Income tax test 2

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This year, Carol, a single taxpayer, purchased a vacation home for $400,000 using an equity debt of $350,000 on her principal residence. Carol has no other debt on her principal residence. Carol paid $16,000 of interest on the debt this year. How much of this interest is deductible assuming Carol itemizes her deductions? a. $0 b. $10,000 c. $16,000 d. $125,000 e. None of the above

ANSWER: a RATIONALE: Because the debt is not secured by the vacation home, it is equity debt on the principal residence which is not deductible

In 2018, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true? a. If Boris is self-employed, he may deduct $7,200 as a deduction for AGI. b. If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction. c. If Boris is an employee, he may deduct $7,200 as a deduction for AGI. d. If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction. e. None of the above.

ANSWER: a RATIONALE: Boris, who is self-employed, may deduct 100% of the premium ($3,800) as a deduction for AGI. He may also deduct the $3,400 HSA contribution as a deduction for AGI.

Barry and Larry, who are brothers, are equal owners in Chickadee Corporation. On July 1, 2018, each loans the corporation $10,000 at an annual interest rate of 10%. Both shareholders are on the cash method of accounting, while Chickadee Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2019, Chickadee repays the loans of $20,000 together with the specified interest of $2,000. How much of the interest can Chickadee Corporation deduct in 2018? a. $0 b. $500 c. $1,000 d. $2,000 e. None of the above

ANSWER: a RATIONALE: Chickadee Corporation can deduct interest expense of $2,000 in 2019 and $0 in 2018. Under § 267, Barry and Larry are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2019).

In the current year, Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games. Also this year, Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? a. $0 b. $6,400 c. $8,000 d. $10,200 e. None of the above

ANSWER: a RATIONALE: Prior to the TCJA of 2017, 80 percent of the $8,000 would be a charitable contribution. With the TCJA of 2017, no deduction is allowed for seating rights.

Hugh, a self-employed individual, paid the following amounts during the year: Real estate tax on Iowa residence $3,800 State income tax 1,700 Real estate taxes on a vacation home 2,100 Gift tax paid on gift to daughter 1,200 State sales taxes 1,750 State occupational license fee 300 Property tax on value of his automobile (used 100% for business) 475 What is the maximum amount Hugh can claim as taxes in itemizing deductions from AGI? a. $7,650 b. $8,850 c. $9,625 d. $10,000 e. None of the above

ANSWER: a RATIONALE: State sales taxes ($1,750) are more than the state income tax ($1,700); so Hugh should choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($300) and the tax on his business use auto ($475) are deductible for AGI as business expenses. The state sales tax ($1,850) and the real estate taxes ($3,800 + $2,100) are deductible as itemized deductions. The gift tax is not deductible. The total itemized deductions are $7,650 ($3,800 + $2,100 + $1,750).

Pat gave 5,000 shares of stock in Coyote Corporation (a publicly traded corporation) to her church (a qualified charitable organization) in the current year. The stock was worth $180,000 and she had acquired it as an investment four years ago at a cost of $120,000. She reported AGI of $300,000 for the year. In completing her current income tax return, how much is her current-year charitable contribution deduction? a. $90,000 b. $120,000 c. $150,000 d. $180,000 e. None of the above

ANSWER: a RATIONALE: Under the general rule concerning capital gain property, Pat can deduct $90,000 (30% of $300,000 AGI) in the current year. The remaining $90,000 [$180,000 (fair market value of the Coyote Corporation stock) - $90,000 (current deduction)] can be carried over for up to five years, subject to the 30% limitation when used.

In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year (assume this year is not a leap year). The tax is payable on June 1. On May 1, Reggie sells his house to Dana for $350,000. On June 1, Dana pays the entire real estate tax of $7,950 for the year ending December 31. Assuming that Reggie itemizes his deductions and the $10,000 limit on state and local taxes does not apply, how much of the property taxes may Reggie deduct? a. $0 b. $2,614 c. $2,625 d. $7,950 e. None of the above

ANSWER: b RATIONALE: $2,614. Under § 164(d), 120/365 (January 1 - April 30) × $7,950 = $2,614 is apportioned to Reggie.

Karen, a calendar year taxpayer, made the following donations to qualified charitable organizations during the year: Basis Fair Market Value Cash donation to State University $30,000 $ 30,000 Unimproved land to the City of Terre Haute, Indiana 70,000 210,000 The land had been held as an investment and was acquired 4 years ago. Shortly after receipt, the City of Terre Haute sold the land for $210,000. Karen's AGI is $450,000. The allowable charitable contribution deduction this year is: a. $100,000. b. $165,000. c. $225,000. d. $240,000. e. None of the above

ANSWER: b RATIONALE: $30,000 (cash) + $135,000 (30% × $450,000 AGI) = $165,000. The capital gain property is limited to 30% of $450,000 AGI, or $135,000. The carryover to the next five years is $75,000 [$210,000 (FMV of the land) - $135,000 (deduction allowed for the current year)].

Zeke made the following donations to qualified charitable organizations during the year: Basis Fair Market Value Used clothing (all acquired more than a year ago) of taxpayer and his family $ 1,350 $ 375 Stock in ABC, Inc., held as an investment for fifteen months 12,000 10,875 Stock in MNO, Inc., held as an investment for eleven months 15,000 18,000 Real estate held as an investment for two years 15,000 30,000 The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is: a. $43,350. b. $56,250. c. $59,250. d. $60,375. e. None of the above.

ANSWER: b RATIONALE: For the used clothing and the ABC stock, fair market value controls in determining the amount of the deduction. The ABC stock was held long term, but it was not appreciated property. The MNO stock would not yield a long-term capital gain if sold because of the holding period. Consequently, it is ordinary income property for charitable contribution purposes and the appreciation cannot be claimed. The real estate meets the definition of capital gain property. Thus, $56,250 ($375 + $10,875 + $15,000 + $30,000) is the amount qualifying as a charitable contribution.

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2018 of some medical expenses he paid in 2017. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income? a. Scotty itemized deductions in 2017. b. Scotty did not itemize deductions in 2017. c. Scotty itemized deductions in 2018. d. Scotty did not itemize deductions in 2018. e. Scotty itemized deductions in 2018 but not in 2017.

ANSWER: b RATIONALE: If Scotty did not itemize in 2017, he can exclude the reimbursement from gross income in 2018. If Scotty itemized deductions in 2017, he must report the reimbursement as gross income in 2018 to the extent he received a tax benefit from deducting medical expenses in 2017. Whether he itemized in 2018 will have no impact on the treatment of the reimbursement.

Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year. What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7, and the stock had a fair market value of $13,800 when he made the donation? a. $3,300 b. $10,500 c. $12,150 d. $13,800 e. None of the above

ANSWER: b RATIONALE: If ordinary income property is contributed to a qualified charitable organization, the deduction is equal to the fair market value of the property less the amount of ordinary income that would have been reported if the property were sold. In most instances, the deduction is limited to basis of the property to the donor. Since he had not held the property long enough to meet the long-term capital gain requirement (i.e., not more than one year), Byron would have recognized a short-term capital gain of $3,300 if he had sold the property. Since short-term capital gain property is treated as ordinary income property for charitable contribution purposes, Byron's charitable contribution deduction is limited to the property's basis of $10,500 ($13,800 - $3,300).

