Becker: EXAM #2, REG 2, MODULES 1-4

Susan paid $1,500 of interest on credit card charges. The charges were for items purchased for personal use. The interest is: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income (3) A tax credit (4) Not deductible

Choice "4" is correct. Consumer interest is not deductible. Choices "1", "2", or "3" are incorrect. Personal (consumer) interest is not deductible.

A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month extension to file until October 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return? (1) October 15 (2) April 15 (3) August 15 (4) November 1

Choice "2" is correct. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).

Jim had gambling losses totaling 2,500 for the year. He is including a lottery prize of $5,000 in his gross income this year. The gambling losses are: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income (3) A deduction from adjusted gross income, subject to a 2% AGI Floor (4) Not deductible

Choice "2" is correct. Gambling losses are deductible as a miscellaneous itemized deduction (from AGI) limited to gambling winnings.

Mitch, who is age 69, single, and has no dependents, had AGI of $100,000 during the year. His potential itemized deductions were as follows: Medical expenses (before percentage limitation) $5,000 State income taxes 3,000 Real estate taxes 7,000 Mortgage (qualified housing and residence) interest 9,000 Cash contributions to various charities 4,000 What is the amount of Mitch's AMT adjustment for itemized deductions for the year? (1) $10,000 (2) $14,000 (3) $19,000 (4) $25,000

Choice "1" is correct. Regular; A.M.T.; A.M.T.Adjustment Medical 5,000; 5,000; 0 State taxes 3,000; 0; 3,000 R.E. taxes 7,000; 0; 7,000 Home mortgage 9,000; 9,000; 0 Charity 4,000; 4,000; 0 Total diff. 10,000 Note: State income taxes and real estate taxes are not allowable deductions in calculating alternative minimum tax and therefore must be added back to taxable income.

Betty is age 34 and has AGI of $50,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $6,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $300 What is the itemized deductions allowed for the AMT? (1) $2,000 (2) $2,800 (3) $3,800 (4) $8,800

Choice "1" is correct. Rule: The itemized deductions added back for the AMT are those allowed for regular tax but disallowed for the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. $1,000 is deductible from regular tax. The AMT allows the same amount, so the medical expenses do not have to be added back. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Real estate tax $1,200 State income tax 800 Total add-back $2,000

Betty is age 34 and has AGI of $70,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $4,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $300 What is the itemized deductions allowed for the AMT? (1) $2,000 (2) $2,800 (3) $3,800 (4) $8,800

Choice "1" is correct. Rule: The itemized deductions added back for the AMT are those allowed for regular tax but disallowed for the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. The medical expenses are not deductible for regular tax purposes. Medical expenses in excess of 10% of AGI are allowed to be deducted for both regular and AMT tax purposes. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Real estate tax $1,200 State income tax 800 Total add-back $2,000

Which allowable deduction can be claimed in arriving at an individual's adjusted gross income? (1) Alimony payment pursuant to a divorce settlement executed on or before December 31, 2018 (2) Charitable contribution (3) Personal casualty loss (4) Unreimbursed business expense of an outside salesperson

Choice "1" is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI) pursuant to a divorce settlement executed on or before December 31, 2018. Charitable contributions and personal casualty losses are deductible from AGI as itemized deductions. Choice "2" is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions. Choice "3" is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions if incurred in a federally declared disaster area. Choice "4" is incorrect. Unreimbursed business expenses of outside salespersons are not deductible.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Cassidy, an individual, reported the following items of income and expense during the current year: Salary $50,000 Alimony paid to a former spouse (divorce finalized in 2017) 10,000 Inheritance from a grandparent 25,000 Proceeds of a lawsuit for physical injuries 50,000 What is the amount of Cassidy's adjusted gross income for the year ended December 31, 2020? (1) $40,000 (2) $50,000 (3) $115,000 (4) $125,000

Choice "1" is correct. Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries. Alimony paid pursuant to a divorce settled on or before 12/31/18 is an adjustment from gross income to arrive at adjusted gross income, as follows: Gross Income: Salary 50,000 Inheritance 0 Proceeds from physical injury lawsuit 0 Adjustments: Alimony paid (10,000) Adjusted gross income 40,000 Choice "2" is incorrect. Although salary is the only item of taxable gross income on the list, alimony is an allowable adjustment to arrive at adjusted gross income. Choice "3" is incorrect. This answer choice includes all items of income given and deducts the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are not items of taxable gross income. Choice "4" is incorrect. This answer choice includes all items of income given and does not deduct the alimony paid. Inheritance and proceeds from a lawsuit for physical injuries are not items of taxable gross income, and alimony is an allowable deduction from gross income.

Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete's employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete's Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance. What amount would be subject to the penalty for the underpayment of estimated taxes? (1) $0 (2) $200 (3) $500 (4) $16,500

Choice "1" is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty. Choice "2" is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes. Choice "3" is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes. Choice "4" is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000.

Anthony entered into a long-term construction contract in Year 3. The total profit of the contract is $80,000 and does not change over the life of the contract. The contract will be completed in Year 5. The contract is 20% and 70% complete at the end of Years 3 and 4, respectively. What is the alternative tax adjustment required in Year 5? (1) ($56,000) (2) ($24,000) (3) $24,000 (4) $56,000

Choice "1" is correct. Regular tax allows the completed contract method, but the AMT requires the percentage of completion method. Under the completed contract method, regular tax reported no income in Years 3 and 4. The entire income of $80,000 is reported in Year 5. Income for the AMT is $16,000 ($80,000 × 20%) in Year 3, $40,000 ($80,000 × 50%) in Year 4, and $24,000 ($80,000 × 30%) in Year 5. The adjustment for Year 5 is a loss of $56,000, the difference between regular tax income of $80,000 and AMT income of $24,000. Choice "2" is incorrect. A loss of $24,000 is the amount of the AMT income for Year 5 expressed as a negative number, not the AMT adjustment. Choice "3" is incorrect. $24,000 is the amount of the AMT income for Year 5, not the AMT adjustment. Choice "4" is incorrect. $56,000 would be the AMT adjustment for Year 5, if it were a negative number. The AMT income for Year 5 is less than regular tax, so the adjustment is a subtraction.

Beginning in 2013, a new Medicare tax was levied on certain income. Which of the following statements is true regarding this new tax? (1) The tax is 3.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (2) The tax is 3.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (3) The tax is 2.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount (4) The tax is 2.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount

Choice "1" is correct. Starting in 2013, a 3.8% Medicare tax is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount. Choice "2" is incorrect. The tax is levied on the lesser amount rather than the greater amount. Choices "3" and "4" are incorrect. The tax rate is equal to 3.8% rather than 2.8%.

Which of the following credits can result in a refund, even if the individual had no income tax liability? (1) Earned income credit (2) Child and dependent care credit (3) Adoption Credit (4) Credit for the Elderly or Permanently Disabled

Choice "1" is correct. The Earned Income Credit is refundable. The other credits listed are not refundable. Note: The Child Tax Credit (not listed) can be refundable in certain circumstances. Do not confuse this with the Child and Dependent Care credit, which is not refundable.

How is the alternative minimum tax credit handled? (1) It is carried forward indefinitely and applied to regular tax only (2) It is carried back five years and applied to regular tax (3) It is carried forward indefinitely and can be applied to regular tax or AMT (4) It is carried forward five years and applied to regular tax only

Choice "1" is correct. The alternative minimum tax credit is carried forward indefinitely and can be applied only to regular tax. Choice "2" is incorrect. The alternative minimum tax credit is not carried back. Choice "3" is incorrect. The alternative minimum tax credit cannot be applied to AMT. Choice "4" is incorrect. The alternative minimum tax credit is carried forward indefinitely, not only five years.

Which of the following statements about the child and dependent care credit is correct? (1) The credit is nonrefundable (2) The child must be under the age of 18 years (3) The child must be a direct descendant of the taxpayer (4) The maximum credit is $600

Choice "1" is correct. The child and dependent care credit is nonrefundable. The only refundable credits are the child tax credit (which is a different credit with a similar name), the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess Social Security taxes paid. The child and dependent care credit is a "personal" tax credit. Choice "2" is incorrect. The child must be under age 13, not age 18, to be a qualifying child and for there to be a credit. Choice "3" is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer. Choice "4" is incorrect. The maximum child and dependent care credit is 35% of eligible expenses, with a phase-out for excessive AGI. There is no pure $600 limit.

Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns. Upon reviewing a client's computer-generated year 1 itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct? I. The client's investment interest expense exceeds net investment income. II. The client's qualified residence interest expense reduces the deductible amount of investment interest expense. (1) I only (2) II only (3) Both I and II (4) Neither I nor II

Choice "1" is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is not investment interest and would not affect investment interest income in any manner.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $1,536,800. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $101,700 (4) $113,400

Choice "1" is correct. The full exemption amount is $113,400. When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $1,536,800 exceeds $1,036,800 by $500,000. 25% of $500,000 is $125,000. This reduction exceeds the full exemption amount of $111,700, so the exemption is fully phased out and is zero. Choice "2" is incorrect. $10,000 would be correct if the exemption was partially phased out. But the AMTI of $1,536,800 results in a full phase-out. Choice "3" is incorrect. $101,700 would be correct if the exemption was partially phased out. But the AMTI of $1,536,800 results in a full phase-out. Choice "4" is incorrect. $113,400 would be correct if the exemption was allowed in full. But the AMTI of $1,536,800 results in a full phase-out.

Ted, who is single, owns a personal residence in the city. He also owns a condo near the ocean. He uses the condo as a vacation home. In March 2016, he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile. During the current year, he paid the following amounts of interest: On his personal residence $15,500 On the condo $6,200 On the home equity loan $4,800 On credit card obligations $1,700 What amount, if any, must Ted recognize as an AMT adjustment for the year? (1) $0 (2) $4,800 (3) $6,200 (4) $11,000

Choice "1" is correct. The interest on the personal residence and condo are deductible for regular tax and AMT purposes, so they are not AMT adjustments. The credit card interest and home equity line not used to improve the home are not deductible at all. Therefore, they are also not an AMT adjustment.

Which of the following is not a refundable tax credit? (1) Retirement savings contribution credit (2) Earned income credit (3) Child tax credit (4) Excess social security paid

Choice "1" is correct. The retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess Social Security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Betty is age 34 and has AGI of $50,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before 10% AGI floor) $3,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $2,000 What is the itemized deductions allowed for the AMT? (1) $2,500 (2) $2,900 (3) $3,400 (4) $3,700

Choice "2" is correct. Rule: The itemized deductions for the AMT are the deductions allowed for regular tax and the AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. None of the medical expenses are deductible for regular tax, so none are deductible for the AMT. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Charitable contributions $600 Mortgage interest on acquisition indebtedness 2,000 Home equity interest on a loan used to improve the home 300 Total allowed deductions for AMT $2,900

How may taxes paid by an individual to a foreign country be treated? (1) As an itemized deduction subject to the 2% floor (2) As a credit against federal income taxes due (3) As an adjustment to gross income (4) As a nondeductible

Choice "2" is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Note that the only correct response to this question is choice "2"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option. Choice "1" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are not subject to a 2% floor. Choice "3" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Choice "4" is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead.

Carol reports taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness $1,200 Charitable contribution $550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What are Carol's total adjustments for alternative minimum tax? (1) $1,200 (2) $2,000 (3) $3,000 (4) $6,750

Choice "2" is correct. All taxes, including real estate taxes, are adjustments for alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for AMT, so are not adjustments for AMT. The private activity bond interest is added in for AMT as a preference item, not an adjustment.

