Adjusted Gross Income
Luis is an ordained minister and common-law employee of a church. His earnings and parsonage allowance are treated as self-employment income on which he pays self-employment tax. The church has no retirement plan covering Luis. Which of the following is Luis permitted to establish for himself? A) Traditional IRA B) Savings Incentive Match Plan for Employees (SIMPLE) IRA C) Simplified Employee Pension (SEP) D) All of the above
Answer A. Common-law employees are not self-employed and cannot set up retirement plans for income from their work, even if that income is self-employment income for social security tax purposes.
Becky is single and works for a small magazine publisher. She was not covered by a qualified plan at her place of employment during the tax year. She establishes an IRA for the tax year and contributes $5,000. Which of the following can she NOT purchase as an investment within her IRA? A) Bank CD B) Annuity C) Treasury bonds D) Artwork
Answer D. Investing IRA funds in collectibles is a prohibited transaction. Artwork is specifically listed as a collectible.
Barry reached age 50 in 2019. Which of the following is an allowable catch-up contribution for Barry to a retirement plan? A) $6,000 for a 401(k) plan B) $3,000 for a SIMPLE plan C) $1,000 for a traditional IRA D) All of the above
Answer D. The maximum catch-up amount for 401(k) plans is $6,000. The SIMPLE plan catch-up limit is $3,000. The limit is $1,000 both a traditional IRA and Roth IRA.
Adam did not receive the required minimum distribution from his qualified retirement plan. Which form is he required to fill out? A) Form 2441 B) Form 5329 C) Form 6251 D) Form 8812
Answer B. You must file Form 5329 if you did not receive the required minimum distribution from your qualified retirement plan.
Alice and Mike file a joint return for 2019 on April 15, 2020. Alice, who is a non-working spouse, is 49. Both Alice and Mike contributed $4,000 each to a traditional IRA although they qualified to contribute the maximum amount. They filed their return timely. On June 1st, 2020, Mike's mother gave each of them $1,000. What additional amount of the gift may Alice and Mike contribute to each of their IRA's for the year 2019? A) $0. B) $1,000 C) $500 D) $2,000
Answer A. Contributions to a traditional IRA must be made by the due date of the return, not including extension. Their due date was April 15, 2020. A contribution for 2019 cannot be made on June 1, 2020.
A contribution to a traditional individual retirement account (IRA) is NOT deductible for tax year 2019 in which of the following situations: A) The taxpayer's only source of compensation is taxable interest. B) The contribution is made on April 15, 2020. C) The taxpayer's only source of compensation is taxable alimony. D) The taxpayer's only source of compensation is income from self-employment.
Answer A. Deductible contributions can only be made up to the due date of the return (extensions do not apply), and deductible IRA contributions cannot exceed taxable compensation. Generally, compensation is the amount earned from working. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts individuals receive for providing personal services. Taxable alimony is considered compensation for IRA purposes. This usually refers to alimony paid under a pre-2019 agreement that was deductible by the payor and included in the recipient's gross income. Income from self-employment qualifies as taxable compensation for IRA purposes.
Celeste, who is single, worked recently for a telephone company in France, and earned $1,500 for which she claimed the foreign earned income exclusion. In addition, she earned $1,200 as an employee of an answering service while she was in the U.S. She also received alimony of $400 for the year from her 2006 divorce. What is her maximum amount of allowable contribution to a traditional IRA for the current year? A) $1,600 B) $3,100 C) $1,200 D) $2,700
Answer A. The money earned in France is not compensation for this purpose because Celeste elects to claim the foreign earned income exclusion. Alimony paid under a pre-2019 divorce decree is compensation for purposes of IRA contributions, as is her U.S. source income. The maximum compensation for determining traditional IRA contributions is $1,600 ($1,200 earned with the answering service plus the $400 in alimony).
Which of the following statements about self employment income is NOT true? A) A self-employed taxpayer may take a deduction on his personal return for 60% of the employment tax paid B) Net income or loss is part of gross income on taxpayer's personal tax return C) A partner's distributive share of ordinary income or loss is considered self-employment income D) The definition of net earnings from self employment is the gross income from trade or business, minus business deductions
Answer A. The net income or loss is part of gross income on his personal tax return. The IRS defines net earnings from self-employment as the gross income from a trade or business, less business deductions. A partner's distributive share of ordinary income or loss is also self-employment income. A self-employed taxpayer must withhold and pay self-employment tax on net earnings from self-employment. A self-employed taxpayer may take a deduction on his personal return for the employer's equivalent portion of the employment tax paid.