Hannah makes the following charitable donations in the current year: Basis Fair Market Value Inventory held for resale in Hannah's business (a sole proprietorship) $ 8,000 $ 7,200 Stock in HBM, Inc., held as an investment (acquired four years ago) 16,000 40,000 Baseball card collection held as an investment (acquired six years ago) 4,000 20,000 The HBM stock and the inventory were given to Hannah's church, and the baseball card collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Hannah's current charitable contribution deduction is: a. $28,000. b. $51,200. c. $52,000. d. $67,200. e. None of the above

ANSWER: b RATIONALE: Inventory is ordinary income property, but the fair market value ($7,200) must be used if lower than the basis ($8,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the HBM stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($40,000). The baseball card collection comes under the tangible personalty exception, and the basis ($4,000) must be used. Thus, $51,200 may be deducted as a charitable contribution ($7,200 + $40,000 + $4,000 = $51,200).

Which of the following items would be an itemized deduction on Schedule A of Form 1040? a. Professional dues paid by an accountant (employed by Ford Motor Co.) to the National Association of Accountants. b. Gambling losses to the extent of gambling winnings. c. Job hunting costs. d. Subscription to the Wall Street Journal. e. None of the above.

ANSWER: b RATIONALE: Items a., c., and d. are miscellaneous deductions previously subject to the 2%-ofAGI floor and no longer deductible after the TCJA of 2017.

Quinn, who is single and lives alone, is physically handicapped as a result of a diving accident. In order to live independently, he modifies his personal residence at a cost of $30,000. The modifications included widening halls and doorways for a wheelchair, installing support bars in the bathroom and kitchen, installing a stairway lift, and rewiring so he could reach electrical outlets and appliances. Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after. As a result of the operation of the stairway lift, Quinn experienced an increase of $680 in his utility bills for the current year. Disregarding the AGI floor for medical expenses, how much of the above expenditures qualify as medical expense deductions? a. $11,680 b. $30,680 c. $30,880 d. $34,880 e. None of the above

ANSWER: b RATIONALE: Quinn, who is physically handicapped, modified his residence so he could live independently. Therefore, the $30,000 cost of the improvements is not reduced by the $11,000 ($140,000 - $129,000) increase in the value of the house. The additional operating expenses of $680 are deductible as a medical expense. The $200 appraisal fee is not deductible as a medical expense. Rather, it is a miscellaneous itemized deduction subject to the 2%-of-AGI floor. However, the deduction for miscellaneous itemized deductions has been suspended from 2018 through 2025. Therefore, $30,680 ($30,000 + $680) qualifies as medical expenses.

Paul, a calendar year single taxpayer, has the following information for 2018: AGI $175,000 State income taxes 13,500 State sales tax 3,000 Real estate taxes 18,900 Gambling losses (gambling gains were $12,000) 6,800 Paul's allowable itemized deductions for 2018 are: a. $10,000. b. $16,800. c. $39,200. d. $42,200. e. None of the above

ANSWER: b RATIONALE: State taxes are limited to $10,000. The itemized deductions allowed are $16,800 ($10,000 + $6,800).

Pedro's child attends a school operated by the church the family attends. Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $6,000 to the school. Based on this information, what is Pedro's charitable contribution? a. $0 b. $800 c. $1,000 d. $6,800 e. $7,000

ANSWER: b RATIONALE: The taxpayer's donation of $1,000 in lieu of the normal $200 registration fee would be deductible to the extent of $800 [$1,000 - $200 benefit received (the registration fee)]. The tuition of $6,000 is a personal expense that cannot be deducted as a charitable contribution.

Tom, age 48, is advised by his family physician that he needs back surgery to correct a problem from his last back surgery. Since Tom is in a wheel chair, he needs his wife, Jean, to accompany him on his trip to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic, which specializes in this type of surgery. Tom incurred the following costs in 2018: Round-trip airfare ($350 each) $ 700 Jean's hotel in Rochester for four nights ($95 per night) 380 Jean's meals while in Rochester 105 Tom's medical treatment 3,500 Tom's prescription medicine 600 Compute Tom's allowable medical expenses for the trip (before application of the AGI floor). a. $4,000 b. $5,000 c. $5,180 d. $5,285 e. None of the above

ANSWER: b RATIONALE: Tom's medical expense deduction for transportation is $700, and his medical expense deduction for lodging for Jean is $200 ($50 per night per person maximum). Tom is not allowed a deduction for the cost of Jean's meals while in Rochester. His medical treatment and prescriptions are deductible. So his total deduction (before application of the AGI floor) is $5,000 ($700 + $200 + $3,500 + $600)

Phillip, age 66, developed hip problems and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $32,000. The increase in the value of the residence as a result of the room addition was determined to be $17,000. In addition, Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair. Phillip's AGI for 2018 was $75,000. How much of these expenditures can Phillip deduct as a medical expense in 2018? a. $14,000 b. $15,000 c. $23,375 d. $29,000 e. None of the above

ANSWER: c RATIONALE: A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and vans specially designed for wheelchair-bound taxpayers. Phillip's medical expense related to the room addition is $15,000 ($32,000 - $17,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the AGI floor only, and the increase in the home's value is deemed to be zero. Phillip's medical expense related to the ramp and hallways is $14,000 ($5,500 + $8,500). So Phillip's medical expense deduction is as follows: Qualifying medical expenses ($15,000 + $14,000) $29,000 Less: 7.5% × $75,000 (AGI) (5,625) Deductible medical expenses $23,375

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2018, he files his state return for 2017, paying an additional $600 in state income taxes. During 2018, his withholdings for state income tax purposes amount to $3,550. On April 13, 2019, he files his state return for 2018 claiming a refund of $800. Brad receives the refund on June 3, 2019. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2018 (filed in April 2019)? a. $3,350 b. $3,550 c. $4,150 d. $5,150 e. None of the above

ANSWER: c RATIONALE: Brad is a cash basis taxpayer. His deduction is limited to the amounts paid in 2018. The $800 refund is reported as income in 2019 under the tax benefit rule. Brad's state income tax deduction for 2018 is determined as follows: Paid April 14, 2018, for 2017 $ 600 Withholdings for 2018 3,550 Total deduction $4,150

During the current year, Ralph made the following contributions to the University of Oregon (a qualified charitable organization): Cash $63,000 Stock in Raptor, Inc. (a publicly traded corporation) 94,500 Ralph acquired the stock in Raptor, Inc., as an investment fourteen months ago at a cost of $42,000. Ralph's AGI for the year is $189,000. What is Ralph's charitable contribution deduction for the current year? a. $56,700 b. $63,000 c. $94,500 Copyright Cengage Learning. Powered by Cognero. Page 51 Chapter 10: Deductions and Losses: Certain Itemized Deductions d. $157,500 e. None of the above

ANSWER: c RATIONALE: No reduction for the appreciation on the Raptor, Inc., stock is necessary because, if sold, it would yield a long-term capital gain. Thus, Ralph's potential charitable deduction for the year is $157,500 [$63,000 (cash) + $94,500 (fair market value of Raptor, Inc., stock)], but his allowable contribution deduction for the year is limited to $94,500 (50% of $189,000 AGI). Although the 30%-of-AGI limitation applies to capital gain property, which would result in a current deduction for the Raptor, Inc., stock of $56,700 (30% of $189,000 AGI), the overall 50%-of-AGI limitation applies to limit the total current deduction to $94,500. When the contributions for the tax year involve both 50% property (the cash of $63,000 in this case) and 30% property (the Raptor, Inc., stock), the allowable deduction comes first from the 50% property. Therefore, Ralph's allowable current deduction of $94,500 consists of: Cash $63,000 Raptor, Inc., stock [overall limitation of $94,500 (50% of $189,000 AGI) - $63,000 (cash)] 31,500 $94,500 The unused portion of the Raptor, Inc., stock contribution of $63,000 [$94,500 (fair market value) - $31,500 (portion used currently)] may be carried over for five years. The carryover continues to be classified as 30% property in the carryover years. If Ralph plans his charitable deductions wisely, sooner or later he will be able to deduct the full $94,500 fair market value of the stock.

Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land being held as an investment. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid and deducted $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is: a. $95,000. b. $18,000. c. $17,500. d. $13,000. e. None of the above.

ANSWER: c RATIONALE: Raul's net investment income is computed as follows: Income from investments: Interest and dividends $18,000 Long-term capital gain* 4,500 Less: Investment expenses (real estate taxes) (5,000) Net investment income $17,500 *Net capital gain generally is not included in investment income. In order to maximize his current investment interest deduction, Raul may elect to treat capital gain as investment income. If this election is made, however, the beneficial tax rate on capital gains will not apply. Raul's current investment interest expense deduction is limited to $17,500, the amount of net investment income, and $77,500 would be disallowed: Total investment interest expense $95,000 Less: Net investment interest income (17,500) Investment interest disallowed in the current year $77,500 The amount of investment interest disallowed carries over and becomes investment interest expense in the subsequent year (subject to the net investment income limitation).

Ramon incurred $83,100 of interest expense related to his investments this year. His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities. Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have. What is the maximum amount of Ramon's investment interest expense deduction in the current year? a. $19,500. b. $34,500. c. $72,000. d. $83,100. e. None of the above.

ANSWER: c RATIONALE: The deduction for investment interest is limited to the amount of net investment income reported. If Ramon elects to treat the net capital gain as investment income for purposes of computing the investment interest expense limitation, the deduction will be $72,000 ($34,500 interest + $37,500 net capital gain). If Ramon elects to include the capital gains as investment income, the $37,500 net capital gain will not qualify for beneficial alternative tax rate treatment. Therefore, he must decide between the tax benefit of an additional deduction of $37,500 versus the benefit of the reduced tax rates applicable to net capital gain

Nancy paid the following taxes during the year: Tax on residence (for the period from March 1 through August 31) $5,250 State motor vehicle tax (based on the value of the personal use automobile) 430 State sales tax 3,500 State income tax 3,050 Nancy sold her personal residence on June 30 of this year under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Nancy? a. $9,180 b. $9,130 c. $7,382 d. $5,382 e. None of the above

ANSWER: c RATIONALE: [(121 days/184 days × $5,250) + $430 + $3,500] = $7,382. Nancy chooses to claim a deduction for the (higher) state sales tax rather than the state income tax

Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emily's deduction associated with this charitable activity? a. $600 b. $1,200 c. $1,800 d. $2,200 e. $3,700

ANSWER: d RATIONALE: Emily cannot deduct the estimated value of $1,500 of her contributed services. However, she can deduct out-of-pocket costs of $2,200 ($600 for transportation, $1,200 for lodging, and $400 for meals).

Brad, who would otherwise qualify as Faye's dependent, had gross income of $9,000 during the year. Faye, who had AGI of $120,000, paid the following medical expenses this year: Cataract operation for Brad $ 5,400 Brad's prescribed contact lenses 1,800 Faye's doctor and dentist bills 12,600 Prescribed drugs for Faye 2,550 Total $22,350 Faye has a medical expense deduction of: a. $3,150 b. $4,950 c. $10,350 d. $13,350 e. None of the above

ANSWER: d RATIONALE: Faye may claim the medical expenses she paid on behalf of Brad (cataract operation and contact lenses), even though Brad cannot be claimed as a dependent. This exception applies if the gross income and/or joint return tests are the only reasons a person cannot be otherwise claimed as a dependent. Her deduction is $13,350 [$22,350 - ($120,000 × 7.5%)].

Chen incurred $58,500 of interest expense this year related to his investments. His investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The maximum amount of Chen's investment interest expense deduction for the year is: a. $15,000. b. $24,000. c. $37,500. d. $46,500. e. None of the above

ANSWER: d RATIONALE: The deduction for investment interest is limited to the amount of net investment income reported. If Chen elects to treat the capital gain and qualified dividends as investment income, the deduction is $46,500 ($15,000 interest + $9,000 qualified dividends + $22,500 net capital gain). However, if he so elects, his capital gain and qualified dividends will not be eligible for beneficial capital gains tax rate treatment.

Cory incurred and paid the following expenses in 2018: Tax return preparation fee $ 600 Moving expenses 2,000 Investment expenses 500 Expenses associated with rental property 1,500 Interest expense associated with loan to finance tax-exempt bonds 400 Calculate the amount that Cory can deduct (before any percentage limitations). a. $5,000. b. $4,600. c. $3,000. d. $1,500. e. None of the above.

ANSWER: d RATIONALE: Only the rental property expenses are deductible.

A participant, who is age 38, in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2018? a. $12,000 b. $17,000 c. $17,500 d. $18,500 e. None of the above

ANSWER: d RATIONALE: The indexed amount for 2018 is $18,500. A taxpayer who is age 38 is not eligible for the $6,000 catch-up amount in 2018

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. a. Indicates employee status. b. Indicates independent contractor status Lynn determines when the services are to be performed.

Allowing for the overall limitation (50% reduction for meals), which of the following trips, if any, will qualify for the travel expense deduction? a. Dr. Jones, a self-employed general dentist, attends a two-day seminar on developing a dental practice. b. Dr. Brown, a self-employed surgeon, attends a two-day seminar on financial planning. c. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. d. Myrna went on a two-week vacation in Boston. While there, she visited her employer's home office to have lunch with former co-workers. e. All of these

Which, if any, of the following factors is not a characteristic of independent contractor status? a. Work-related expenses are reported on Form 2106. b. Receipt of a Form 1099 reporting payments received. c. Workplace fringe benefits are not available. d. Services are performed for more than one party. e. None of these.

Which of the following is a deduction for AGI? a. Contribution to a traditional IRA. b. Roof repairs to a personal use home. c. Safe deposit box rental fee in which stock certificates are stored. d. Property tax on personal residence. e. All of the above.

ANSWER: a RATIONALE: Choice c. and d. are deductions from AGI. Choice b. is not deductible.

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct? a. No income is included in AGI. b. No expenses are deductible. c. Expenses must be allocated between rental and personal use. d. Only a. and b. are correct. e. a., b., and c. are correct

ANSWER: a RATIONALE: Expenses that would otherwise be deductible (e.g., property taxes and interest on mortgage of personal residence) can be claimed (choice b.).

Under the actual expense method, which, if any, of the following expenses will not be allowed? a. Parking fines incurred during business use of a car. b. Interest expense on a car loan (taxpayer is self-employed). c. Auto insurance. d. Auto club dues. e. None of the above.

ANSWER: a RATIONALE: Fines and penalties are not deductible

In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involve self-employed? a. Schedule C of Form 1040. b. Form W-4. c. Form W-2. d. Schedule A of Form 1040. e. None of these.

ANSWER: a RATIONALE: Form W-4 is used by employees to assist their employer(s) withhold taxes appropriately (choice b.). Schedule C is used to list the job-related income and expenses of self-employed taxpayers (choice a.). Form W-2 reports the wages earned by employees (choice c.). Income earned by self-employed persons is often shown on Form 1099. The results of Form 2106 (see choice b.) are transferred to Schedule A (choice d.)