On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels' current year income tax return? (1) $12,000 (2) $11,000 (3) $1,000 (4) $0

Choice "2" is correct. Michaels may deduct $11,000 on her current year return. Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers. Term of loan = 12 months (December 1, prior year − November 30, current year) Interest paid − $12,000 on December 1 of the prior year. Allocated interest per month = $12,000 ÷ 12 = $1,000/month Interest deductible in current year = $1,000 × 11 = $11,000

The Tiller family has a modified adjusted gross income of $50,000. The Tillers have 2 children, ages 12 to 13, who qualify as dependents. All of the Tillers' income is from wages and their tax liability is $1,000 before the child tax credit. What total amount of the child tax credit will the Tillers use a credit? What portion of this amount is refundable? Child Tax Credit Taken; Refundable Portion (1) $4,000; $0 (2) $3,800; $2,800 (3) $2,000; $1,400 (4) $2,000; $0

Choice "2" is correct. The Tillers' maximum child tax credit is $4,000 ($2,000 × 2 children). The Tillers will take the first $1,000 against the tax liability. Of the remaining $3,000 credit, only $2,800 is refundable and can be taken as a credit. The refundable portion of the child tax credit for 2020 is the lesser of: 1. the excess child tax credit over tax liability ($3,000) 2. earned income less $2,500 × 15% ($50,000 − $2,500 = $47,500 × 15% = $7,125), or 3. $1,400 per qualifying child ($1,400 × 2 = $2,800) Therefore, $2,800 of the child tax credit is refundable. The total amount of the child tax credit utilized by the Tillers is $3,800 ($2,800 refundable + $1,000 taken against tax liability).

Which of the following is not an adjustment to arrive at adjusted gross income? (1) Self-employed health insurance (2) Qualified mortgage interest paid (3) Alimony paid pursuant to a divorce settled on or before December 31, 2018 (4) Self-employed FICA (50 percent)

Choice "2" is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction. Choices "1", "3", and "4" are incorrect. Each of these items is an adjustment to gross income to arrive at adjusted gross income.

Anthony entered into a long-term construction contract in Year 3. The total profit of the contract is $80,000 and does not change over the life of the contract. The contract will be completed in Year 5. The contract is 20% and 70% complete at the end of Years 3 and 4, respectively. What is the alternative minimum tax adjustment required in Year 4? (1) $16,000 (2) $40,000 (3) $56,000 (4) $80,000

Choice "2" is correct. Regular tax allows the completed contract method, but the AMT requires the percentage of completion method. Under the completed contract method, regular tax reported no income in Years 3 and 4. The entire income of $80,000 is reported in Year 5. Income for the AMT is $16,000 ($80,000 × 20%) in Year 3, $40,000 ($80,000 × 50%) in Year 4, and $24,000 ($80,000 × 30%) in Year 5. The adjustment for Year 4 is $40,000, the difference between regular tax income of $0 and the AMT income of $40,000. Choice "1" is incorrect. $16,000 is the amount of the adjustment for Year 3, not Year 4. Choice "3" is incorrect. $56,000 is the total adjustment in Years 3 and 4 together, not the adjustment for Year 4. Choice "4" is incorrect. $80,000 is the total income for the contract, not the adjustment for Year 4.

Which of the following tax credits may result in a refund even if the taxpayer had no income tax liability? (1) Adoption credit (2) Additional child tax credit (3) Dependent care credit (4) Elderly and permanently disabled credit

Choice "2" is correct. The additional child tax credit may result in a refund to the extent of the lesser of (1) excess child tax credit over the tax liability or (2) earned income less certain thresholds. Choices "1", "3", and "4" are incorrect. These allowable credits are personal tax credits that are not deemed "refundable" credits, which means that they can reduce the total tax liability to zero, but may not result in a cash refund in excess of the liability.

Chris, age 5, has $3,000 of interest income and no earned income this year. Assume the current applicable standard deduction for dependents is $1,100 how much of Chris' income will be taxed at his parents' marginal rate? (1) $0 (2) $800 (3) $1,900 (4) $3,000

Choice "2" is correct. The net unearned income of a dependent child under age 18 is taxed at the parents' marginal rate under the "kiddie tax" rules. Net unearned income is calculated by taking the child's unearned income and reducing it by the dependent child's allowable standard deduction of $1,100 plus an additional $1,100 (which is taxed at the child's marginal tax rate). Chris' net unearned income taxed at his parents' marginal rate is $800 ($3,000 interest income - $1,100 standard deduction - $1,100 taxed at child's marginal rate). Choice "1" is incorrect. The $0 indicates that nothing is taxed at the parents' marginal rate. Taxing net unearned income at the parents' marginal rate is the whole idea of the "kiddie tax." Choice "3" is incorrect. The $1,900 uses only the $1,100 standard deduction, but the next $1,100 would be taxed at the child's marginal rate. Choice "4" is incorrect. The $3,000 indicates that the entire $3,000 interest income is taxed at the parents' marginal rate.

Carol has taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness $1,200 Charitable contribution $550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What is Carol's alternative minimum taxable income (AMTI)? (1) $50,000 (2) $53,000 (3) $54,200 (4) $54,750

Choice "2" is correct. The private activity bond interest is added in for the AMT as a preference item. All taxes, including real estate taxes, are added back as adjustments for the alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for the AMT, and are not adjustments or preference items. Taxable income $48,000 Real estate tax 2,000 Private activity bond interest 3,000 AMTI $53,000

Betty is age 34 and has AGI of $50,000, and regular taxable income of $35,000. The following items may qualify as itemized deductions for Betty: Qualified medical expenses (before percentage of AGI floor) $3,000 Real estate tax $1,200 State income tax $800 Charitable contributions $600 Mortgage interest on acquisition indebtedness $2,000 Home equity interest on a loan not used to improve the home $300 What is the alternative minimum taxable income (AMTI)? (1) $35,000 (2) $37,500 (3) $37,000 (4) $52,800

Choice "3" is correct. Rule: The itemized deductions added back to regular taxable income to calculate AMTI are those allowed for regular tax but disallowed for AMT. Medical expenses are only deductible from regular tax if they exceed 10 percent of AGI. None of the medical expenses are deductible, for either regular tax or AMT. All of the property taxes and state income taxes are deductible for regular tax and disallowed for the AMT. Charitable contributions are allowed for regular tax and the AMT. Both of the interest items are deductible for regular tax and AMT. Taxable income $35,000 Real estate tax 1,200 State income tax 800 AMTI $37,000

Chris Baker's adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of: I. 90% of the tax on the return for the current year paid in four equal installments. II. 110% of prior year's tax liability paid in four equal installments. (1) I only (2) II only (3) Both I and II (4) Neither I nor II

Choice "3" is correct. Both I and II. I. Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax. II. Generally, payment of 110% of the prior year's tax liability avoids the penalty for underpayment of estimated tax when the taxpayer's AGI from the prior year exceeds $150,000. Note: Payment of the lesser of the two above will provide "safe harbor" to the taxpayer.

Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes: Home mortgage interest on a loan to acquire a principal residence $11,000 Miscellaneous itemized deductions above the threshold limitation 2,000 What are Farr's total allowable itemized deductions for computing alternative minimum taxable income? (1) $0 (2) $2,000 (3) $11,000 (4) $13,000

Choice "3" is correct. Both mortgage interest and real estate property taxes are deductible for regular (schedule A) tax purposes. However, real estate property taxes are not allowed as a deduction for alternative minimum tax (AMT) purposes. Choice "1" is incorrect. Mortgage interest is allowed as a deduction for AMT purposes. Choice "2" is incorrect. Real estate property taxes are not allowed for AMT purposes Choice "4" is incorrect. The $2,000 real estate property taxes are an add back for AMT purposes.

Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. Mills had no tax preferences. His itemized deductions were as follows: State and local income taxes $ 5,000 Home mortgage interest on loan to acquire residence 6,000 Miscellaneous deductions that exceed 2% of adjusted gross income 2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? (1) $72,000 (2) $75,000 (3) 77,000 (4)$83,000

Choice "3" is correct. Mills' alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and property taxes paid ($2,000) for a total of $77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not increase alternative minimum taxable income. Choice "1" is incorrect. State and local income taxes must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "2" is incorrect. Property taxes paid and deducted as itemized deductions must be added back to Mills' taxable income in calculating alternative minimum taxable income. Choice "4" is incorrect. Home mortgage interest is not added back to Mills' taxable income to calculate alternative minimum taxable income.

On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan. The following information pertains to interest paid in Year 4: Mortgage interest $17,000 Interest on room construction loan 1,500 Auto loan interest 500 For Year 4, how much interest is deductible, prior to any itemized deduction limitations? (1) $17,000 (2) $17,500 (3) $18,500 (4) $19,000

Choice "3" is correct. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Choice "1" is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Choice "2" is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Choice "4" is incorrect. Interest on auto loans (consumer interest) is not deductible.

Poole, 45 years old and unmarried, is in the 15% tax bracket. He had adjusted gross income of $30,000. Assume a 10% gross income floor for medical expenses. The following information applies to Poole: Medical expenses $16,000 Standard deduction 12,000 Poole wishes to minimize his income tax. What is Poole's total income tax? (1) $3,000 (2) $1,845 (3) $2,550 (4) $1,350

Choice "3" is correct. Poole's total income tax would be calculated as follows: Adjusted gross income (AGI) 30,000 Itemized deductions 13,000* Taxable income 17,000 Tax rate × 0.15 Total income tax 2,550 * Larger of $12,000 standard deduction or $13,000 itemized deduction ($16,000 medical expenses less 10% × $30,000 AGI).

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein's current year income tax return? (1) $17,000 (2) $21,000 (3) $24,000 (4) $25,000

Choice "3" is correct. Stein may deduct $24,000 on Stein's current year income tax return. Rule: The taxpayer can deduct long-term (i.e., held longer than 12 months) capital gain appreciated property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carryforward period applies. Fair market value of appreciated long-term stock 25,000 Less: Limitation AGI 80,000 Times 30% × 0.30 Deduction limit (24,000) Carryforward 1,000

The credit for prior year alternative minimum tax liability may be carried: (1) Forward for a maximum of five years (2) Back to the three preceding years or carried forward for a maximum of five years (3) Back to the three preceding years (4) Forward indefinitely

Choice "4" is correct. Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial accounting purposes. The credit is carried forward indefinitely.

Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income? (1) Individual taxpayer net operating losses (2) Passive activity losses (3) Deductible state and local taxes (4) Deductible contributions to individual retirement accounts

Choice "4" is correct. Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer's alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes. Choices "1", "2", and "3" are incorrect. Adjustments to arrive at AMTI include individual net operating losses, passive activity losses, and deductible state and local taxes.

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes: Real estate tax on personal residence $2,000 Ad valorem tax on personal automobile 500 Current-year state and city income taxes withheld from paycheck 1,000 What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return? (1) $1,000 (2) $2,500 (3) $3,000 (4) $3,500

Choice "4" is correct. In answering this question, we must assume that the examiners mean to ask, "What total amount of the tax expense should the Rites claim as an itemized deduction?" Obviously, the Rites have more deductions than just those tax deductions above, or they would take advantage of the standard deduction. In any case, for cash-basis taxpayers, deductible taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes (e.g., ad valorem taxes on personal automobile) are allowable deductions. The total amount of deductions for tax expense is calculated as follows: Real estate tax on personal residence 2,000 Ad valorem tax on personal automobile 500 Current-year state and city income taxes withheld 1,000 Total deduction for taxes 3,500 Choice "1" is incorrect. Real estate taxes and personal property taxes are allowable itemized deductions. Choice "2" is incorrect. Current-year state and city income taxes withheld from a paycheck are allowable itemized deductions. Choice "3" is incorrect. Personal property taxes (e.g., ad valorem taxes paid) are allowable itemized deductions.