Non-spouse beneficiaries must take distributions from inherited IRAs in one of the following manners. Which of the following is NOT an approved method? A) Life expectancy distribution B) Rollover into own account C) Five year deferral D) Lump sum
Answer B. Beneficiaries must begin withdrawals from a traditional IRA by December 31 of the year following the IRA owner's death. Non-spouse beneficiaries must take distributions in one of the following manners: lump sum, life expectancy payments, five-year deferral. Only spouses have the option to rollover Inherited IRAs
Bonnie, is single and age 35. She received income from the following sources in 2019: wages of $2,500 dividends and interest of $600 royalty income of $400 capital gains of $35,000 What is the maximum amount of money that she can contribute to a traditional IRA? A) $5,500 B) $2,500 C) $2,900 D) $6,500
Answer B. For 2019, the most that can be contributed to a traditional IRA generally is $6,000 ($7,000 if you are age 50 or older), or taxable compensation for the year, whichever is smaller. Her taxable compensation is $2,500, so that is also her maximum allowable contribution to a traditional Individual Retirement Account.Compensation includes wages, salaries, commissions, self-employment income, alimony and separate maintenance, and non-taxable combat pay.Compensation does not include earnings and profit from property, interest and dividend income, pension or annuity income, deferred compensation, income from certain partnerships and any amount you exclude from income.
Miriam Wallesto has come to Wilma Randolph to do her federal income taxes. Ms. Wallesto has gross income for the year of $40,000. She spent $100 this year and wants to know if that amount can be used to reduce her adjusted gross income. Under which of the following will she NOT be able to use that amount to reduce the amount reported as her adjusted gross income? A) She is a 4th grade teacher and spent the money for supplies for her class and was not reimbursed. B) She changed jobs this year and spent the money moving 55 miles to be closer to the new place of business because she rides her bicycle to work. C) She put the money into an Individual Retirement Account. D) She recently graduated from college and spent the money to pay for interest on her education loans.
Answer B. The TCJA suspends the deduction for moving expenses for taxable years 2018 through 2025 for taxpayers other than members of the Armed Forces. The TCJA retains the deduction for moving expenses for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station. Therefore, since her move was not pursuant to a military order, she can not deduct her moving expenses. The other three costs can all be deducted from gross income to arrive at adjusted gross income.
Brenda, age 52, participates in a high deductible health plan at work and contributes 3% of her salary to a health savings account (HSA). Her employer matches her 3% contribution. During the tax year, Brenda pays $1,200 for doctor appointments, $400 for prescriptions, and another $375 in over-the-counter nutritional supplements from funds in her health savings account. She also pays for a $600 membership to a health club. What amount of Brenda's expenses may be excluded from gross income as qualified medical expenses? A) $975 B) $1,600 C) $1,975 D) $2,575
Answer B. The funds spent on doctor appointments ($1,200) and prescriptions ($400) are excluded from gross income as qualified medical expenses under Brenda's health savings account. The over-the-counter supplements and health spa membership are not qualified expenses. The amount distributed from the HSA for these items will be included in taxable income and, because Brenda is not 65, will be subject to the 20% additional tax penalty.
In the case of a deceased taxpayer with an IRA, which of the following can elect to rollover the account into their own name? A) Any named beneficiary under age 59.5 B) The spouse C) The taxpayer's minor child D) The taxpayer's adult child who is also the only named beneficiary
Answer B. When inheriting a qualified retirement plan or IRA, surviving spouses can elect to treat it as their own by rolling the account into their names. All other beneficiaries must withdraw the entire balance of the retirement account over a specified period, depending on several factors, including age of decedent, age of beneficiary and type of beneficiary.
What is the last date upon which a 2019 calendar year filer can contribute to his HSA for the 2019 tax year? A) December 31, 2019 B) January 15, 2020 C) April 15, 2020 D) October 15, 2020
Answer C. A taxpayer can make 2019 contributions to his HSA until April 15, 2020.
Brad makes the following payments to his ex-wife Jen in 2018. Which payment can he claim as alimony? A) $500 made under a written separation agreement to pay the gardener at the house where Jen is living that Brad owns. B) A property settlement for Brad to keep the Ferrari that he and Jen owned together. C) $2,000 paid under a written separation agreement to the Actor's Studio for Jen to take acting lessons. D) $1,000 that is required to be made after Jen dies in a car accident.