Joyce, age 40, and Sam, age 42, who have been married for seven years, are both active participants in qualified retirement plans. Their total AGI for 2018 is $130,000. Each is employed and earns a salary of $65,000. What are their combined deductible contributions to traditional IRAs? a. $0 b. $3,000 c. $4,000 d. $8,000 e. None of the above

ANSWER: a RATIONALE: Joyce and Sam may contribute a total of $11,000 ($5,500 each) to a traditional IRA, but because their AGI exceeds the phaseout ceiling of $121,000 in 2018, $0 is deductible.

Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce $1,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Tax Consequences of property settlement 1,300 Of the $5,000 Velma pays to her attorney in 2018, the amount she may deduct as an itemized deduction is: a. $0. b. $700. c. $2,000. d. $5,000. e. None of the above.

ANSWER: a RATIONALE: Legal fees that relate to tax advice are no longer deductible.

. Melba incurred the following expenses for her dependent daughter during the current year: Payment of principal on daughter's automobile loan $3,600 Payment of interest on above loan 2,900 Payment of daughter's property taxes 1,800 Payment of principal on daughter's personal residence loan 2,800 Payment of interest on daughter's personal residence loan 7,000 How much may Melba deduct in computing her itemized deductions? a. $0. b. $8,800. c. $11,700. d. $18,100. e. None of the above.

ANSWER: a RATIONALE: None of the items are incurred for the taxpayer's (Melba) benefit or as a result of the taxpayer's obligation

Andrew, who operates a laundry business, incurred the following expenses during the year. ∙ Parking ticket of $250 for one of his delivery vans that parked illegally. ∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. ∙ DUI ticket of $500 while returning from the rock concert. ∙ Attorney's fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425. e. None of the above.

ANSWER: a RATIONALE: None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket, and the $600 attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses: Operating expenses in conducting bingo games $247,000 Payoff money to state and local police 24,000 Newspaper ads supporting H.R. 9 3,000 Political contributions to legislators who support H.R. 9 8,000 Of these expenditures, Rex may deduct: a. $247,000. b. $250,000. c. $258,000. d. $282,000. e. None of the above.

ANSWER: a RATIONALE: Rex can deduct only the $247,000 of operating expenses

Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's aunt. b. The taxpayer's brother. c. The taxpayer's grandmother. d. A corporation owned more than 50% by the taxpayer. e. None of the above.

ANSWER: a RATIONALE: Taxpayer's aunt is not a related party under § 267

Under the deemed substantiation method of accounting for expenses, what is the maximum amount taxpayers are allowed as a deduction without being required to substantiate the amount of the expenses? a. The appropriate Federal per diem amount. b. $75 per day. c. All expenses up to $25 per day. d. The per diem rate established by the state in which they live. e. None of the above.

ANSWER: a RATIONALE: The Federal per diem rate is the amount deemed substantiated.

Which, if any, of the following is an advantage of using the simplified method for determining the office in the home deduction? a. No depreciation on the personal residence has to be computed. b. The exclusive use requirement does not have to be met. c. Allows the expense to be classified as a deduction for AGI. d. Can also be used for a residence that is rented (not owned) by the taxpayer. e. None of these.

ANSWER: a RATIONALE: The exclusive use requirement (choice b.) always has to be met for an office in the home deduction to be available. The method chosen for arriving at the deduction has no relevance to how it is classified (i.e., deduction for or from AGI)--choice c. Either the simplified method or the regular method can be used for rented property (choice d.).

During the year, Sophie (a self-employed marketing consultant) went from Omaha to Lima (Peru) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Sophie's expenses are: Air fare $3,000 Lodging 800 Meals 600 Entertainment 400 Sophie's deductible expenses are: a. $4,300. b. $2,900. c. $2,800. d. $2,500. e. None of these.

ANSWER: b RATIONALE: $1,800 [60% (6 days business/10 day trip) × $3,000 (air fare)] + $800 + $300 [50% x $600] = $2,900. The air fare has to be allocated as Sophie did not meet either the seven days (or less) or less than 25% personal use exceptions for foreign travel.

Ralph made the following business gifts during the year. To Robert (a key client) at Christmas $50 To Angel (Robert's 8-year old daughter) on her birthday 20 To Art (Ralph's secretary) on his birthday ($3 was for gift wrapping) 30 To Paige (Ralph's boss) at Christmas 40 Presuming proper substantiation, Ralph's deduction is: a. $0. b. $53. c. $73. d. $78. e. $98.

ANSWER: b RATIONALE: $25 (Robert) + $28 (Art) = $53. The gift to Angel counts as a gift to Robert (whose $25 limit already has been reached). Gifts to superiors (Paige) cannot be deducted.

Which, if any, of the following expenses are deductible? a. Safety shoes purchased by an plumber employed by a company. b. Bottled water purchased by a gig driver for passengers. c. Unreimbursed employee expenses. d. Tax return preparation fee paid by a non-employed retiree. e. None of these.

ANSWER: b RATIONALE: All employee expenses, unless reimbursed pursuant to an adequate accounting, are not deductible (choices a. and c.). Tax preparation fees, unless related to a business, are not deductible.

. Benita incurred a business expense on December 10, 2018, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2019. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2019. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2018. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019. d. Only b. and c. are correct. e. a., b., and c. are correct.

ANSWER: b RATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2018. If Benita uses the accrual method, she deducts the expense in 2018. In any event, she does not merely choose the year in which to deduct the expense (choice c.).

When using the automatic mileage method, which, if any, of the following expenses also can be claimed? a. Engine tune-up. b. Parking. c. Interest on automobile loan. d. MACRS depreciation. e. None of these.

ANSWER: b RATIONALE: Choices a., c., and d. would be allowed under the actual cost method.

Tom operates an illegal drug-running operation and incurred the following expenses: Salaries $ 75,000 Illegal kickbacks 20,000 Bribes to border guards 25,000 Cost of goods sold 160,000 Rent 8,000 Interest 10,000 Insurance on furniture and fixtures 6,000 Utilities and telephone 20,000 Which of the above amounts reduces his taxable income? a. $0. b. $160,000. c. $279,000. d. $324,000. e. None of the above.

ANSWER: b RATIONALE: Cost of goods sold of $160,000 is treated as a negative item in calculating gross income rather than as a deduction. For a drug dealer, all deductions are disallowed.

Fred and Lucy are married, ages 33 and 32, and together have AGI of $120,000 in 2018. They have four dependents and file a joint return. They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In October 2018, they received an insurance reimbursement of $4,400 for the hospitalization. They expect to receive an additional reimbursement of $1,000 in January 2019. Determine the maximum itemized deduction allowable for medical expenses in 2018. a. $800 b. $3,800 c. $9,200 d. $12,800 e. None of the above

ANSWER: b RATIONALE: Fred and Lucy can claim an itemized medical expense deduction for the current year of $3,800, determined as follows: Physician bills, dentist bills, and hospital expenses $ 9,200 Less: Reimbursement (4,400) Unreimbursed expenses $ 4,800 Health insurance premiums 5,000 Prescribed medicines and drugs 3,000 Total medical expenses $12,800 Less: 7.5% of $120,000 (AGI) (9,000) Deductible medical expenses $ 3,800 The contribution of $2,600 to the HSA is a deduction for AGI, and is not included in the medical expense calculation.