How is the earned income credit handled for AMT? (1) It is allowed only as carryback against previous AMT (2) It is allowed only as a carryforward against future AMT (3) It is not allowed as a credit against AMT (4) It is allowed as a credit against AMT in the current year

Choice "4" is correct. The earned income credit is allowed as a credit against the current-year AMT.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $128,900. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $101,700 (4) $113,400

Choice "4" is correct. The full exemption amount is $113,400. When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $128,900 does not exceed $1,036,800, so the exemption is the full $113,400. Choice "1" is incorrect. Zero would be correct if the exemption was fully phased out. The AMTI of $128,900 results in no phase-out. Choice "2" is incorrect. $10,000 would be correct if the exemption was partially phased out. The AMTI of $128,900 results in no phase-out. Choice "3" is incorrect. $101,700 would be correct if the exemption was partially phased out. The AMTI of $128,900 results in no phase-out.

An individual taxpayer's tax return included the following: Regular tax before tax credits $5,000 Current-year estimated tax payments 6,000 Amount paid with current-year extension 1,000 Federal income tax withheld 1,000 What amount, if any, is the taxpayer's overpayment? (1) $0 (2) $1,000 (3) $2,000 (4) $3,000

Choice "4" is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000. Choice "1" is incorrect. The amount of the overpayment is $3,000, not $0. All of the tax payments are applied against the current year regular tax liability. Choice "2" is incorrect. The amount of the overpayment is $3,000, not $1,000. All of the tax payments are applied against the current year regular tax liability. Choice "3" is incorrect. The amount of the overpayment is $3,000, not $2,000. All of the tax payments are applied against the current year regular tax liability.

Bob and Nancy are married and file a joint return for tax year 2020. They are both under age 50 and employed, with wages of $50,000 each. Their total AGI is $110,000. Neither or them is an active participant in a qualified plan. What is the maximum traditional IRA deduction they can take for the current year? (1) $0 (2) $6,000 (3) $7,700 (4) $12,000

Choice "4" is correct. They may each deduct the maximum amount of $6,000, which is a total of $12,000. Because Bob and Nancy are not active participants in another qualified plan, their deductible contribution is not phased out. Choice "1" is incorrect. Zero would be correct if they were phased out of the deduction, but there is no limitation here because neither Bob nor Nancy is an active participant in another qualified plan. Choice "2" is incorrect. $6,000 would be correct if only one of them were allowed to deduct the IRA contribution. They can both take the deduction. Choice "3" is incorrect. $7,700 would be correct if they were partially phased out of the deduction because Bob was an active participant in a plan, total AGI was $110,000, and Nancy was a non-working spouse. There is no limitation here because neither Bob nor Nancy is an active participant in another qualified plan.

Which of the following would preclude a taxpayer from deducting student loan interest expense? (1) The total amount paid is $1,000 (2) The taxpayer is single with AGI of $55,000 (3) The taxpayer is married filing jointly with AGI of $120,000 (4) The taxpayer is taken as a dependent of another taxpayer

Choice "4" is correct. This deduction is not allowed if the taxpayer is a dependent of another taxpayer. Choice "1" is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible. Choice "2" is incorrect. $55,000 of AGI is below the single phase-out for the student loan interest expense adjustment. Choice "3" is incorrect. $120,000 of AGI is below the MFJ phase-out for the student loan interest expense adjustment.

During the year, Donna Nichols, a single taxpayer, had 60,000 in taxable income before personal exemptions. She had not tax preferences, and her itemized deductions included the following: Home mortgage interest on loan to acquire residence 25,000 Home equity interest on loan used to purchase an automobile 5,000 State and local income taxes 4,500 Gambling losses 3,000 What amount would be reported by Donna on her current year income tax return as an alternative minimum taxable income before the AMT exemption? (1) $64,500 (2) $69,500 (3) $67,500 (4) $65,000

Choice "1" is correct and is calculated as follows: Regular taxable income 60,000 Adjustments: State and local taxes 4,500 Alternative minimum taxable income before AMT exemption 64,500 Home mortgage interest, charitable contributions, and gambling losses are all deductible for regular tax purposes and AMT purposes. State and local taxes are not deductible for AMT, so must be added back to regular taxable income to arrive at AMTI.

Jermaine and Kesha are married, file a joint tax return, have AGI of $50,000, and have two children, Devona and Arethia. Devona is beginning her freshman year at State University this fall and she will not be enrolled on a full-time basis. Arethia is beginning her senior year at Northeast University this fall, but will not be enrolled at least half-time in any academic period. Both Devona and Arethia qualify as dependents on their parents' tax return. Devona's qualifying tuition expenses and fees total $3,600 for the fall semester, while Arethia's qualifying tuition expenses and fees total $4,250 for the fall semester. Full payment is made for the tuition and related expenses for both children during the fall semester. The American Opportunity credit and lifetime learning credit respectively, available to Jermaine and Keesha for the year are (assume 2020 tax law): American Opportunity; Lifetime Learning Credit (1) $2,400; $850 (2) $2,400; $1,000 (3) $2,500; $2,000 (4) $2,500; $4,250

Choice "1" is correct. American opportunity credit (Devona) First $2,000 × 100% = 2,000 Second up to $2,000 × 25% = 400 [$1,600 × 25%] Maximum 2,400 Lifetime learning credit (Arethia) $4,250 × 20% = 850 Note: Maximum qualified expenses for the lifetime learning credit are $10,000 per year and the maximum credit per return is $2,000 per year. A taxpayer can claim both credits on the same return, but not for the same student. Arethia's expenses do not qualify for the American opportunity credit because she was not enrolled at least half-time for at least one academic period during the tax year. Choice "2" is incorrect. This answer would be correct had the qualified expenses for Arethia been $5,000. Choice "3" is incorrect. The American opportunity credit is calculated as 100 percent of the first $2,000 in expenses and 25 percent of the second $2,000. The lifetime learning credit is 20 percent of qualified expenses up to $10,000, not 20 percent of $10,000, regardless of the expense. Choice "4" is incorrect. The American opportunity credit is calculated as 100 percent of the first $2,000 in expenses and 25 percent of the second $2,000. The lifetime learning credit is 20 percent of qualified expenditures, not 100 percent, and the maximum credit per return is $2,000.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount should the Burgs deduct for the casualty loss in their itemized deductions on Schedule A for the current year? (1) $0 (2) $90 (3) $300 (4) $400

Choice "1" is correct. $0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty." In addition, a casualty loss is only deductible if it is in a nationally declared disaster area.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for taxes expense in their itemized deductions on Schedule A for the current year? (1) $1,200 (2) $3,825 (3) $5,025 (4) $7,650

Choice "1" is correct. $1,200 tax deduction for state income tax. Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI.

Which of the following statements is correct? (1) Tax preference items for the alternative minimum tax are always added back to regular taxable income (2) Itemized deductions that are added back to regular taxable income for the alternative minimum tax are preference items (3) Tax preference items for the alternative minimum tax can be an increase or decrease to regular taxable income (4) All taxpayers are able to deduct the full exemption for the alternative minimum tax

Choice "1" is correct. All of the tax preference items are add-backs to regular taxable income. Choice "2" is incorrect. Itemized deductions that are added back for the alternative minimum tax are adjustments, not tax preference items. Choice "3" is incorrect. All of the tax preference items are add-backs to regular taxable income. Choice "4" is incorrect. The alternative minimum exemption is phased out for taxpayers with AGI over a certain amount.

For the current year, Seth and Sheila intend to file a joint return. Seth expects to earn $35,000 in wages from his teaching job. He is covered by the university's pension plan. Sheila is a volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in interest income and $50 in prize winnings from a local radio contest. Each would like to make a deductible contribution to an individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct? Deductible Contribution; Claim Credit (1) Yes; Yes (2) Yes; No (3) No; Yes (4) No; No

Choice "1" is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit.

Which of the following is correct regarding the proper form to deduct self-employed health insurance and 50% of the tax on self-employment for a sole proprietor? Self-employed Health Insurance; 50% Tax on Self-Employment (1) Form 1040; Form 1040 (2) Form 1040; Schedule C (3) Schedule C; Form 1040 (4) Schedule C; Schedule C

Choice "1" is correct. Although both of these items are business related, neither one of them is deductible directly on Schedule C. They are both considered adjustments and are deductible on Form 1040, page 1.

Mr. Jones made a contribution to his self-employed retirement plan (SEP IRA Plan) This contribution is: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income (3) A deduction from adjusted gross income, subject to a 2 percent AGI floor (4) Not deductible

Choice "1" is correct. Amounts contributed to self-employed retirement plans are permitted as adjustments (for AGI).

An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year, may claim: (1) Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers (2) Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers (3) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers (4) The excess as a credit against income tax, if that excess was withheld by one employer

Choice "1" is correct. An employee who has had social security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess was correctly withheld by two or more employers.

An individual's losses on transactions entered into for personal purposes are deductible only if: (1) The losses qualify as casualty or theft losses (2) The losses can be characterized as hobby losses (3) The losses do not exceed $3,000 ($6,000 on a joint return) (4) No part of the transaction was entered into for profit

Choice "1" is correct. An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. Casualty and theft losses are limited to nationally declared disaster areas. In addition, the individual must itemize deductions and the loss must exceed 10 percent of AGI plus $100 per casualty. Choice "2" is incorrect. If the losses can be characterized as hobby losses, none of the loss is deductible. Choice "3" is incorrect. Losses entered into for personal purposes other than casualty losses are not deductible in any amount. Choice "4" is incorrect. If no part of the transaction was entered into for profit, none of the related loss is deductible.

Bob and Nancy are married and file a joint return for tax year 2019. They are both under age 50 and employed, with wages of $50,000 each. Their total AGI is $200,000. Bob is an active participant in a qualified plan, but Nancy is not. What is the maximum traditional IRA deduction they can take for the current year? (1) $0 (2) $6,000 (3) $9,600 (4) $12,000

Choice "1" is correct. Because Bob is covered by another qualified plan and the couple's AGI is over the phase-out range, they are both phased out completely and no IRA deduction is available. Choice "2" is incorrect. $6,000 would be correct if Nancy could still deduct her IRA contribution. But because they are "super rich," she is phased out as well. Choice "3" is incorrect. $9,600 assumes that Bob and Nancy are allowed a partially phased-out Roth contribution. However, their AGI is above the current year threshold for Roth IRA contributions, so they are not allowed to contribute to a Roth IRA. Choice "4" is incorrect. $12,000 would be correct if they were allowed the entire deduction. But they are completely phased out.

Which of the following would qualify as a deductible charitable contribution in Year 1 for an individual taxpayer? (1) A $200 contribution to the taxpayer's church charged by credit card on December 31, Year 1 (2) A $450 contribution to a senator's campaign on December 31, Year 1 (3) A $1,000 contribution to a foreign charity on December 31, Year 1 (4) A contribution on December 31, year 1, of $500 worth of clothing to the Salvation Army for which substantiation was not obtained

Choice "1" is correct. Contributions to charitable entities (including churches) are deductible. When the contribution is charged to a credit card, the contribution is deductible in the year the charge is made, even if payment to the credit card issuer is made in a later year. Choice "2" is incorrect. Political contributions are not deductible as charitable contributions. Choice "3" is incorrect. Contributions to foreign charities are not deductible as charitable contributions. Choice "4" is incorrect. In order to be deductible, all charitable contributions must be substantiated (e.g., by a canceled check, receipt, etc.). A contribution that is not substantiated is not deductible.

