Taxes Chapter 1-8 Questions

Helen, age 60, made total contributions of $60,000 to a Roth IRA she established 15 years ago. Five years ago she withdrew $10,000 tax free. How much income must she recognize if she takes a complete distribution from the Roth IRA this year when its value is $90,000?

Answer: $0 Explanation: Helen's Roth IRA is a qualified distribution and is entirely tax -free. A qualified distribution from a Roth IRA is one that is made no earlier than five years after the year for which the owner made his or her first Roth IRA contribution and: -The individual is age 59 1/2 or older The distribution is a qualified first-time homebuyer distribution -The individual is disabled - The distribution is made to a beneficiary on or after the individual's death

Bob, an Army colonel, was transferred from Germany to Moscow for a permanent change of station. His spouse chose not to accompany him and returned to the United States. If she received a $10,000 relocation allowance and was later reimbursed an additional $2500, how much of the allowance, if any, must she include in her income?

Answer: $0 Explanation: in the case of a military relocation, the taxpayer's move must be pursuant to a military order and involve a permanent change of stationIn such a case, no paid or incurred moving and storage expenses : -Furnished in kind, or -For which reimbursement or allowance is provided to the service member, spouse or dependents ...are includible in gross income or reported. In addition, if the moving expenses paid or incurred in connection with a military relocation are furnished or reimbursed (or an allowance is provided) to the service member's spouse and dependents to move: - To a location other than the one to which the service member moves, or From a location other than the from which the service member moves ...such expenses are likewise neither includible in gross income nor reported.

Bob and Phyllis are married and their household includes their 20 year old daughter. They have chosen not to purchase healthcare coverage and have remained uncovered for the entire year. What is the penalty for which they would liable in 2019?

Answer: $0 Explanation: the tax cuts and job act of 2017 reduced the tax penalty for failing to maintain health coverage to zero for 2019 and later

Phil is age 67 and has just received a $20,000 taxable HSA distribution that he is using to supplement his retirement income. What tax penalty applies to his HSA distribution for other than qualified medical expenses?

Answer: $0 Explanation: Phil is not liable for a tax penalty on account of the taxable HSA distribution because he has reached the age of Medicare. HSA distributions are incluso le in income and subject to income tax penalties of 20% when they are used for other than qualified medical expenses and fail to meet specific exceptions. The exceptions to the tax penalty apply to distributions received while the account holder is disabled, following the account holders death or by the account holder reaching the eligibility age for Medicare.

Harry purchased a luxury vehicle in 2019 for use in his business. What is the maximum depreciation he may take in the first year ?

Answer: $10,000 Explanation: The TCJA increased the luxury auto depreciation limits. Under prior law, the maximum amount of depreciation that could be taken in the year in which the vehicle was placed in service in a trade or business was $ 160,\$5,10( in year two, $3,050 in year three and $1,875 for the fourth and later years in the recovery period. Under the tax law generally effective for years beginning in 2018, the comparative luxury auto limits are $10,000 in year one, $16,000 in year two, $9,600 in year three and $5,760 for the fourth and later years

Hank is single and has a $28,875 adjusted gross income in 2019. What would his saver's credit be if he deferred $1,000 in his employers 401k plan and received a $500 employer match?

Answer: $100 Explanation: hank qualifies for a 10% retirement savings contribution tax credit since the credit is based on his retirement contribution during the year, his savers credit is $100. ($1000 x 10% = $100)

Phil, a tax return preparer, charged his client $500 to prepare her income tax return that claimed a $5,000 refund based on an unreasonable position . To what penalty is Phil subject if Phil knew the position was unreasonable , but it was not determined to be the result of his willful and reckless conduct ?

Answer: $1000 Explanation: In this case, the preparer is subject to a $1,000 penalty. If a tax return preparer prepares a tax return or claim of refund based on an unreasonable position and the preparer knew or reasonably should have known it was an unreasonable position, the preparer is subject to a penalty equal to the greater of a) $1,000, b) 50 % of the income derived , or to be derived , by the tax return preparer with respect to the return or claim .

Arthur became ill and was unable to continue working. He received $1,000 monthly sick pay under a welfare fund and $3,000 monthly under a disability insurance policy offered by his employer for which Arthur paid the premiums. How much, if any, of Arthur's monthly sick pay benefits must he include in his income for tax purposes ?

Answer: $1000 Explanation: Only $1,000 is taxable. Payments received from an employer while the taxpayer is sick or injured are considered part of the taxpayer's salary or wages and generally must be included in the taxpayer's income . Thus, sick pay benefits from a welfare fund, state sickness or disability fund, an association of employers or an insurance company (only if the employer paid for the plan) must be included in income. However , if the taxpayer received benefits under an accident or health insurance policy for which he or she paid the premiums --a disability income polipy, for example- such benefits would not be taxable .