Answer C. Alimony does not include payments to maintain property of the payer, property settlements, or payments after the recipient's death. Cash payments, checks, or money orders to a third party on behalf of a spouse under the terms of the divorce or separation instrument can be alimony, if they otherwise qualify. These include payments for a spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by the spouse and then paid to the third party.
Which of the following is NOT included in a taxpayer's total income? A) Alimony paid in 2018 B) Alimony received in 2018 C) Child support received D) Child support paid
Answer C. Child support received is not included in income. Alimony received in 2018 is income and is reported on Form 1040. Alimony and child support paid in 2018 are included in the payor's total income but the taxpayer may deduct alimony payments as an adjustment to income in arriving at AGI. No such deduction is available for payments of child support.Total income includes income from all sources before any deductions for AGI. Since alimony paid is a deduction from total income for AGI, the amount of alimony paid does appear in total income but is removed to arrive at AGI. Alimony received is also part of total income for the recipient. Child support paid is not a deduction, so any amount paid for child support is included in the payor's total income and adjusted gross income. Child support received is not taxable to the recipient; therefore, it does not appear in total income when received.
Max Snyder teaches science in the fifth grade of his local public school. Because of budgetary cutbacks, he is forced to buy certain supplies (such as test tubes) himself. In the current year, he spent three hundred dollars for supplies to be used by his students. Which of the following statements is true? A) These expenditures were made at the decision of the taxpayer and are not deductible. B) These expenses are not deductible if Snyder itemizes. He must claim the standard deduction. C) These expenditures can be deducted in arriving at the taxpayer's adjusted gross income but only up to a set limit. D) As a public school teacher, the taxpayer can deduct all of these amounts regardless of the amount reported as adjusted gross income.
Answer C. Educators in all of the grades from K-12 are allowed to deduct their out-of-pocket costs up to a maximum amount. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment, software, and even the costs to participate in professional development courses related to the curriculum. A taxpayer that was an eligible educator during the tax year, can deduct up to $250 ($500 if married filing jointly and both were eligible educators) of qualified expenses paid in 2018 as an adjustment to gross income on Form 1040. The maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses. Qualified expenses that are not claimed as an adjustment to gross income are no longer deductible as an itemized deduction subject to the 2% limit.
Bob Slate Jr.'s mother passed away and he inherited half of her traditional IRA account. What can he do? A) He may designate himself as the owner B) He can roll it over into his own IRA C) He can treat himself as the beneficiary of the IRA D) All of the above
Answer C. If a taxpayer inherits a traditional IRA from anyone other than his deceased spouse, he cannot treat the inherited IRA as his own. This means that he cannot make any contributions to the IRA. It also means he cannot roll over any amounts into or out of the inherited IRA. However, he can make a trustee-to-trustee transfer as long as the IRA into which funds are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the taxpayer as beneficiary.
Andy has a traditional IRA account. His IRA can invest in which of the following as an allowable investment? A) Stamps that have been issued by the United States Postal Service B) A drawing by Picasso that is officially certified as authentic C) One-ounce silver coins minted by the U. S. Treasury Department D) None of the above.
Answer C. If a traditional IRA invests in collectibles, the IRS will consider the amount a distribution in the year invested. The 10% additional tax on early distributions may apply. Collectibles include artworks, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property.EXCEPTION: An IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
When figuring compensation for a self-employed individual for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following statements is NOT true? A) Self-employment income must be reduced by the deduction allowed for one-half of your self-employment taxes. B) When you have both self-employment income, and salary and wages, your compensation includes both amounts. C) If you have a net loss from self-employment, you must subtract the loss from any salary or wages received when figuring total compensation. D) In order to include net earnings from a trade or business as compensation, your personal services must be a material income-producing factor.
Answer C. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Roger doesn't want to incur any tax or penalty for prohibited transactions in his IRA account. He therefore must avoid all of the following EXCEPT: A) Borrowing money from his IRA account. B) Selling stocks he personally owns to his IRA account. C) Rolling over an IRA inherited from his spouse to his own IRA account. D) Using his IRA as security for a loan.
Answer C. Rolling an IRA inherited from your spouse into your own IRA is not a prohibited transaction.