During the year, the Andradis', who were both under age 65, paid the following expenses: Unreimbursed costs for prescription drugs required for their dependent daughter's medical condition $ 2,300 Mrs. Andradis' face lift 4,000 Physical therapy for their dependent son's soccer injury 3,000 Massage therapy fees at Mr. Andradis' health club obtained because he enjoys massages 500 The Andradis' adjusted gross income for the current year was $65,000. What amount could be claimed on the Andradis' current year tax return for medical expenses? (1) $0 (2) $1,300 (3) $6,000 (4) $4,300

Choice "1" is correct. Deductible medical expenses are limited to the amount that exceeds 10 percent of the taxpayer's adjusted gross income. Deductible medical expenses are those expenses that are "necessary" (such as doctors, prescriptions, required surgery, etc.) Nondeductible expenses are such things as elective surgeries, health club memberships, and unnecessary medical expenditures. The Andradis' AGI is $65,000; 10 percent of that is $6,500. Qualified medical expenses are $1,300 for their daughter's prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $4,300 are less than the threshold of $6,500. So the answer is zero. Choice "2" is incorrect. The son's physical therapy is also a deductible expenditure, and the $1,300 does not take into account the 10 percent threshold. Choice "3" is incorrect. This answer is the threshold, which should then be compared with the qualified expenses in order to figure the amount to be deducted on Schedule A. Choice "4" is incorrect. This answer is the total deductible medical expenses; however, the answer does not take into account the 10 percent threshold.

For the current year, Val and Pat White filed a joint return. Val earned $40,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $5,000 in alimony payments (from a divorce agreement executed in 2017) for the first four months of the year before marrying. The couple had no other income. Each contributed $5,000 to an IRA account. The allowable IRA deduction on their current year joint tax return is: (1) $10,000 (2) $5,000 (3) $1,000 (4) $0

Choice "1" is correct. In 2020, taxpayers can contribute and deduct up to $6,000 per year to a traditional IRA. Alimony paid pursuant to divorce or separation agreements executed before December 31, 2018, is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2020 begins at AGI of $104,000 and is complete at $124,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range begins at $196,000 and is complete at $206,000 (2020). The earned income for IRA purposes here is $45,000 ($40,000 salary + $5,000 taxable alimony), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made. Choice "2" is incorrect. Pat's alimony is deemed "earned income" for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $6,000, provided the couple's combined earned income is at least $12,000. Choice "3" is incorrect. This is the amount of the additional catch-up contribution for taxpayers age 50 and older. Choice "4" is incorrect. When a taxpayer or taxpayer's spouse is an active participant in a pension plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as in this case).

A CPA's adjusted gross income (AGI) for the preceding 12-month tax year exceeds $150,000. Which of the following methods is (are) available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. The annualization method. II. The seasonal method. (1) I only (2) II only (3) Both I and II (4) Neither I nor II

Choice "1" is correct. In computing the amount of estimated payments due, an individual taxpayer may choose between the annualized method (90% of current year's tax), or the prior year method (100% of last year's tax) unless the taxpayer's adjusted gross income exceeds $150,000 then they must use 110% of last year's tax. Therefore, the taxpayer in this example can use the annualized method. The seasonal method is not permitted.

Taylor, an unmarried taxpayer, had $90,000 in adjusted gross income for 2012. During the current year, Taylor donated land to a church and made no other contributions. Taylor purchased the land in 15 years ago as an investment for $14,000. The land's fair market value was $25,000 on the day of the donation. What is the maximum amount of charitable contribution that Taylor may deduct as an itemized deduction for the land donation for the current year? (1) $25,000 (2) $14,000 (3) $11,000 (4) $0

Choice "1" is correct. Individual taxpayers may deduct the FMV of property donated to charity. The FMV of the property is $25,000 and the church is a qualified charity.

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan.The following information pertains to interest paid in Year 4: Mortgage interest on first loan $19,000 Interest on home equity line of credit 2,500 Auto loan interest 500 For Year 4, how much interest is deductible? (1) $19,000 (2) $22,000 (3) $21,500 (4) $19,500

Choice "1" is correct. Interest on mortgages of up to $750,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans generally is no longer deductible unless the proceeds are used to substantially improve the home. Interest for personal expenses such as auto loans and credit cards is not deductible. The total deduction is $19,000.

An individual taxpayer reports the following information: U.S Treasury bond income $100 Municipal bond income 200 Rental income 500 Investment interest expense 1000 What amount of investment interest can the taxpayer deduct in the current year? (1) $100 (2) $300 (3) $800 (4) $1,000

Choice "1" is correct. Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S. Treasury bond interest. Choice "2" is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest. Choice "3" is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income. Choice "4" is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitation.

During the year, Barlow moved from Chicago to Miami to start a new job, including costs of $1,200 to move household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these expenses. What amount should Barlow deduct as itemized deduction for moving expense? (1) $0 (2) $2,700 (3) $3,000 (4) $3,700

Choice "1" is correct. Moving expenses only deductible when moving pursuant to military orders.

Ben Willis paid self-employment taxes of 3,000 as a result of earnings from his consulting business. The " employer" portion of these taxes are: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income (3) A tax credit (4) Not deductible

Choice "1" is correct. One-half of the self-employed taxpayer's self-employment tax (social security and Medicare) is for the employer portion of taxes and is an adjustment (for AGI). The other half is personal and is not deductible.

Tom and Sally White, married and filing joint income tax returns, derive their entire income from the operation of their retail stationery shop. Their current year adjusted gross income was $100,000, and the Whites itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Whites during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 600 Tuition, meals, and lodging at special school for physically handicapped dependent child in an institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 8,000 Without regard to the adjusted gross income percentage threshold, what amount may the Whites claim in their current year return as qualifying medical expenses? (1) $8,600 (2) $8,000 (3) $600 (4) $0

Choice "1" is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense. Choice "2" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. Choice "3" is incorrect. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is a deductible medical expense. Choice "4" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is also a deductible medical expense.

Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows: Medical expenses (before percentage limitations) $12,000 State income taxes 4,000 Real estate taxes 3,500 Qualified housing and residence mortgage interest 10,000 Home equity mortgage interest (used to consolidate personal debts) 4,500 Charitable contributions (cash) 5,000 What are Robert's itemized deductions for alternative minimum tax? (1) $17,000 (2) $19,500 (3) $21,500 (4) $25,500

Choice "1" is correct. Robert's itemized deductions for alternative minimum tax purposes are calculated as follows: Medical expenses (exceeding 10% of AGI) 2,000 State income taxes (not allowed) − Real estate taxes (not allowed) − Qualified housing and residence interest 10,000 Home equity mortgage interest (not used to buy, build, or improve the home-not allowed) − Charitable contributions 5,000 Alternative Minimum Itemized deductions 17,000

In the current year, Joan Frazer's residence was totally destroyed by a hurricane. It was located in a federally declared disaster area. The property had an adjusted basis and a fair market value of $130,000 before the hurricane. During the year, Frazer received insurance reimbursement of $120,000 for the destruction of her home. Frazer's current year adjusted gross income was $70,000. Frazer had no casualty gains during the year. What amount of the storm loss was Frazer entitled to claim as an itemized deduction on her current year tax return? (1) $2,900 (2) $8,500 (3) $8,600 (4) $10,000

Choice "1" is correct. The casualty loss is measured by the difference in the property's value before ($130,000) and after (zero) the casualty, in other words, $130,000. The loss may not exceed the adjusted basis of the property. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer's adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer's tax return is $9,900 - $7,000 = $2,900.

Robinson's personal residence was partially destroyed by a wildfire that was part of a federally declared disaster area. The fair market value (FMV) of the residence before the fire was $500,000, and the FMV after the fire was $300,000. Robinson's adjusted basis in the home was $350,000. Robinson settled the insurance claim on the fire for $175,000. If Robinson's adjusted gross income (AGI) for the year is $120,000, what amount of the casualty loss may Robinson claim after consideration of threshold limitations? (1) $12,900 (2) $13,000 (3) $24,900 (4) $25,000

Choice "1" is correct. The computation of the allowable casualty loss is as follows: Lesser of: Decrease in fair market value ($500,000 - $300,000) 200,000 or Adjusted basis 350,000 200,000 Less: insurance proceeds (175,000) Economic loss 25,000 Less: 100 floor (applied to each separate casualty loss) (100) Remaining loss after applying 100 floor 24,900 Less: AGI threshold applied to all casualty losses in the aggregate: 10% of AGI of $120,000 (12,000) Loss after consideration of all threshold limits 12,900 Note: It is very important to remember that the $100 reduction applies to each separate casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate. Choice "2" is incorrect. Each casualty loss must be reduced by $100. Choice "3" is incorrect. All casualty losses in the aggregate must be reduced by 10% of AGI. Choice "4" is incorrect. Each casualty loss must be reduced by $100 and then all casualty losses in the aggregate must be reduced by 10% of AGI.

Grant had adjusted gross income of 55,000. During the year his personal use summer home was completely destroyed by a fire. Pertinent data with respect to the home follows: Cost basis 135,000 Value before casualty 140,000 Value after casualty 123,000 Grant was insured for his actual loss and he received the insurance settlement. What is Grant's allowable casualty loss deduction? (1) $0 (2) $12,000 (3) $12,900 (4) $16,900

Choice "1" is correct. The entire loss was covered by insurance. Choices "2", "3", or "4" are incorrect. Grant was insured for his actual loss and in receiving reimbursement would have no allowable casualty loss deduction.

West is single, has no dependents, and does not itemize. West provides the following information regarding his current-year's return: Long-term capital gain $15,000 Percentage depletion in excess of property's adjusted basis 9,000 Dividends from publicly-held companies 10,000 What is the amount of West's AMT tax preference items? (1) $9,000 (2) $19,000 (3) $24,000 (4) $34,000

Choice "1" is correct. The percentage depletion in excess of the property's adjusted basis is an AMT tax preference item. Depletion is limited to the property's adjusted basis for AMT purposes. Choice "2" is incorrect. Dividends are not AMT tax preference items. Choice "3" is incorrect. Long-term capital gains are not AMT tax preference items. Choice "4" is incorrect. Dividends and long-term capital gains are not AMT tax preference items.

In Year 1, Kane's residence had an adjusted basis of $250,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $425,000. Later that same year, Kane received $200,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Kane's Year 1 adjusted gross income was $100,000 and he did not have any casualty gains. What total amount can Kane deduct as a year 1 itemized deduction for casualty loss, after the application of the threshold limitations? (1) $39,900 (2) $40,000 (3) $49,900 (4) $50,000

Choice "1" is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows: Smaller loss 250,000 Insurance recovery (200,000) Taxpayer's loss 50,000 Less $100 (100) Eligible loss 49,900 10% AGI limitation (10,000) Deductible loss 39,900

Bob and Nancy are married and file a joint return for tax year 2020. They are both under age 50 and employed, with wages of $50,000 each. Their total AGI is $110,000. Neither or them is an active participant in a qualified plan. What is the maximum Roth IRA deduction they can take for the current year? (1) $0 (2) $6,000 (3) $9,600 (4) $12,000

Choice "1" is correct. Their AGI exceeds the current year threshold for contributions to a Roth IRA, so they are completely phased out from making any Roth IRA contributions for the year. It is irrelevant that neither of them is covered by another qualified plan. Choice "2" is incorrect. $6,000 would be correct if one of them could contribute to a Roth IRA. But because their AGI exceeds the allowable threshold, they are completely phased out. Choice "3" is incorrect. $9,600 assumes that Bob and Nancy are allowed a partially phased-out Roth contribution. However, their AGI is above the current year threshold for Roth IRA contributions, so they are not allowed to contribute to a Roth IRA. Choice "4" is incorrect. $12,000 would be correct if they were allowed the entire contribution. But they are completely phased out.

