percent of the taxpayer's qualified business income