Fran is a CPA who has a small tax practice in addition to working as the controller for a local manufacturing business. Fran runs her tax practice out of a 150 square foot office in her home where she meets clients and works on their tax returns and researches their tax issues. She meets the exclusive use test for this space. The gross income from her tax practice amounts to $7,500 for the year. Business expenses amount to $1,000. Based on square footage, $4,000 of Fran's mortgage interest and real estate taxes are allocable to the home office. The allocable portion of maintenance, utilities, and depreciation is $4,500. Assuming no other expenses related to the business were incurred, what amount of the maintenance, utilities, and depreciation is deductible by Fran? a. $0. b. $2,500. c. $3,500. d. $4,500. e. None of the above

ANSWER: b RATIONALE: Home office expenses cannot generate a loss, and expenses are deducted in the following order: (1) business expenses, (2) interest and taxes, (3) operating expenses of home, and (4) depreciation. Net income before items (3) and (4) amounts to $2,500. As a result, the maximum Fran can only deduct $2,500 of the maintenance, utilities, and depreciation. The balance ($2,000; $4,500 − $2,500) carries over to the following year

Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution $2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Penalty on early withdrawal of savings 250 Her AGI is: a. $39,750. b. $49,750. c. $40,000. d. $39,750. e. None of the above.

ANSWER: b RATIONALE: Marsha's AGI is calculated as follows: Gross income $50,000 Deductions for AGI: Penalty on early withdrawal of savings (250) AGI $49,750

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2018, the following occur associated with bad debts. Credit sales $400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2018 12,000 The amount of the deduction for bad debt expense for Petal for 2018 is: a. $10,000. b. $12,000. c. $22,000. d. $140,000. e. None of the above.

ANSWER: b RATIONALE: Only the specific charge-off method can be used. Reserves for estimated expenses are not allowed for tax purposes because the economic performance test cannot be satisfied.

Rachel is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During the year, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $4,100 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). As to the MBA program, Rachel has a: a. Deduction for and deduction from AGI of $0. b. Deduction for AGI of $4,000 and deduction from AGI of $0. c. Deduction for AGI of $4,000 and deduction from AGI of $800. d. Deduction for AGI of $4,100 and deduction from AGI of $700. e. None of these.

ANSWER: b RATIONALE: Section 222 allows up to $4,000 for qualified tuition and related expenses. As Rachel spent $4,100, she can claim only $4,000 as a deduction for AGI. The remaining expenses of $800 ($100 + $300 + $200 + $200) are miscellaneous itemized deductions (deductions from AGI), and are not deductible from 2018 through 2025.

Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2018, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Expense $23,000 for 2018. c. Expense $9,000 for 2018 and capitalize $14,000. d. Capitalize $23,000. e. None of the above

ANSWER: b RATIONALE: Since Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted.

Which, if any, of the following is subject to an overall limitation on meals in 2018? a. Meals provided to employees during a business meeting. b. Meals provided at cost to employees by a cafeteria funded by the employer. c. Fourth of July company picnic for employees. d. Meals provided to employees during a training event or retreat at an off-site location. e. All of these.

ANSWER: b RATIONALE: Subsidized eating facilities are subject to a 50% limitation beginning in 2018 (and no deductions will be allowed beginning in 2026).

Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry Jim Employee salaries $200,000 $200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000. e. None of the above.

ANSWER: b RATIONALE: Terry and Jim should report net profit from their businesses as follows: Terry Jim Gross revenues $500,000 $500,000 Less: Cost of goods sold (-0-) (125,000) Gross income $500,000 $375,000 Less: Expenses Employee salaries (200,000) (-0-) Rent and utilities (50,000) (-0-) Bribes to police (-0-) (-0-) Net profit $250,000 $375,000 For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim's expenses can be deducted. However, the cost of goods sold is viewed as a negative item in calculating gross income (i.e., gross income = gross profit) rather than as a deduction.

Sandra is single and does a lot of business entertaining at home. Because Arthur, Sandra's 80-year old dependent grandfather who lived with Sandra, needs medical and nursing care, he moved to Twilight Nursing Home. During the year, Sandra made the following payments on behalf of Arthur: Room at Twilight $4,500 Meals for Arthur at Twilight 850 Doctor and nurse fees 700 Cable TV service for Arthur's room 107 Total $6,157 Twilight has medical staff in residence. Disregarding the AGI floor, how much, if any, of these expenses qualify for a medical deduction by Sandra? a. $6,157 b. $6,050 c. $5,200 d. $1,550 e. None of the above

ANSWER: b RATIONALE: The amount that qualifies is $6,050 ($4,500 + $850 + $700). The room and board for Twilight qualifies because the move was motivated by Arthur's need for medical care. The cable fee is a personal expense and cannot be deducted.

A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons: a. To claim unreimbursed work-related expenses as a deduction for AGI. b. To avoid the self-employment tax. c. To avoid the overall limitation (50%) on unreimbursed business entertainment expenses. d. To avoid the limitations on unreimbursed work-related expenses. e. None of these

ANSWER: b RATIONALE: The self-employment tax is twice the Social Security equivalent imposed on employees (choice b.). Most unreimbursed employee expenses are deductions from AGI as miscellaneous itemized deductions; these deductions have been susptended from 2018 through 2025 (choice a. and choice d.). Unreimbursed ente

During the year, Walt (self-employed) travels from Seattle to Tokyo (Japan) on business. His time was spent as follows: 2 days travel (one day each way), 2 days business, and 2 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion): Air fare $3,000 Lodging 2,000 Meals 1,000 Presuming no reimbursement, Walt's deductible expenses are: a. $3,500. b. $4,500. c. $5,500. d. $6,000. e. None of these.

ANSWER: c RATIONALE: $3,000 + $2,000 + (50% × $1,000) = $5,500 . Since the 7-days-or-less exception applies, the full airfare ($3,000) is allowed.

During the year, John (a self-employed management consultant) went from Milwaukee to Alaska on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are: Air fare $3,200 Lodging 900 Meals 800 Entertainment 600 Presuming no reimbursement, deductible expenses are: a. $3,200. b. $3,900. c. $4,500. d. $5,500. e. None of these.

ANSWER: c RATIONALE: $3,200 + $900 + $400 [50% x $800] = $4,500. No allocation is required for domesti

Jana has $225,000 of earned income in 2018. Calculate the amount she can contribute to a SEP. a. $22,500 b. $24,500 c. $55,000 d. $56,250 e. None of the above

ANSWER: c RATIONALE: 25% × $225,000 statutory limit = $56,250, but limited to $55,000 (in 2018).

Which of the following would constitute an employer-employee relationship? a. A plumber who comes to your home to fix a leaking faucet. b. A CPA who prepares a client's tax return. c. A physician who hires a nurse to help her with patient screening and preliminary tests in the office. d. A gardener who takes care of individual lawns for a monthly fee. e. None of the above would constitute an employer-employee relationship.

ANSWER: c RATIONALE: A nurse hired by a doctor would be considered an employee

Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 What is Al's AGI? a. $94,100. b. $103,000. c. $107,000. d. $127,000. e. None of the above.

ANSWER: c RATIONALE: Al's AGI is calculated as follows: Gross income $140,000 Deductions for AGI: Alimony $20,000 IRA 5,500 Expenses on rental property 7,500 (33,000) AGI $107,000

Which of the following must be capitalized by a business? a. Replacement of a windshield of a business truck which was broken in an accident. b. Repair of a roof of a building used in business. c. Amount paid for a covenant not to compete. d. Only b. and c. must be capitalized. e. a., b., and c. can be expensed rather than capitalized

ANSWER: c RATIONALE: All of these expenses, except for the covenant, can be deducted in the current tax year. The amortization period for the covenant is 15 years.