Which of the following legal expenses are deductible in arrive at an individual's AGI? (1) Ordinary and necessary expenses incurred in connection with a trade or business (2) Ordinary and necessary expenses incurred in defense of a traffic ticket (3) Ordinary and necessary expenses incurred for tax advice relative to the preparation of an individual's income tax return (4) Ordinary and necessary expenses incurred for estate planning advice

Choice "1" is correct. Trade or business expenses are deductible on Schedule C (for AGI), where the number is transferred to Form 1040 and is part of adjusted gross income.

In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes. Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and immediately started legal action to recover the overstatement. In November, Year 11, the matter was resolved in Farb's favor, and he received a $5,000 refund. Farb itemizes his deductions on his tax returns. Which of the following statements is correct regarding the deductibility of the property taxes? (1) Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as income in his Year 11 income tax return (2) Farb should not deduct any amount in his Year 10 income tax return when originally filed, and should file an amended Year 10 income tax return in Year 11 (3) Farb should deduct $3,000 in his Year 10 income tax return (4) Farb should not deduct any amount in his Year 10 income tax return and should deduct $3,000 in his Year 11 income tax return

Choice "1" is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10. Choice "2" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11. Choice "3" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10. Choice "4" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11.

In 2020, Jan Thomas, who is under age 65, is an employee of an engineering firm, had adjusted gross income of $80,000 in the year, and qualifies to itemize deductions. Assume a 10 percent AGI threshold when calculating the medical expense deduction. Jan provided the following expenses to her CPA to use for the itemized medical expenses on Schedule A of her tax return for the year: Medical insurance premiums paid $8,000 Deductible paid for medical insurance 1,000 Hospital costs for emergency room visit 2,000 Vitamins for general health 500 Prescription eyeglasses 200 Visits to the doctor and dentist 700 Health club dues for general health 1,200 Insurance co-pays for prescription drugs 300 Mandatory Medicare A payments 1,160 Transportation to doctor's office for required medical care 100 Insurance reimbursement for hospital visit 1,500 What is the total amount of medical expenses that will be deductible on Jan's Schedule A for the current year? (1) $0 (2) $2,800 (3) $1,800 (4) $3,300

Choice "2" is correct, per the calculation below: Medical insurance premiums paid $8,000 Deductible paid for medical insurance 1,000 Hospital costs for emergency room visit 2,000 Vitamins for general health − Prescription eyeglasses 200 Visits to the doctor and dentist 700 Health club dues for general health − Insurance co-pays for prescription drugs 300 Mandatory Medicare A payments − Transportation to doctor's office for required medical care 100 Insurance reimbursement for hospital visit (1,500) Total net qualified medical expenses $ 10,800 Less: Limitation based on AGI: AGI $ 80,000 Times 10% 8,000 (8,000) Total medical expenses on Schedule A $ 2,800

Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income was $30,000 and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction of Jimet's current year income tax return? (1) $0 (2) $1,500 (3) $2,000 (4) $5,000

Choice "2" is correct. $1,500. Deductible amount is lower of: Stock at cost (short-term property) $1,500* AGI limit (60% of $30,000) 18,000 *Allowable contribution Rule: Contributions of long-term property (property owned for more than one year) are generally deductible at fair market value at the date of the gift. Contributions of short-term property (property owned for one year or less) are generally deductible at the lower of cost or fair market value. The cash gift to the "needy family" is not deductible because charitable contributions need be made to organizations that are qualified by the IRS to be deductible.

On December 1 of the current taxable year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest's current year income tax return? (1) $0 (2) $2,000 (3) $22,000 (4) $24,000

Choice "2" is correct. $2,000 of interest is deductible on her current year tax return. Total interest 24,000 Divide by # of months of the loan ÷ 12 Monthly deduction 2,000 Times: Months in current year × 1 Total current year deduction 2,000 Rule: Prepaid interest must be allocated over the period of the loan, even for a cash basis taxpayer.

In the current year, Drake, a disabled taxpayer, made the following improvements: Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $100,000 Widening doorways to accommodate Drake's wheelchair (the improvement did not increase the value of his home) 10,000 For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum would be allowable as a medical expense deduction in the current year? (1) $110,000 (2) $85,000 (3) $75,000 (4) $10,000

Choice "2" is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible. Choice "1" is incorrect. Although a capital expenditure for the improvement of a home qualifies as a medical expense, it is only deductible to the extent that the expenditure exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. Choice "3" is incorrect. In addition, to the capital improvement expenditure of $75,000, the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. The widening of hallways qualifies as this type of expense and, therefore, the entire $10,000 is deductible. Choice "4" is incorrect. Both the capital improvement expenditure of $75,000 and the full cost of home-related capital expenditures to enable a physically handicapped individual to live independently and productively ($10,000) qualify as medical expenses.

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer? (1) A contemporaneous written acknowledgement is required for donations of $100 (2) A charitable contribution deduction is not allowed for the value of services rendered to a charity (3) A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000 (4) The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income

Choice "2" is correct. A charitable contribution is not allowed for the value of services rendered to a charity. Choice "1" is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more. Choice "3" is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000. Choice "4" is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income.

Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole's adjusted gross income? (1) $3,000 (2) $2,600 (3) $2,500 (4) $1,600

Choice "2" is correct. Adjusted gross income (AGI) is gross income less adjustments or deductions to arrive at AGI. $3,000 in wages is part of gross income. The only adjustment listed is $400 in student loan interest, resulting in an AGI of $2,600. Choice "1" is incorrect. Student loan interest is a deduction to arrive at AGI. Choice "3" is incorrect. Charitable contributions are itemized deductions subtracted from AGI. Choice "4" is incorrect. Unreimbursed employee business expenses are not deductible.

The question below includes actual dates that must be used to determine the approximate tax treatment of the transaction. Jake and his wife were divorced in 2015. Jake pays the following amounts to his former spouse during the current year: Regular alimony payments $12,000 Child support $10,000 Residence as part of a property settlement $115,000 What amount can Jake deduct as alimony for the current year? (1) $0 (2) $12,000 (3) $22,000 (4) $137,000

Choice "2" is correct. Alimony paid on a divorce or separation agreement executed on or before 12/31/18 is deductible as a for AGI deduction. The regular alimony payments are deductible, but the child support is not. The residence was a property settlement and is not part of deductible alimony. Choice "1" is incorrect. The regular alimony payments are deductible because the divorce was executed prior to 2019. Choice "3" is incorrect. This amount includes the child support, which is not deductible. Choice "4" is incorrect. This amount includes the child support and the property settlement, both of which are not deductible.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Paula pays alimony to her former spouse. The divorce decree, which was finalized in 2010, requires Paula to make regular cash payments to her former spouse of $30,000 annually. The divorce decree also requires Paula to pay the $24,000 annual mortgage on her former spouse's home, which they used to share. Paula still has ownership interest in the home. During the current year, Paula pays $18,000 directly to her former spouse, $12,000 for some expenses of her former spouse, and $24,000 on the mortgage. How much of these payments are deductible alimony in the current year? (1) $18,000 (2) $30,000 (3) $42,000 (4) $54,000

Choice "2" is correct. Alimony paid pursuant to a divorce decree executed prior to 2019 is deductible as a for AGI deduction. Deductible alimony must be paid in cash or cash equivalent. The expenses paid on behalf of the former spouse qualify as cash equivalents, so all $30,000 alimony has been paid. Deductible alimony only includes amounts that cannot extend beyond the death of the payee. The mortgage will not qualify because this would still be payable after the death of the payee. Choice "1" is incorrect. This only includes the amounts paid in cash, but the expenses paid will qualify as a cash equivalent. Choice "3" is incorrect. This includes the cash payments and the mortgage. The expenses paid will qualify as a cash equivalent. The mortgage will not qualify because it would still be payable after the death of the payee. Choice "4" is incorrect. This includes all amounts paid, but the mortgage will not qualify because it would still be payable after the death of the payee.

Which of the following is a deduction for AGI? (1) Charitable contributions (2) Alimony paid pursuant to a 2015 divorce agreement (3) Tax preparation fees (4) Mortgage interest paid on your primary residence

Choice "2" is correct. Alimony paid pursuant to a divorce or separation agreement on or before December 31, 2018, is an adjustment, which is a deduction for AGI. Choice "1" is incorrect. Charitable contributions are an itemized deduction, which is a deduction from AGI. Choice "3" is incorrect. Tax preparation fees are an itemized deduction, which is a deduction from AGI. Choice "4" is incorrect. Mortgage interest paid on your primary residence is an itemized deduction, which is a deduction from AGI.

Carroll, a 35 year old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses for the year: Doctor bills resulting from a serious fall $5,000 Cosmetic surgery that was necessary to correct a congenital deformity 15,000 Carroll had no medical insurance. For regular income tax purposes, what was Carroll's maximum allowable medical expense deduction, after the applicable threshold limitation, for the year? (1) $0 (2) $12,500 (3) $15,000 (4) $20,000

Choice "2" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, because it was necessary to correct a congenital deformity. Doctor bills 5,000 Surgery 15,000 20,000 AGI floor ($100,000 × 7.5%) (7,500) Deduction $12,500

Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible? (1) $0 (2) $3,000 (3) $5,800 (4) $7,000

Choice "2" is correct. Gambling losses are miscellaneous itemized deductions. The deduction for gambling losses are, however, limited to gambling winnings. Choice "1" is incorrect. Gambling losses are deductible up to gambling winnings. Choice "3" is incorrect. Gambling losses are deductible to the extent of gambling winnings. Choice "4" is incorrect. The deduction for gambling losses cannot exceed gambling winnings.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. For 2020, the Stevensons are filing married filing jointly, and their adjusted gross income was $58,250. Additional information is as follows: Interest paid on their home mortgage $5,200 State taxes paid 2,000 Medical expenses in excess of AGI floor 1,500 Deductible contributions to IRAs 4,000 Alimony paid to Mr. Stevenson's first wife (divorce finalized in 2015) 5,000 Child support paid for Mr. Stevenson's daughter 5,100 What amount may the Stevensons claim as itemized deductions on their 2020 Schedule A? (1) $7,200 (2) $8,7000 (3) $12,300 (4) $13,800

Choice "2" is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of the AGI floor are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction. Home mortgage interest 5,200 State taxes paid 2,000 Medical expenses 1,500 Total itemized deductions 8,700 Choice "1" is incorrect. This answer includes only the interest paid on the mortgage and the state taxes. The medical expenses in excess of the AGI floor are also deductible on Schedule A. Choice "3" is incorrect. This answer includes the interest, state taxes paid, and the child support. It does not include the medical expenses (as is proper) and should not include the child support. Choice "4" is incorrect. This is the total of all items listed, three of which (the IRA contributions, alimony, and child support) should not be included.

Mary, an unmarried taxpayer, made the following charitable contributions during the current year: A cash contribution to a church $2,000 A donation of used furniture to a hospital's thrift shop, with a fair market value of 500 A donation to a state university of publicly traded stock purchased by Mary for $3,000 four months ago, with a fair market value of 4,000 (1) $5,000 (2) $5,500 (3) $6,000 (4) $6,500

Choice "2" is correct. Mary can claim $5,500 as a charitable contribution deduction. Cash to church $2,000Used furniture to thrift shop (FMV) 500 Publicly traded stock (cost basis) 3,000 $5,500 The used furniture donated to a thrift shop is ordinary income property because it is a personal use asset that has depreciated in value (although the original cost is not provided, it is reasonable to assume that it is worth less than the original cost). The publicly traded stock is also ordinary income property because the stock was held for less than one year. The amount of the deduction for ordinary income property is the lesser of the property's adjusted basis or its fair market value (FMV) at the time it is contributed. All of the contributions were made to public charities, so the AGI limitations are 60 percent for the cash contribution and 50 percent for the ordinary income property contributions. The AGI limitations are $30,000 ($50,000 AGI × 60%) for the cash contribution and $25,000 ($50,000 × 50%) for the property contributions. The amount of the contributions are well below the AGI limitation amounts, so the charitable contribution deduction is not limited. Choice "1" is incorrect. The $5,000 amount does not include the FMV of the used furniture contributed to the hospital's thrift store. Choice "3" is incorrect. The $6,000 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis, and does not include the FMV of the used furniture. Choice "4" is incorrect. The $6,500 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis.