Roger Miller, single and age 75, has income of $50,000. He wants to contribute to a Roth IRA for himself. Can he? A) No, he is too old B) No, he is collecting social security C) Yes, if he received taxable compensation in the year he plans to contribute to the Roth IRA D) Yes, only if he is not covered by a retirement plan at work
Answer C. There is no age limit to establish or contribute to a Roth IRA, so long as the taxpayer has taxable compensation during the year for which a contribution is made.
What kind of transfer of qualified retirement plan assets cannot be made tax free? A) Trustee to trustee transfer B) Rollover C) Transfer to Roth D) Any of the above
Answer C. Transfer of qualified retirement assets to a Roth IRA is called a conversion and a taxpayer who does this must include in his gross income distributions from the qualified retirement plan that he would have had to include in income had he not rolled them over into a Roth IRA. He does not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to him when he contributed. A taxpayer can transfer, tax free, assets (i.e., money or property) from other retirement plans, including traditional IRAs, to a traditional IRA.
A taxpayer can make contributions to a traditional IRA at any time during the year, but at the latest by: A) December 31 of the tax year B) January 15 of the year following the tax year C) April 1 of the year following the tax year D) April 15 - the due date for filing the return
Answer D. A taxpayer can make contributions to a traditional IRA at any time during the year or by the due date for the filing the return for that year, not including extensions. For most taxpayers, this is April 15th.
Mike is 28 years old and single. In 2019, he was covered by a retirement plan at work. His salary was $57,312. His modified AGI was $80,000. Mike made a $6,000 IRA contribution for 2019. Can he deduct his entire contribution? A) Yes. B) Yes, but only if he did not contribute the maximum amount to his employer's retirement plan. C) No, he must withdraw the $6,000 before April 15, 2020. D) No, but he does not need to withdraw the money.
Answer D. Although a deduction for IRA contributions may be reduced or eliminated, contributions can be made to a taxpayer's IRA up to the general limit or, if it applies, the spousal IRA limit. The difference between a taxpayer's total permitted contributions and his IRA deduction, if any, is his nondeductible contribution. Because Mike was covered by a retirement plan and his modified AGI in 2019 was over $74,000, he cannot deduct his contribution. That doesn't mean he cannot keep it in the IRA. He should report the contribution as a nondeductible contribution by filing Form 8606, Nondeductible IRAs.
Jacob's return is missing information regarding his IRA contribution. Which of the following sections of his tax return should have included this content? A) Gains and Losses B) Income C) Itemized Deductions D) Adjustments to Income
Answer D. An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. You want to include your IRA information because you may be able to deduct some or all of your contributions to it, and they are generally not taxed until they are distributed. This information should be included in Adjustments to Income.
Which one of the following is not an adjustment to total income in arriving at adjusted gross income? A) Interest paid on student loans B) Portion of health insurance of self-employed persons C) Certain contributions to a medical savings account D) Contributions to a Roth IRA
Answer D. Contributions to a Roth IRA are non-deductible and cannot be used as an adjustment to income.
Which of the following is compensation for the purpose of contributions to individual retirement accounts? A) Deferred compensation received. B) Foreign earned income excluded from income. C) Pension or annuity income. D) Taxable alimony and separate maintenance paid under the terms of a divorce decree finalized before 2019
Answer D. For IRAs, consider the term compensation is direct payment received for active effort. The most common form of compensation is wages. Taxable compensation includes income such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Taxable alimony and separate maintenance payments received by an individual paid under the terms of a divorce decree finalized before 2019 are treated as compensation for IRA purposes. Compensation doesn't include earnings and profits from property, such as rental income, interest and dividend income, or any amount received as pension or annuity income, or as deferred compensation.
Donovan established a Roth IRA at age 57 and has contributed $3,000 each year up through 2019. In 2019, at age 61, Donovan received a distribution of his entire account balance from the Roth IRA account. Is any of Donovan's distribution included in his gross income for 2019? A) No, because Donovan reached the statutory age for Roth IRA withdrawals. B) No, because distributions from Roth IRAs are not included in gross income. C) Yes, but only the amount that does not exceed his basis. D) Yes, if the distribution exceeded his basis.
Answer D. While it is the case that qualified distributions from a Roth IRA are not included in gross income, Donovan's distribution was not qualified because the distribution was made before the end of the five-year time period that commenced with the first taxable year for which a contribution was made.