On January 2, 2018, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2018? a. $10,667. b. $16,000. c. $20,000. d. $32,667. e. None of the above

ANSWER: c RATIONALE: All of these intangibles are § 197 intangibles and are amortized over a 15-year statutory period. Patent $140,000 ÷ 15 = $ 9,333 Covenant $60,000 ÷ 15 = 4,000 Goodwill $100,000 ÷ 15 = 6,667 $20,000

For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion). (2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies). For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is: a. (1), (2), (3). b. (1), (3), (2). c. (2), (3), (1). d. (2), (1), (3). e. (3), (2), (1).

ANSWER: c RATIONALE: Before 2018, the last two categories of deductions were deductible from AGI as miscellaneous itemized deductions (to the extent they exceeded 2 percent of AGI). From 2018 through 2025, miscellaneous itemized deductions are not deductible.

Payments by a cash basis taxpayer of capital expenditures: a. Must be expensed at the time of payment. b. Must be expensed by the end of the first year after the asset is acquired. c. Must be deducted over the actual or statutory life of the asset. d. Can be deducted in the year the taxpayer chooses. e. None of the above.

ANSWER: c RATIONALE: Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets through amortization, depletion, or depreciation over the actual or statutory life of the asset.

Aiden performs services for Lucas. Which, if any, of the following factors indicate that Aiden is an employee, rather than an independent contractor? a. Aiden provides his own support services (e.g., work assistants). b. Aiden obtained his training (i.e., job skills) from his father. c. Aiden is paid based on hours worked. d. Aiden makes his services available to others. e. None of these

ANSWER: c RATIONALE: Choices a., b., and d. reflect independent contractor status.

Edna had an accident while competing in a rodeo. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her chin, which was not injured in the accident. The surgery to restore her appearance cost $9,000 and the surgery to reshape her chin cost $6,000. How much of Edna's surgical fees will qualify as a deductible medical expense (before application of the 10%-of-AGI floor)? a. $0 b. $6,000 c. $9,000 d. $15,000 e. None of the above

ANSWER: c RATIONALE: Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $9,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($6,000 for reshaping the chin) are not deductible as a medical expense.

Dana, age 31 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $124,000. What amount, if any, may Dana contribute to a Roth IRA in 2018? a. $0. b. $3,225. c. $4,033. d. $5,500. e. None of the above

ANSWER: c RATIONALE: Dana may contribute $4,033 to a Roth IRA in 2018, calculated as follows: $124,000 AGI - $120,000 threshold = $4,000 excess AGI $4,000/$15,000 phaseout range × $5,500 = $1,467 phaseout $5,500 maximum contributions - $1,467 phaseout = $4,033 contribution ceiling

A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons: a. Avoids the overall limitation (50%) as to business meals. b. All of the self-employment tax is deductible for income tax purposes. c. Work-related expenses of an independent contractor are deductible for AGI. d. A Schedule C does not have to be filed. e. None of these

ANSWER: c RATIONALE: Independent contractors are also subject to the overall limitation (50%) (choice a.). All of the self-employment tax is not deductible (choice b.). Work-related expenses of an independent contractor are deductions for AGI. The work-related expenses of an employee are not deductible.(choice c.). Work-related expenses will have to be reported on Schedule C (choice d.).

Under the actual cost method, which, if any, of the following expenses will not be allowed? a. Car registration fees. b. Auto insurance. c. Interest expense on a car loan (taxpayer is an employee). d. Dues to auto clubs. e. All of these will be allowed

ANSWER: c RATIONALE: Interest on a car loan is deductible only by a self-employed taxpayer (not an employee)—choice c

Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis). b. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. d. Only a. and b. are correct. e. a., b., and c. are correct.

ANSWER: c RATIONALE: Nikeya's realized loss of $25,000 ($95,000 amount realized - $120,000 adjusted basis) is disallowed because Shamed is a related party. Shamed's adjusted basis for the land is his cost of $95,000. However, when he sells the land for $112,000, his realized gain of $17,000 ($112,000 amount realized - $95,000 adjusted basis) is not recognized because he can offset it against $17,000 of Nikeya's $25,000 disallowed loss in calculating his taxable income.

Doctor and dentist bills for Richard 5,100 Prescribed medicines for Richard 830 Nonprescribed insulin for Richard 960 Derrick and Jane would qualify as Richard's dependents except that they file a joint return. Richard's medical insurance policy does not cover them. Richard filed a claim for $4,800 of his own expenses with his insurance company in November 2018 and received the reimbursement in January 2019. What is Richard's maximum allowable medical expense deduction for 2018? a. $0 b. $7,090 c. $10,340 d. $20,090 e. None of the above

ANSWER: c RATIONALE: Richard's medical expense deduction is $10,340, determined as follows: Medical insurance premiums $ 5,300 Doctor and dentist bills for Derrick and Jane 7,900 Doctor and dentist bills for Richard 5,100 Prescribed medicines for Richard 830 Nonprescribed insulin for Richard 960 Total medical expenses $20,090 Less: 7.5% of $130,000 (AGI) (9,750) Deductible portion of medical expenses $ 10,340 Although Derrick and Jane cannot be claimed as Richard's dependents, they could have been had they not filed a joint return. Therefore, they qualify for the medical expense deduction. Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical expenses. The insurance recovery was not received until 2019. Therefore, it has no effect on the medical expense deduction for 2018.

Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years. The account is now worth $376,000. How much of these funds can Frank withdraw tax-free? a. $0 b. $131,244 c. $244,756 d. $376,000 e. None of the above

ANSWER: d RATIONALE: $376,000. Assuming that Frank met the AGI limitations at the time of his contributions, all of the funds may be withdrawn tax-free. He satisfies the five-year holding period requirement for a Roth IRA and is over age 59 1/2 at the time of the distribution

Which of the following expenses, if any, qualify as deductible? a. Contributions to a Coverdell Education Savings Account (CESA). b. Contributions to a qualified tuition program (§ 529 plan). c. Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX). d. Contribution to a traditional IRA. e. None of these.

ANSWER: d RATIONALE: Although the benefits paid out are nontaxable, neither the contribution to CESAs (choice a.) nor § 529 plans (choice b.) are deductible. Since being an FBI agent and a city manager do not appear to be in the same trade or business (law enforcement), the job hunting expense does not qualify (choice c.). Further, even if allowed, the job hunting expenses would be a miscellaneous itemized deduction (and not allowed from 2018 through 2025).

Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years. The account is now worth $199,000, consisting of $75,000 in contributions plus $124,000 in accumulated earnings. How much can Mary withdraw tax-free? a. $0 b. $75,000 c. $124,000 d. $199,000 e. None of the above

ANSWER: d RATIONALE: Assuming that Mary meets the income limitation at the time of the contributions to the Roth IRA, all of the funds may be withdrawn tax-free. She satisfies the fiveyear holding period for a Roth IRA and is over age 59 1/2 at the time of the distribution.

Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During 2018 she sold the bedspreads for $10,000. She incurred expenses as follows: Supplies $4,000 Interest on loan to get business started 500 Advertising 6,500 Assuming that the activity is deemed a hobby, how should she report these items on her tax return? a. Include $10,000 in income and deduct $11,000 for AGI. b. Ignore both income and expenses since hobby losses are disallowed. c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions. d. Include $10,000 in income and deduct nothing. e. None of the above.

ANSWER: d RATIONALE: Beginning in 2018 expenses related to a hobby are not deductible.