In 2020, Tom, age 66, paid the medical expenses of his mother-in-law, age 86. Although Tom provided more than half the support, his mother-in-law does not qualify as his dependent because her gross income was too high. This expenditure is: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income, subject to an AGI floor (3) A deduction from adjusted gross income, without limit to an AGI floor (4) Not deductible

Choice "2" is correct. Medical expenses are itemized deductions (from AGI), subject to an AGI floor. Note: The definition of "dependent" for purposes of taking the medical expenses for that person as an itemized deduction does not consider the dependent's gross income. Thus, there is no limitation to a dependent's gross income when it relates to medical or dental expenses. The remaining dependency tests apply and Tom's mother-in-law meets those tests. Choice "1" is incorrect. Medical expenses are an itemized deduction from adjusted gross income, not an adjustment to arrive at adjusted gross income. Choice "3" is incorrect. Medical expenses are subject to an AGI floor. Choice "4" is incorrect. See the explanation for choice "2".

A 22-year-old full-time student earned $11,000 in salary and received $9,000 in interest from corporate bonds. The bonds were a gift from the student's grandparents. The student's parents pay more than half of the student's support, including $25,000 in tuition. Which of the following statements is correct regarding the student's current year income tax? (1) The student's salary income and no other income will be subject to the "kiddie tax." (2) A portion of the student's interest income and no other income will be subject to the "kiddie tax." (3) Both the student's interest income and a portion of the interest income will be subject to the "kiddie tax." (4) Neither the student's interest income nor the interest income will be subject to the "kiddie tax."

Choice "2" is correct. Only a portion of the student's interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent's marginal rate ("kiddie tax"). Net unearned income is unearned income minus $2,200. Choice "1" is incorrect. The student's salary income is earned income, so it is not subject to the kiddie tax. Choice "3" is incorrect. Only a portion of the interest income, not the salary income, is subject to the kiddie tax. Choice "4" is incorrect. A portion of the student's interest income is subject to the kiddie tax.

Alternative minimum tax preferences include: Tax exempt interest from private activity bonds; Charitable contributions of appreciated capital gain property (1) Yes; Yes (2) Yes; No (3) No; Yes (4)No; No

Choice "2" is correct. Tax-exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.

Deet, an unmarried taxpayer, qualified to itemize deductions. Deet's adjusted gross income was $40,000 and he made a $1,500 substantiated cash donation directly to a needy family. Deet also donated art, valued at $11,000, to a local art museum. Deet had purchased the art work two years earlier for $2,000.What was the maximum amount of the charitable contribution allowable as an itemized deduction on Deet's income tax return? (1) $12,500 (2) $11,000 (3) $ 3,500 (4) $ 2,000

Choice "2" is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year, the fair market value could be deducted. In this case, the $11,000 was within the taxpayer's limitation of $12,000 (30% of AGI of $40,000) for donations of appreciated property. Choice "1" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Choice "3" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property. Choice "4" is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated property.

Mr. and Mrs. Sloan incurred the following expenses during the year when they adopted a child: Child's medical expenses $ 5,000 Legal expenses 8,000 Agency fee 3,000 Without regard to the limitation of the credit, what amount of the above expenses are qualifying expenses for the adoption credit? (1) $16,000 (2) $11,000 (3) $8,000 (4) $5,000

Choice "2" is correct. The legal fees and agency fee would be qualifying expenses for the tax credit (medical expenses do not qualify). Choice "1" is incorrect. $5,000 of the $16,000 of total expenses are not eligible. Choice "3" is incorrect. The agency fee is also a qualifying expense. Choice "4" is incorrect. Medical expenses are not eligible for the credit.

For the current year, Jennifer has self-employment net income of $50,000 before any SEP IRA deduction and no other earned income for the year. The total amount of self- employment tax related to Jennifer's earnings was $7,064. What is the maximum amount Jennifer may deduct for contributions to her SEP IRA plan for the year? (1) $8,587 (2) $9,294 (3) $12,500 (4) $53,000

Choice "2" is correct. The maximum annual deductible amount for self-employed individuals to a Keogh Plan is the lesser of $57,000 or 20 percent of net earnings. "Net earnings" is defined as business income minus business expenses minus 50 percent of self-employment taxes. Net business income 50,000 50% of self-employment taxes (3,532) [$7,064 / 2] Self-employment earning before Keogh 46,468 Times 20% × .20 Calculated SEP IRA Deduction 9,294 Then compare to the $57,000 maximum, and the deduction is the lesser amount. Therefore, use $9,294. Choice "1" is incorrect. This amount assumes that 100 percent of the self-employment tax was an allowable reduction to the "net earnings" figure, which it is not. Only 50 percent of the total amount is an allowable reduction. Choice "3" is incorrect. This amount assumes that $50,000 was multiplied by 25 percent. Choice "4" is incorrect. This amount ignores the fact that the maximum annual deductible amount for self-employed individuals to a SEP IRA plan is the lesser of $57,000 or 20 percent of net earnings. In this case, 20 percent of net earnings is less than $57,000 (per the above calculation).

Andre Davis is 17 years old and lives at home with his parents. He earned $5,000 in the current tax year mowing lawns. Andre also received $3,000 in interest on a corporate bond that his grandmother gave him. Assuming the 2019 "kiddie tax" threshold of $2,200 at what marginal tax rate is Andre's $8,000 of income taxed? (1) $8,000 less the standard deduction is taxed at his parents' marginal rate (2) $7,200 less the standard deduction is taxed at Andre's marginal rate. $800 is taxed at his parents' marginal rate (3) $5,000 less the standard deduction is taxed at Andre's marginal rate. $3,000 is taxed at his parents' marginal rate (4) $8,000 less the standard deduction is taxed at Andre's marginal rate

Choice "2" is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate. The net unearned income is calculated by taking the child's net unearned income (in this case, interest) and subtracting the allowable standard deduction for dependents ($1,100 for 2020) plus an additional $1,100 taxed at the child's marginal rate. Andre's net unearned income is $800 ($3,000 - $2,200). Therefore, $800 is taxed at his parents' marginal rate and $7,200 (less Andre's standard deduction) is taxed at Andre's marginal tax rate. Note that because Andre has both earned income and unearned income, his standard deduction is the greater of: (1) $1,100; or (2) earned income + $350 ($5,000 + $350 = $5,350). All of the income is reported on Andre's income tax return. Choices "1", "3", and "4" are incorrect. The "kiddie tax" applies only to unearned income in excess of $2,200, not total earned income, as calculated in the above explanation.

Smith, a single individual, made the following charitable contributions during the current year. Smith's adjusted gross income is $60,000. Donation to Smith's church $5,000 Art work donated to the local art museum(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for) 3,000 Contribution to a needy family 1,000 What amount should Smith deduct as a charitable contribution? (1) $5,000 (2) $7,000 (3) $8,000 (4) $9,000

Choice "2" is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property (appreciated property held one year or less is short-term property). Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization. Choice "1" is incorrect. This choice excludes the donation of the artwork to the art museum. Choice "3" is incorrect. This choice erroneously includes the donation of the artwork at the art's fair market value. Choice "4" is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to the needy family, which is not a deductible donation.

Sam's Year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For Year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make? (1) $30,000 (2) $33,000 (3) $45,000 (4) $50,000

Choice "2" is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of: 90% of the current year's tax ($50,000 x 90%) = $45,000, or 100% of the previous year's tax ($30,000 x 100%) = $30,000 However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000). Choice "1" is incorrect. $30,000 is 100% of last year's tax. This would be sufficient if the previous year's income were $150,000 or less. Choice "3" is incorrect. $45,000 is 90% of this year's tax, which is sufficient, but we are looking for the minimum amount. Choice "4" is incorrect. $50,000 is 100% of the current year's tax, which is sufficient, but more than required.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Mark and his wife divorced in 2016. Mark pays alimony and child support to his former spouse. He is required to pay $6,000 in child support and $10,000 in alimony a year. At the beginning of the current year, he is in arrears for child support in the amount of $12,000 and for alimony in the amount of $20,000. During the current year, he starts to catch up and pays $25,000. How much is deductible alimony for the current year? (1) $0 (2) $7,000 (3) $10,000 (4) $25,000

Choice "2" is correct. When a person is behind in child support and alimony, payments are allocated completely to child support first until the full obligation is met. Any additional amounts are allocated to alimony. The alimony is deductible because the divorce was executed prior to 2019. However, only the amount allocated to alimony is deductible. The first $12,000 fulfills the child support in arrears. The next $6,000 is allocated to the current-year's child support. The remaining $7,000 ($25,000 - $12,000 - $6,000) is then allocated to the alimony in arrears and is deductible in the current year.

An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim: (1) Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers (2) Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers. (3) The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers (4) The excess as a credit against income tax, if that excess was withheld by one employer

Choice "3" is correct. An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. Choice "1" is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax. Choice "2" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers. Choice "4" is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee.

Charitable contributions subject to the 60-percent limit that are not fully deductible in the year made may be: (1) Neither carried back nor carried forward (2) Carried back two years or carried forward twenty years (3) Carried forward five years (4) Carried forward indefinitely until fully deducted

Choice "3" is correct. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward five years. Choice "1" is incorrect. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward. Choice "2" is incorrect. Charitable contributions are never carried back. Choice "4" is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer's death).

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after school-care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return? (1) $1,600 (2) $800 (3) $500 (4) $1,200

Choice "3" is correct. First of all we need to determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. So of the $8,000 spent, only $4,000 will qualify. The maximum eligible for one dependent, though, is $3,000. Then it is further limited because it is limited to the lowest earned income of either spouse. That would be Mary's $2,500. Due to their combined income level, they are in the 20% credit range. The credit is 20% of $2,500, or $500.

For income to be taxable on a tax return, it must be: (1) Realized only (2) Recognized only (3) Both recognized and realized (4) Either recognized or realized

Choice "3" is correct. For income to be taxable on a tax return, it must be both realized (i.e., it must involve an accrual or receipt of cash, property, or services, or a change in the form of an investment, such as a sale or an exchange) and recognized (i.e., the tax law requires that the income be reported as taxable in the tax return).

The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan , the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as: (1) Deductible personal interest (2) Deductible qualified residence interest (3) Nondeductible interest (4) Investment interest expense

Choice "3" is correct. Interest paid on debt not used to acquire or substantially improve a home is not deductible. This is true even if the debt is secured by a home. Choice "1" is incorrect. Personal interest is not deductible. It is also called consumer interest. Choice "2" is incorrect. Interest paid on debt secured by a home mortgage is not deductible if not used to acquire or substantially improve the home. Choice "4" is incorrect. Interest paid on a debt secured by a home mortgage is not classified as investment interest.

The self-employment tax is: (1) Fully deductible as an itemized deduction (2) Fully deductible in determining net income from self-employment (3) One-half deductible from gross income in arriving at adjusted gross income (4) Not deductible

Choice "3" is correct. One half of the self-employment tax is deductible to arrive at adjusted gross income. Choice "1" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income. Choice "2" is incorrect. Self-employment tax is not deductible in determining self-employment income. Choice "4" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.