Howard and Sharon, a married couple, purchased their primary residence in 2019 and took out a $400,000 mortgage for the purchase. Since the house required repairs and updating, they took an additional home equity loan of $150,000 which they used to improve their home. If their 2019 interest paid on the $400,000 mortgage was $12,000 and on the home equity loan was $7,000, what is their 2019 mortgage interest deduction?

Answer: $19,000 Explanation: They may deduct the entire amount. The TCJA made the following changes to the existing home mortgage interest deduction for taxable years 2018 through 2025 -Interest paid on home equity indebtedness--home equity loans and lines of credit, in other wordsincurred after December 15, 2017 is not tax-deductible unless used to buy, build or substantially improve the taxpayer's home that secures the loan -Interest paid on acquisition debt incurred after December 15, 2017 less any acquisition debt incurred on or before December 15, 2017 less any acquisition debt incurred on it before December 15 2017, is limited to interest paid on total acquisition indebtedness but only if the total of such mortgages is $750,000 or less ($375,000 or less if married filing separately) - Interest paid on acquisition debt incurred on or before December 15, 2 2017 is limited to interest paid on acquisition indebtedness of $1,000,000 or less ($500,000 or less if married filing separately). An exception to the new mortgage rules may apply to written binding contracts to purchase a residence entered into before December 15 2017

Bob and Susan's two dependent daughters are attending college as undergraduates. Their younger daughter's qualified education expenses are $10,000 and their older daughter's qualified education expenses are $14,000. Assuming they otherwise qualify, what is the maximum amount of lifetime learning credit they may claim for the year?

Answer: $2,000 Explanation: Bob and Susan's lifetime learning credit is $2,000. The maximum annual amount of lifetime learning credit a taxpayer may claim is $2,000 per return. The credit is equal to 20% of the first $10,000 of qualified education expenses paid for all eligible students.

Harry received $12,000 when he cashed in qualified savings bonds, consisting of $9,000 of investment and $3,000 of interest. If his adjusted qualified education expenses amount to $9,000, how much of the interest can he exclude under the education savings bond program assuming he meets the modified adjusted gross income requirements?

Answer: $2,250 Explanation: harry may exclude 75% of the interest he received since his adjusted qualified education expenses constitute 75% of his total distribution.

Karl received qualified long term care insurance benefits in 2019 of $390 per day. How much of such daily benefits must he include in income, if any, assuming his actual long term care costs were $300 per day and the applicable per diem limitation is $370?

Answer: $20 Explanation: Karl needs to include only $20 per day in his income because benefits received under qualified long term care insurance policies may be excluded from income as long the the benefits do not exceed the greater of: the applicable per diem limitation for the year or the costs incurred for qualified long term care services provided by the insured. The applicable per diem limitation for 2019 is $370

Harold is a sole proprietor of a small company. He sponsors an employee picnic each year that costs him $25,000. If he incurs $15,000 in food and $10,000 in beverage expenses for his 2019 employee picnic, how much of the expense may he deduct for income tax purposes?

Answer: $25,000 Explanation: Taxpayers are generally permitted to deduct 50% of the expenses for food and beverages paid or incurred in conducting their trade or business as well as the expenses for food and beverages provided by the taxpayer on the taxpayer's premises primarily for employees. However, the 50% limitation on the deduction of an employer's food and beverage expenses does not apply to any expenses if, among other exceptions , the expenses are for recreational , social or similar activities primarily for the benefit of employees other than highly compensated employees .

What is George's business expense deduction if he uses a 400 square foot office in his rented home, assuming he qualifies for a home office deduction, pays $1,200 for business telephone service, uses 20% of the home for business and elects the simplified home office deduction method?

Answer: $2700 Explanation: George's business deduction is $2,700, comprised of a $1,500 home -office deduction and business expenses not related to his home of $1,200 .

Tanya is a single taxpayer who has two qualifying children and qualifies for the earned income credit in 2019. What is the maximum investment income she can have in 2019 and still be eligible for the credit?

Answer: $3600 Explanation: The 2019 investment income of a taxpayer eligible for EIC cannot be greater than $3,600If the taxpayer's investment income is greater than $3,600, the taxpayer is ineligible for the EIC.

Peter, age 45, made his first Roth IRA contribution ten years ago and has made contributions to the IRA every year since. His total contributions amount to $ 40,000, and he has never previously taken a distribution from the IRA. If he withdrew $ 50,000 this year from the Roth IRA in a nonqualified distribution , what is the maximum amount of the distribution, if any, he may exclude from income?

Answer: $40,000 Explanation: Peter may exclude $ 40,000 of the distribution from his income. Because a Roth IRA receives FIFO tax treatment, all contributions to the IRA are deemed to be distributed before any earnings are distributed. Since Roth IRA Aontributions are made with after-tax dollars, they are withdrawn tax free, even though earnings withdrawn in a distribution that is not a "qualified distribution" would be subject to income tax and, possibly, to a premature distribution tax penalty.