. Jordan performs services for Ryan. Which, if any, of the following factors indicate that Jordan is an independent contractor, rather than an employee? a. Ryan sets the work schedule. b. Ryan provides the tools used. c. Jordan follows a specific set of instructions from Ryan to complete tasks. d. Jordan is paid based on tasks performed. e. None of these

ANSWER: d RATIONALE: Choices a., b., and c. reflect employee status.

Which of the following legal expenses are deductible for AGI in 2018? a. Incurred in connection with a trade or business. b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual's income tax return. d. Only a. and b. qualify. e. a., b., and c. qualify.

ANSWER: d RATIONALE: Expenses paid in 2018 for tax advice relative to the preparation of an individual's income tax return are not deductible.

In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions? a. Disallowed loss to James of $2,000; gain to Lance of $1,000. b. Disallowed loss to Lance of $2,000; gain to James of $3,000. c. Deductible loss to Lance of $2,000; gain to James of $3,000. d. Disallowed loss to Lance of $2,000; gain to James of $1,000. e. None of the above.

ANSWER: d RATIONALE: Lance's realized loss of $2,000 ($24,000 - $26,000) is disallowed. James may reduce his realized gain of $3,000 ($27,000 - $24,000) by Lance's disallowed loss of $2,000. So James' recognized gain is $1,000.

Which of the following miscellaneous expenses is deductible in 2018? a. Unreimbursed employee business expenses. b. Job hunting expenses. c. Union dues. d. Losses from Ponzi-type investment schemes. e. All of the above expenses are miscellaneous itemized deductions.

ANSWER: d RATIONALE: Losses from Ponzi-type investment schemes are miscellaneous itemized deductions, but are not subject to the 2%-of-AGI limitation. Items a., b., and c. are all subject to the 2%-of-AGI limitation and not deductible from 2018 through 2025.

Merrill is a participant in a SIMPLE § 401(k) plan, and he elects to contribute 4% of his $40,000 compensation to the account, while his employer contributes 3%. What amount will vest immediately, if any? a. $0 b. $1,200 c. $1,600 d. $2,800 e. None of above

ANSWER: d RATIONALE: Merrill has elected to contribute $1,600 ($40,000 × 4%) to his SIMPLE § 401(k) plan. His employer will contribute $1,200 ($40,000 × 3%). Both amounts will vest immediately.

The § 222 deduction for tuition and related expenses is available: a. Regardless of the amount of a taxpayer's MAGI. b. To cover room and board expenses to attend college. c. To a married taxpayer filing a separate return. d. Even if a taxpayer does claim the standard deduction. e. None of these.

ANSWER: d RATIONALE: No deduction at all is allowed if the taxpayer has AGI in excess of $80,000 ($160,000 in the case of a joint return) (choice a.). Section 222 does not cover room and board (choice b.). In order to claim a deduction under § 222, a married taxpayer must file a joint return (choice c.). Since § 222 provides for a deduction for AGI, it does not matter if a taxpayer claims the standard deduction.

Which is not an advantage of a § 401(k) plan over a traditional IRA? a. Deduction limitation. b. Early withdrawal option without penalty. c. Loans from the plan. d. Record keeping. e. All of the above are advantages of § 401(k) plan

ANSWER: d RATIONALE: Record keeping is more detailed for § 401(k) plan

Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan. His modified AGI is $55,000 in 2018. The maximum amount that Sammy can deduct for a contribution to a traditional IRA is: a. $2,800. b. $3,500. c. $5,000. d. $5,500. e. None of the above.

ANSWER: d RATIONALE: Sammy can deduct $5,500 because he is not an active participant in a qualified retirement plan.

Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2018: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 7,000 Based on this information, Sammy has: a. AGI of $90,000. b. AGI of $95,000. c. AGI of $99,500. d. Deduction for medical expenses of $0. e. None of the above.

ANSWER: d RATIONALE: Sammy's AGI is calculated as follows: Salary from job $ 90,000 Alimony received from ex-wife 10,000 AGI $100,000 Sammy's deduction for medical expenses, an itemized deduction, is $0 [$7,000 - 7.5%($100,000)].

Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Mortgage interest $9,000 Real estate taxes 3,000 Utilities 2,000 Maintenance 1,000 Insurance 500 Depreciation (rental part) 4,000 Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are: a. $0. b. $6,000. c. $8,000. d. $12,000. e. None of the above.

ANSWER: d RATIONALE: Since the property is classified as personal/rental use, the general rule is that the deductible expenses cannot exceed the gross income. Thus, under the general rule, the deductible expenses would be limited to $6,000. However, this ceiling does not apply to expenses that otherwise would be deductible as itemized deductions. Consequently, all of the mortgage interest and real estate taxes can be deducted ($9,000 + $3,000 = $12,000).

If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct? a. All rental income is included in gross income. b. All rental related expenses that are deductible are classified as deductions from AGI. c. Expenses must be allocated between rental and personal use. d. Only a. and c. are correct. e. a., b., and c. are correct

ANSWER: d RATIONALE: The allowable deductions are classified as deductions for AGI.

Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct? a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part. b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part. c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part. d. Only b. and c. are correct. e. a., b., and c. are correct.

ANSWER: d RATIONALE: The obligation is that of Scott and not of Jeanette. If Scott pays his mortgage company, he can deduct the mortgage interest part of the payment. Under no circumstances can Jeanette deduct Scott's mortgage interest.

Statutory employees: a. Report their expenses as miscellaneous itemized deductions. b. Include common law employees. c. Are subject to income tax withholdings. d. Claim their expenses as deductions for AGI. e. None of these.

ANSWER: d RATIONALE: Their expenses are for AGI deductions and reported on Schedule C, not as miscellaneous itemized deductions (choice a.). Although subject to Social Security tax, they are not subject to income tax withholdings (choice c.). Statutory employees are not common law employees (choice b.). Expenses are deductions for AGI (choice d.)

Paula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2018 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct? a. Paula's gross income will increase by $100,000 as a result of the IRS adjustment. b. Violet's taxable income will not be affected by the IRS adjustment. c. Paula's gross income will decrease by $100,000 as a result of the IRS adjustment. d. Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment. e. None of the above is correct.

ANSWER: e RATIONALE: $100,000 of salary is reclassified as a dividend. Thus, Violet's taxable income increases by $100,000 because dividends are not deductible. Paula's gross income remains the same. Her salary income decreases by $100,000, but her dividend income increases by $100,000

Corey is the city sales manager for "RIBS," a national fast food franchise. Every working day, Corey drives his car as follows: Miles Home to office 20 Office to RIBS No. 1 15 RIBS No. 1 to No. 2 18 RIBS No. 2 to No. 3 13 RIBS No. 3 to home 30 Corey renders an adequate accounting to his employer. As a result, Corey's reimburseable mileage is: a. 0 miles. b. 50 miles. c. 66 miles. d. 76 miles. e. None of these.

ANSWER: e RATIONALE: 15 miles + 18 miles + 13 miles = 46 miles. The mileage for driving from his home to the office (20 miles) and from the last worksite to home (30 miles) is not deductible.

Which of the following expenses, if any, qualify as deductible in 2018? a. Contribution to a Roth IRA. b. Costs involved in maintaining an office in the home by a self-employed insurance adjuster. Taxpayer's wife also uses the office as a meeting place for her bridge club. c. Cost of moving to first job location. Taxpayer just graduated from college. d. Job hunting expenses of a fishing guide to become an insurance salesman. e. None of the above

ANSWER: e RATIONALE: A contribution to a Roth IRA is not deductible. An office in the home deduction is not allowed because the location is not used exclusively for business. Moving expenses are not allowed as a deduction from 2018 through 2025. Job hunting expenses are not allowed because a change from fishing guide to insurance salesman is a different trade or business.

in which of the following plans is this statement true: A deduction is allowed for contributions to the plan, and no income tax consequences result from distributions to the participant at retirement. a. Roth IRAs. b. Traditional IRAs. c. Keogh (H.R. 10) plans. d. Both b. and c., but not a. e. None of the above.