Matthews was a cash basis taxpayer whose current year records showed the following: State and local income taxes withheld $1,500 State estimated income taxes paid December 30 of the current year 400 Federal income taxes withheld 2,500 State and local income taxes paid April 17 of the following year 300 What total amount was Matthews entitled to claim for taxes on her current year Schedule A of Form 1040? (1) $4,700 (2) $2,200 (3) $1,900 (4) $1,500

Choice "3" is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900. Choice "1" is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid. Choice "2" is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid. Choice "4" is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year.

Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual? (1) Traditional IRA account contribution (2) One-half of the self-employment tax deduction (3) State income taxes (4) Charitable contributions

Choice "3" is correct. State income taxes are allowed as an itemized deduction for regular tax purposes, but not for AMT purposes. Choice "1" is incorrect. Traditional IRA account contributions are allowed for both regular tax purposes and AMT purposes. Choice "2" is incorrect. One-half of the self-employment tax deduction is allowed for both regular tax purposes and for AMT purposes. Choice "4" is incorrect. Charitable contributions are allowed as deductions for both regular tax purposes and for AMT purposes.

Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year: Cash contribution to church $4,000 Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase) 1,200 Donation of used clothing to Salvation Army (fair value evidenced by receipt received) 600 What is the maximum amount Spencer can claim as a deduction for charitable contributions in the current year? (1) $5,400 (2) $5,200 (3) $5,000 (4) $4,400

Choice "3" is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). The contributions are also well below the appropriate thresholds of 60 percent (for the cash contribution) and 60 percent (for the purchase of the art and donation of used clothing). Choice "1" is incorrect. The art object deduction is not its fair market value of $800, but the $400 excess paid over its fair market value. Choice "2" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the art object deduction is only the $400 excess paid over fair market value, not the $1,200 paid. Choice "4" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value.

Which of the following credits can result in a refund, even if the individual had no income tax liability? (1) Credit for prior year minimum tax (2) Elderly and permanently and totally disabled credit (3) Earned income credit (4) Child and dependent care credit

Choice "3" is correct. The earned income credit is refundable. Eligible taxpayers can get advance payments from their employers because the credit is assured.

Mike and Janet are married and file jointly. For Year 1, their alternative minimum taxable income (AMTI) is $1,076,800. What amount is their AMT exemption using the rules in effect for the current year? (1) $0 (2) $10,000 (3) $103,400 (4) $113,400

Choice "3" is correct. The full exemption amount is $113,400 (2020). When the AMTI exceeds $1,036,800 for married taxpayers filing jointly, the full exemption is reduced by 25% of the overage. $1,076,800 exceeds $1,036,800 by $40,000. 25% of $40,000 is $10,000. So the exemption of $113,400 is reduced by $10,000 to $103,400. Choice "1" is incorrect. Zero would be correct if the exemption was fully phased out. Choice "2" is incorrect. $10,000 is the amount of the exemption that is phased out, not the remaining amount allowed. Choice "4" is incorrect.$113,400 is the full exemption amount, but it is partially phased out because the AMTI exceeds the current year threshold.

The Welles family has three children. Which of the children listed below would be subject to the "kiddie tax"? (1) Willy: 20 years old, not a college student, supports himself fully (2) Walker: 25 years old, full-time college student, supports himself fully (3) Wilson: 20 years old, full-time college student, fully supported by his parents (4) None of these

Choice "3" is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate under the "kiddie tax" rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents' marginal rate. If Wilson's unearned income is less than $11,000 and consists solely of interest, dividends, and capital gain distributions, his parents can elect to include the income on the parents' return, rather than file a separate income tax return for Wilson. Choice "1" is incorrect. Because Willy supports himself fully, his income is not subject to the "kiddie tax." Choice "2" is incorrect. Because Walker is over the age of 24, his income is not subject to the "kiddie tax." Choice "4" is incorrect. The net unearned income of a dependent child under 18 years of age (or a child age 18-24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate.

On their joint tax return, Sam and Joann, who are both over age 65, had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions: Interest of $15,000 on a $100,000 home equity loan to purchase a motor home Real estate tax and state income taxes of $10,000 Unreimbursed medical expenses of $15,000 (prior to AGI limitation) Miscellaneous itemized deductions of $5,000 (prior to AGI limitation) Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income? (1) $15,000 (2) $25,000 (3) $10,000 (4) $28,750

Choice "3" is correct. The only AMT add-back adjustment in computing alternative minimum taxable income is the real estate tax and state income tax of $10,000. The taxes were deducted as itemized deductions, but are not allowed for AMT purposes and, therefore, must be added back. The interest on the home equity loan to purchase a boat is not allowed for regular tax purposes or AMT purposes. The unreimbursed medical expenses are treated the same for regular and AMT purposes, so there is no add-back amount. The charitable contributions are also allowed for both regular and AMT purposes, so there is no add-back amount.

Carol reports taxable income of $48,000. Included in that calculation are the following items: Real estate taxes on her home $2,000 Mortgage interest on acquisition indebtedness 1,200 Charitable contribution 550 Carol also had excluded municipal bond interest income of $8,000, $3,000 of which was deemed to be private activity bond interest. What are Carol's total preference items for the alternative minimum tax? (1) $1,200 (2) $2,000 (3) $3,000 (4) $6,750

Choice "3" is correct. The private activity bond interest is added in for the AMT as a preference item. All taxes, including real estate taxes, are adjustments for the alternative minimum tax. The mortgage interest and charitable contributions are allowed deductions for the AMT, so are not adjustments or preference items for AMT purposes.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Jake and his wife divorced in 2015. Jake pays the following amounts to his former spouse during the current year: Regular alimony payments $30,000 Residence as part of a property settlement $250,000 Jake and his former spouse have a 10-year-old child. When the child reaches the age of 18, the regular alimony payments are reduced by $10,000. What amount can Jake deduct as alimony for the current year? (1) $0 (2) $10,000 (3) $20,000 (4) $280,000

Choice "3" is correct. The regular alimony payments are deductible because the divorce was executed prior to 2019, but the amount that is contingent on the child being under the age of 18 is deemed to be child support. Because this contingent amount is $10,000, only the other $20,000 ($30,000 - $10,000) is deemed to be true deductible alimony. The residence was a property settlement and is not part of deductible alimony. Choice "1" is incorrect. The regular alimony payments not allocated to child support are deductible because the divorce was executed prior to 2019. Choice "2" is incorrect. This is simply the reduction of the regular alimony payments when the child becomes 18. Choice "4" is incorrect. This amount includes the child support and the property settlement, neither of which are deductible.

During the year, Justin, a self-employed individual, paid the following amounts: Federal income tax $5,000 State income tax 3,000 Real estate taxes on land in Europe (held as an investment) 800 State occupational license fee 400 What amount can Justin claim as taxes when itemizing deductions from AGI? (1) $3,000 (2) $3,400 (3) $3,800 (4) $4,200

Choice "3" is correct. The state taxes of $3,000 and the real estate taxes of $800 are permitted as itemized deductions ($3,800). Choice "1" is incorrect. The real estate taxes are also deductible. Choice "2" is incorrect. This choice indicates that the state income tax and the state occupational license fee are deductible as taxes. The real estate taxes are also deductible as taxes, and the occupational license fee is not deductible as a tax. Choice "4" is incorrect. This choice indicates that all items listed in the question are deductible, except for the federal income tax. The state occupational license fee is not deductible as a tax when itemizing deductions, but is deductible as a business expense on the taxpayer's Schedule C (for IRS Form 1040).

Which of the following statements is false? (1) If an individual fails to pay estimated taxes for a year, there is no underpayment penalty due under any circumstances if the balance of tax due at filing is less than $1,000 (2) If tax payments are withheld from payroll checks, regardless of the dollar amounts withheld at any particular time throughout the year, the payments are deemed to have been paid evenly throughout the year (3) If an individual files a tax return with a zero tax liability in the prior year, the individual must pay in at least 90 percent of the current year's tax to avoid underpayment penalties, as the ability to use the 100 percent of prior year tax is lost (4) The Internal Revenue Service may waive the penalty for underpayment of taxes if the failure to pay was due to casualty, disaster, illness, or death of the taxpayer

Choice "3" is correct. The statement is false. If an individual files a tax return with a zero tax liability in the prior year, the individual is allowed to use the 100 percent of prior year's tax rule (as the "lesser" of 90 percent of the current year's tax or 100 percent of the prior year's tax) to avoid underpayment penalties.

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 What amount should the Burgs deduct for gifts to charity in their itemized deductions on Schedule A for the current year? (1) $160 (2) $100 (3) $60 (4) $0

Choice "3" is correct. The taxpayer may only deduct the excess contribution over the consideration received. $60 Payment to qualified charity 160 Fair value of 4 tickets at $25 (100) Charitable contribution 60

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year: Repair and maintenance of motorized wheelchair for physically handicapped dependent child $ 300 Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care 4,000 State income tax 1,200 Self-employment tax 7,650 Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office 160 Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90 Fee for breaking lease on prior apartment residence located 20 miles from new residence 500 Security deposit placed on apartment at new location 900 Without regard to the $100 "floor" and the adjusted gross income percentage threshold, what amount may the Burgs claim in their current year return as qualifying medical expenses? (1) $0 (2) $300 (3) $4,000 (4) $4,300

Choice "4" is correct. $4,300 medical expenses. Wheelchair repair 300 School for handicapped 4,000 Total 4,300

During the year, Scott charged $4,000 on his credit card for his dependent son's medical expenses. Payment to the credit card company had not been made by the time Scott filed his income tax return in the following year. In addition, in the current year, Scott paid a physician $2,800 for the medical expenses of his wife, who died in the prior year. Disregarding the adjusted gross income percentage threshold, what amount could Scott claim in his current year income tax return for medical expenses? (1) $0 (2) $2,800 (3) $4,000 (4) $6,800

Choice "4" is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses. Rules: Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death.

Which of the following statements about the alternative minimum tax (AMT) of an individual is correct? (1) It is determined from the tax rate schedules and computed on income that exceeds $100,000 (2) It is computed on an individual's regular taxable income at a rate of 28% (3) It is calculated after certain tax preference items that may be used as an alternative to the regular tax are deducted (4) AMT credits may be carried forward to future tax years

Choice "4" is correct. AMT credits may be carried forward indefinitely against regular tax. Choice "1" is incorrect. The AMT of an individual is determined by adjusting the individual's regular taxable income by certain tax preference items and adjustments, subtracting the AMT exemption, and applying the applicable AMT rates to the resulting AMT income. Choice "2" is incorrect. AMT is based on tax rates of both 26% and 28%. Choice "3" is incorrect. Tax preference items are added back to taxable income in computing alternative minimum taxable income (AMTI).

Bob and Nancy Goldberg are both age 67 and file a joint return. For the current year, the regular standard deduction for a couple married filing jointly is $24,800. What is the maximum standard deduction available to Bob and Nancy? (1) $24,400 (2) $25,700 (3) $26,000 (4) $27,400

Choice "4" is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,300 each in addition to the regular amount. $24,800 + $1,300 + $1,300 = $27,400

During the current year, Wood's residence had an adjusted basis of $150,000 and it was destroyed by a tornado. An appraiser valued the decline in market value at $175,000. Later in the current year, Wood received $130,000 from his insurance company for the property loss and did not elect to deduct the casualty loss in an earlier year. Wood's current year adjusted gross income was $60,000 and he did not have any casualty gains.What total amount can Wood deduct as a current year itemized deduction for casualty loss, after the application of the threshold limitations? (1) $25,000 (2) $20,000 (3) $19,900 (4) $13,900

Choice "4" is correct. Casualty losses are deductible as an itemized deduction if located in a presidentially declared disaster area. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property's basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.) Choice "1" is incorrect. This is the market value decline minus the adjusted basis. Choice "2" is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied. Choice "3" is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI.