Sally made a $4,000 traditional IRA contribution in 2019 and received $1000 savers credit. If she would be eligible to deduct the contribution in the absence of a savers credit, how much of her contribution may she deduct?

Answer: $4000 Explanation: sally may deduct the entire traditional IRA contribution, provided she is otherwise eligible to take the deduction. The retirement savings contribution tax credit, if any, for which a taxpayer is eligible does not affect the tax treatment to which the contribution would normally be subject

Ellen is 55 years old by the end of the tax year. What is her maximum 2019 HSA contribution if she has a self only high deductible health policy coverage?

Answer: $4500 Explanation: Ellen can make a $4500 HSA contribution in 2019 which a total of her regular $3500 contribution plus an additional $1000 because she is age 55 or older before the close of the taxable year. Thus, an HSA account holder who is age 55 or older and has self only coverage may make a maximum contribution in 2019 of $4500 such an individual with family coverage may make a maximum contribution of $8000

As a single taxpayer, Arthur's alternative minimum taxable income exemption in 2019 would be $71,700 if his income does not exceed $510,300 . What is his AMTI exemption amount if his alternative taxable income is $610,300 ?

Answer: $46,700 Explanation: Arthur's reduced AMTI exemption is $46,700. The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer's alternative minimum taxable income exceeds: -$1,020,600 for taxpayers whose filing status is married filing jointly" or "qualifying widow (er) ^ n and -$510,300 for taxpayers whose filing status is single head of household ." married filing separately and -$83,500 for trusts and estates .

A taxpayer paid $8,000 of qualified education expenses for his two dependents during the tax year: $5,000 for his older son and $3,000 for his younger son. What is the total American opportunity credit he may claim ?

Answer: $4750 Explanation: The taxpayer may claim $2,500 for his older son and $2,250 for his younger son. The maximum amount of the American opportunity credit for each eligible student is $2,500 and is equal to the total of 100% of the first $2,000 of qualified education expenses paid by the taxpayer for the eligible student plus 25% of the next $2,000 of qualified education expenses the taxpayer paid for the eligible student

Harriet, a tax return preparer, failed to comply with the EITC due diligence requirements in completing her client's income tax return. If the IRS determined that her failure was not due to reckless disregard for the EITC rules or maintaining an unreasonable position, to what penalty is she subject ?

Answer: $530 Explanation: Harriet is subject to a $530 penalty. IRC section 6695(g) imposes a financial penalty on any income tax return preparer failing to comply with the due diligence requirements related to determining a taxpayer's eligibility for the credit or its amount. The financial penalty was increased by subsequent legislation from $100 to $500 for returns filed after December 31, 2011 and is subject to annual inflation adjustments .

Walters is a 52-year-old single client. His adjusted gross income in 2019 is $200,000, and he is not an active participant in an employer-sponsored retirement pian. What is the maximum 2019 traditional IRA contribution that he may deduct?

Answer: $6500 Explanation: Bill may make and deduct a traditional IRA contribution in 2019 that is neither eliminated nor reduced by his relatively high adjusted gross income. Because he is age 50 or older the maximum contribution allowable in 2019 includes both a regular IRA contribution of $5,500 and a catch-up contribution of an additional $1,000. Since he is not an active participant in an employer- sponsored qualified plan, his entire traditional IRA contribution is tax deductible.

Ellen has two qualifying children and files her federal income tax return as married filing separately. What is the maximum AGI she may have in 2019 and still qualify for EIC?

Answer: Ellen is ineligible for EIC Explanation: EIC is not available to a taxpayer filing a federal tax return as married filing separately , irrespective of the taxpayer's AGI or number of qualifying children .

At what tax rate is a dependent child's 2019 earned income taxed?

Answer: at the tax rate applicable to unmarried taxpayers Explanation: Taxable income attributable to the child's earned income is taxed in accordance with unmarried taxpayers' rates and brackets .

For how long is a tax return preparer required to make a client's e file signature authorization available to the IRS?

Answer: for 3 years Explanation: Forms 8878 and 8879, IRS e-file Signature Authorization forms, must be available to the IRS for three years from the due date of the return or the IRS received date , whichever is later.

Arthur worked for his employer until he retired at age 75. At what age must he begin receiving required minimum distributions from his Roth IRA?

Answer: no lifetime minimum distributions are required at any from a Roth IRA Explanation: Unlike traditional IRAs, Roth IRAs are not subject to required minimum distribution (RMD ) rules during the owner's lifetime. Funds contributed to and accumulated within a Roth IRA can remain in the account as long as the owner wishes, even after age 70 1/2 Because qualified Roth distributions create no tax liability for the Roth IRA owner (nor provide any benefit for the federal coffers), there is no requirement that Roth IRAs must distribute their funds during the owner's lifetime.