ANSWER: e RATIONALE: A deduction is allowed for contributions to traditional IRAs and Keogh (H.R. 10) plans (choices b. and c.) but not to Roth IRAs (choice a.). Distributions are free of income tax in the case of Roth IRAs (choice a.) but not for traditional IRAs and Keogh (H.R. 10) plans (choices b. and c.) Thus, the combination of a deduction and tax-free distributions does not exist (choice e.).

61. Which of the following can be claimed as a deduction for AGI? a. Personal casualty losses. b. Investment interest expenses. c. Medical expenses. d. Property taxes on personal use real estate. e. None of the above.

ANSWER: e RATIONALE: All of these expenses are classified as itemized deductions

Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers or their advisers. c. The time and effort expended. d. The relationship of profits earned and losses incurred. e. All of the above are relevant factors

ANSWER: e RATIONALE: All of these items are relevant factors in determining whether an activity is profitseeking or a hobby.

Which, if any, of the following factors is a characteristic of independent contractor status? a. Services are performed for more than one business. b. Receipt of a Form 1099 reporting payments received. c. Workplace fringe benefits are not available. d. Work-related income and expenses are reported on Schedule C (Form 1040). e. All of the above are characteristic of independent contractor status.

ANSWER: e RATIONALE: All of these might indicate that an individual is an independent contractor.

Which of the following may be deductible in 2018? a. Bribes that relate to a U.S. business. b. Fines paid for violations of the law. c. Interest on a loan used in a hobby. d. All of the above. e. None of the above.

ANSWER: e RATIONALE: Choices a. and b. are not deductible. Interest incurred in connection with a hobby is no longer deductible since 2% miscellaneous itemized deductions are no longer allowed.

In which, if any, of the following situations is the automatic mileage available? a. A limousine to be rented by the owner for special occasions (e.g., weddings, high school proms). b. The auto belongs to taxpayer's mother. c. One of seven cars used to deliver pizzas. d. MACRS statutory percentage method has been claimed on the automobile. e. None of these.

ANSWER: e RATIONALE: Multiple vehicles (5 or more) cannot qualify (choice c.) nor can vehicles held for hire (choice a.). The car must be owned or leased by the taxpayer (choice b.).

Which of the following is not deductible in 2018? a. Moving expenses in excess of reimbursement. b. Tax return preparation fees of an individual. c. Expenses incurred associated with investments in stocks and bonds. d. Allowable hobby expenses in excess of hobby income. e. All of the above.

ANSWER: e RATIONALE: None of the expenses are deductible in 2018

Aaron is a self-employed practical nurse who works out of his home. He provides nursing care for disabled persons living in their residences. During the day he drives his car as follows. Miles Aaron's home to patient Louise 12 Patient Louise to patient Carl 4 Patient Carl to patient Betty 6 Patient Betty to Aaron's home 10 Aaron's deductible mileage for each workday is: a. 10 miles. b. 12 miles. c. 20 miles. d. 22 miles. e. 32 miles

ANSWER: e RATIONALE: Since Aaron's office is in his home, he has no nondeductible commuting mileage—all of the mileage is deductible.

Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are: a. A deduction for AGI. b. A deduction from AGI, subject to the 2 percent floor. c. A deduction from AGI, not subject to the 2 percent floor. d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period. e. Not deductible

ANSWER: e RATIONALE: Since Tommy is not in a business that is the same as or similar to the one being investigated and did not acquire the new business, his investigation expenses cannot be deducted.

Tax advantages of being self-employed (rather than being an employee) include: a. The self-employment tax is lower than the Social Security tax. b. The overall limitation (50%) on meals does not apply. c. An office in the home deduction (for AGI) is available. d. Job-related expenses are deductions for AGI. e. Both c. and d. are advantages.

ANSWER: e RATIONALE: The self-employment tax is double what the employee pays (choice a.). The overall limitation on meals also applies to self-employed taxpayers (choice b.). Job-related expenses are reported on Schedule C which results in deduction-for-AGI treatment (choice d.). The deduction for office in the home for a self-employed individual is a deduction for AGI.

The § 222 deduction for tuition and related expenses is available: a. Only if the taxpayer itemizes deductions from AGI. b. To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit. c. To cover the tuition of a son who does not qualify as taxpayer's dependent. d. Only if job related. e. None of these.

ANSWER: e RATIONALE: The § 222 deduction is a deduction for AGI (choice a.). The deduction is not available when the lifetime learning credit is used (choice b.). The student involved is not a dependent of the taxpayer (choice c.). The education need not be job related (choice d.).

Robert entertains several of his key clients on January 1 of the current year. Expenses paid by Robert are as follows: Cab fare $ 60 Cover charge at supper club 200 Dinner at club 800 Tips to waiter 160 Presuming proper substantiation, Robert's deduction is: a. $610. b. $640. c. $740. d. $1,220. e. None of these.

ANSWER: e RATIONALE: With the TCJA of 2017, entertainment is no longer deductible

Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income $4,000 Less: Mortgage interest and property taxes $3,500 Other allocated expenses 2,000 (5,500) Net rental loss ($1,500) What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable? a. A $1,500 loss should be reported. b. Only the mortgage interest and property taxes should be deducted. c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return

Sue performs services for Lynn. Regarding this arrangement, use the legend provided to classify each statement. a. Indicates employee status. b. Indicates independent contractor status Sue does not file a Schedule SE with her Form 1040.

Which of the following is incorrect? a. Alimony is a deduction for AGI. b. The expenses associated with royalty property are a deduction from AGI. c. Contributions to a traditional IRA are a deduction for AGI. d. Property taxes on taxpayer's personal residence are a deduction from AGI e. All of the above are correct.

Which of the following statements is correct in connection with the investigation of a business? a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned. b. Expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired. c. That business must be related to the taxpayer's present business for any expense ever to be deductible. d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized. e. None of the above.

58. Trade or business expenses of a self-employed taxpayer should be treated as: a. Deductible for AGI on Schedule E. b. A deduction from AGI. c. Deductible for AGI on Schedule C. d. An itemized deduction if not reimbursed. e. None of the above

Which of the following are deductions for AGI? a. Mortgage interest on a personal residence. b. Property taxes on a personal residence. c. Mortgage interest on a building used in a business. d. Fines and penalties incurred in a trade or business. e. None of the above

Which of the following is not a "trade or business" expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. e. All of the above are "trade or business" expenses.

During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2017 and $0 in 2018. b. If Silver uses the cash method, $0 in 2017 and $195,000 in 2018. c. If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018. d. If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018. e. None of the above is correct.

Which of the following is a required test for the deduction of a business expense? a. Ordinary b. Necessary c. Reasonable d. All of the above e. None of the above

For a president of a publicly held corporation hired in 2018, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Contribution to pension plan. c. Premiums on group term life insurance of $50,000. d. Only b. and c. are not subject to the limit. e. a., b., and c., are not subject to the limit.

Which of the following is correct? a. A personal casualty loss incurred from a Presidentially declared disaster is classified as a deduction from AGI. b. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI. c. An expense associated with rental property is classified as a deduction for AGI. d. Only a. and b. are correct. e. a., b., and c., are correct.

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