When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? (1) State income taxes (2) Standard deduction (3) Real estate property taxes (4) Casualty losses

Choice "4" is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction. Choice "1" is incorrect. State income taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "2" is incorrect. Standard deductions are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "3" is incorrect. Real estate property taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction.

For the current tax year, Tom and Karen, married taxpayers filing a joint tax return, qualified to itemize deductions. Their adjusted gross income was $90,000. Karen gave $1,000 for Christmas gifts directly to a needy family identified by her co-workers. Tom had $1,500 withheld from his payroll checks throughout the year to benefit the Children's Make-a-Wish Foundation. In addition, Tom and Karen donated to their church a piece of artwork valued at $2,000 that they purchased for $500 when they were married 10 years ago. There were no other contributions made throughout the year. Considering only to the information contained here, on their current year income tax return, Tom and Karen will claim: (1) A charitable deduction of $3,000 and a capital gain of $1,500 (2) A charitable deduction of $4,500 and a capital gain of $0 (3) A charitable deduction of $3,500 and a capital gain of $1,500 (4) A charitable deduction of $3,500 and a capital gain of $0

Choice "4" is correct. Considering only to the information contained here, on their current year income tax return, Tom and Karen will claim a charitable deduction of $3,500 [$1,500 from Tom's payroll deductions plus $2,000 for the painting] and capital gain of $0. Because the painting [a capital asset] was held over one year before being contributed, it qualified to be deducted at the higher FMV without capital gains being recognized on the difference between the FMV and tax basis. Although the 30% rule applies to such contributions, this case is below the threshold (i.e., 30% of $90,000 AGI equals $27,000, which would be the upper limit for deducting at the higher FMV). Deductions made directly to needy families that are not listed by the IRS as qualified organizations are not allowable itemized deductions and would be deemed a gift (and follow the gift tax rules). Choice "1" is incorrect. This choice assumes one of two scenarios. In either case, the proper amounts of charitable contributions do not exist. In the first case [$1,000 + $1,500 + $500 = $3,000], the $1,000 given to a needy family is not deductible, and the painting is deductible at the higher FMV, not the lower purchase price. In the second case [$1,000 + $2,000 = $3,000], the $1,000 given to a needy family is not deductible, and the amount given to Make-a-Wish is not included when it should be. Further, recognized capital gain on the donation of the painting is zero. Choice "2" is incorrect. The $1,000 given to the needy family is not an allowable charitable deduction. Choice "3" is incorrect. Capital gain is not recognized in this case.

Davis, a sole proprietor with no employees, has a SEP IRA profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the: (1) Deductible SEP IRA contribution (2) Self-employment tax (3) Self-employment tax and one-half of the deductible SEP IRA contribution (4) Deductible Keogh contribution and one-half of the self-employment tax

Choice "4" is correct. For SEP IRA plans, earned income is defined as net self-employment earnings reduced by ½ the self-employment tax.

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred during a year: (1) Includes acquisition indebtedness secured by a qualified residence (2) May exceed the fair market value of residence (3) Must exceed the taxpayer's net equity in the residence (4) Is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan

Choice "4" is correct. Home equity debt is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan.

For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity indebtedness incurred this year: (1) Must exceed the taxpayer's net equity in the residence (2) May exceed the fair market value of the residence (3) Is limited to $100,000 on a joint income tax return (4) Must be incurred to acquire, construct, or substantially improve the residence and is subject to the overall mortgage interest limitation

Choice "4" is correct. Interest on home equity debt is deductible as part of the total mortgage interest deduction if the home equity debt is used to acquire, construct, or substantially improve the residence. The overall limitation on home-related interest incurred after December 15, 2017, is $750,000 of debt. Choice "1" is incorrect. There is no requirement that the home equity indebtedness exceed the taxpayer's net equity in the residence. Choice "2" is incorrect. Interest on up to $750,000 of home-related indebtedness is deductible as home mortgage interest. Qualified indebtedness includes original acquisition debt and home equity debt incurred in buying, constructing, or substantially improving the taxpayer's qualified residence. Choice "3" is incorrect. Interest on home equity debt is deductible as part of the total mortgage interest deduction. There is not a separate allowance for home equity debt interest.

Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. Immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied? (1) $4,100 (2) $4,000 (3) $100 (4) $0

Choice "4" is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 - $4,000 - $100). Choice "1" is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions. Choice "2" is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction. Choice "3" is incorrect. $100 is merely the amount of the reduction per casualty.

Madison and Nick Koz have two children, ages 8 and 10. Both children meet the definition of qualifying child. The Koz family has adjusted gross income of $300,000. What is the amount of the child tax credit on the couple's income tax return? (1) $1,000 (2) $2,000 (3) $3,000 (4) $4,000

Choice "4" is correct. The child tax credit is available fully for taxpayers with AGI up to $400,000 for a joint return (2020). The eligible children must be under the age of 17. The two Koz children qualify for the child tax credit of $2,000 each ($4,000 total).

Moore, a single taxpayer, had $50,000 in adjusted gross income for the year. During the year she contributed $18,000 to her church. She had a $10,000 charitable contribution carryover from her prior year church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for the current year? (1) $10,000 (2) $18,000 (3) $25,000 (4) $28,000

Choice "4" is correct. The contribution limit for a church is 60% of the contribution base (adjusted gross income in this case). Moore's contribution limit for the current year is 60% × $50,000 = $30,000. Against this limit she can take her current year contributions ($18,000) plus the prior year carryover ($10,000) until she reaches the current year limit. Therefore, she can take all the current year contributions plus the carryover for a $28,000 total. Choice "1" is incorrect. Moore is not limited to her prior year charitable contribution carryover. Choice "2" is incorrect. Moore may use part of her prior year charitable contribution carryover.

An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses? (1) $0 (2) $2,000 (3) $3,000 (4) $5,000

Choice "4" is correct. The deduction for investment interest expense is limited to net taxable investment income. The noninterest investment expenses are not deductible; therefore, net investment income is equal to $10,000. All $5,000 of the investment interest expense is deductible because it is less than $10,000. Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate.

Smith paid the following unreimbursed medical expenses: Dentist and eye doctor fees $ 5,000 Contact lenses 500 Facial cosmetic surgery to improve Smith's personal appearance (surgery is unrelated to personal injury or congenital deformity) 10,000 Premium on disability insurance policy to pay him if he is injured and unable to work 2,000 What is the total amount of Smith's tax-deductible medical expenses before the adjusted gross income limitation? (1) $17,500 (2) $15,500 (3) $ 7,500 (4) $5,500

Choice "4" is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "1" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "2" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Choice "3" is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Dawn White's adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is: (1) 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year's tax liability paid in four equal installments (2) 110% of the prior year's tax liability paid in four equal installments only (3) 100% of the prior year's tax liability paid in four equal installments only (4) 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments

Choice "4" is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments. Choice "1" is incorrect. 110% of the prior year's tax liability is only required if AGI is in excess of $150,000. Choices "2" and "3" are incorrect. There is always an option to pay 90% of the current year's tax.

Marcus incurred $750 of expenses for business meals and entertainment in his position as an employee of Alexander Corporation. Marcus' expenses were not reimbursed. This expenditure is: (1) A deduction to arrive at adjusted gross income (2) A deduction from adjusted gross income (3) A tax credit (4) Not deductible

Choice "4" is correct. Unreimbursed business meals incurred as an employee are not deductible.

The question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Tana's divorce decree requires Tana to make the following transfers to Tana's former spouse during 2020: Alimony payments of $3,000. Child support of $2,000. Property division of stock with a basis of $4,000 and a fair market value of $6,500. What is the amount of Tana's alimony deduction for the year ended December 31, 2020? (1) $3,000 (2) $7,000 (3) $9,500 (4) 11,500

RULE: Alimony payments to a former spouse pursuant to a divorce settlement executed on or before December 31, 2018, are adjustments to arrive at AGI. Child support payments are not alimony and are not deductible. Property settlements are not alimony and are not deductible. Alimony paid in a divorce settlement executed after December 31, 2018, is not deductible. Choice "1" is correct. Only the amount of alimony ($3,000) is allowed as Tana's alimony deduction. Choice "2" is incorrect. The basis of property division of stock ($4,000) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible. Choice "3" is incorrect. The fair market value of property division of stock ($6,500) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible. Choice "4" is incorrect. The fair market value of property division of stock ($6,500) and the child support ($2,000) are not alimony and are not deductible, but the $3,000 in alimony paid is deductible.

An individual starts paying student loan interest in the current year. How many years may the individual deduct a portion of the student loan interest? (1) Current year only (2) Five years (3) Ten years (4) Duration of time that interest is paid

Rule: IRC Section 221 allows the deduction of student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction and other minor restrictions, such as a married couple being required to file joint returns to take the deduction. Choice "4" is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid.

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes? (1) As a $500 deduction to arrive at AGI for the year (2) As a $1,000 deduction to arrive at AGI for the year (3) As a $1,000 itemized deduction (4) As a nondeductible item of personal interest

Rule: The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. The adjustment is phased-out for single taxpayers with modified AGI between $70,000 and $85,000 (2020) and married filing jointly between $140,000 and $170,000 (2020). Choice "2" is correct. Per the above rule, the $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. Choice "1" is incorrect. The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. Therefore, the total amount paid of $1,000 is an allowable adjustment. (The $500 limit likely refers to an older education tax law that is no longer in effect.) Choice "3" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported as the less-advantageous itemized deduction. Choice "4" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this case there is no disallowed portion) is a nondeductible item of personal interest.

Which of the following disqualifies an individual from the earned income credit? (1) The taxpayer's qualifying child is a 17-year-old grandchild (2) The taxpayer has earned income of $5,000 (3) The taxpayer's five-year-old child lived in the taxpayer's home for only eight months (4) The taxpayer has a filing status of married filing separately

Rules: Earned income tax credit is a refundable tax credit. It is designed to encourage low-income workers (i.e., those with earned income) to offset the burden of U.S. tax. A claimant can have one qualifying child or two or more qualifying children for this credit. There is a maximum credit available for this purpose. Further: The taxpayer must meet certain earned low-income thresholds. The taxpayer must not have more than the specified amount of disqualified income. The taxpayer must be over age 25 and less than 65 if there are no qualifying children. If married, the taxpayer must generally file a joint return with his/her spouse (i.e., the married filing separate status disqualifies a taxpayer from claiming the earned income credit). A qualifying child can be up to and including age 18 at the end of the tax year, provided the child shared a residence with the taxpayer for 6 months or more. The taxpayer must be related to the qualifying child (or children) through blood, marriage, or law. The child must be either in the same generation or a later generation of the taxpayer. A foster child qualifies if officially placed with the taxpayer by an agency. Choice "4" is correct. Based on the above rules, the filing status of married filing separately disqualifies a taxpayer from claiming the earned income credit. Choice "1" is incorrect. If the taxpayer's qualifying child is a 17-year-old grandchild, the requirement of age and relation is satisfied, and the taxpayer may qualify to claim the EIC. Choice "2" is incorrect. The taxpayer earning an income of $5,000 meets the earned low-income requirements; thus, it does not disqualify him or her from claiming the EIC. Choice "3" is incorrect. The taxpayer's 5-year-old child lived in the taxpayer's home for eight months. The above rules indicate that the otherwise qualifying child must live with the taxpayer for six or more months; thus, this fact does not disqualify the taxpayer from claiming the EIC.