Chapter 6 TAX4001

Where can Deductions for AGI get reported as part of the Federal Income Tax return? A. Schedule 1. B. Sch C. C. Sch E. D. All of the above

D.

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

Deduct the $4,000 loss on equipment and $3,000 of the loss on investment in the current year. The remaining investment loss is carried forward.

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

Ellen can deduct $3,000 for AGI.

Which of the following categories represent Deduction for AGI? A. Expenses predominately personal in nature. B. Expenses directly related to business.

Expenses directly related to business.

Which of the following medical costs would be deductible as qualified medical expenses? Eyeglasses Laser eye surgery Over-the-counter medications Dental work Tummy tuck

Eyeglasses Laser eye surgery dental work

The Deduction for Qualified Business Income (QBI) excludes all services entities. T/F

False

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

False

True or false: Taxpayers may deduct both state and local income taxes and state and local sales taxes as itemized deductions.

False

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

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

True or false: Activities classified as hobbies can generate tax deductible losses that can be used against other types of income.

False; Hobby expenses are not deductible

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

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

Which of the following types of interest expense are NOT deductible as an itemized deduction? Multiple select question. Interest on credit cards used to purchase furnishing for a personal residence Interest on acquisition debt secured by a personal residence Interest on a loan used to purchase taxable securities Interest on a qualified home-equity loan used to purchase a car

Interest on credit cards used to purchase furnishing for a personal residence Interest on a qualified home-equity loan used to purchase a car

Which of the following statements related to investment interest expense is INCORRECT? Investment interest expense not deductible in the current year may carry forward to a subsequent year. Investment interest expense is limited to investment income. Interest on loans to purchase land held for investment is NOT deductible. Investment interest expense due to investments in tax-exempt securities is NOT deductible.

Interest on loans to purchase land held for investment is NOT deductible.

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

It is intangible property such as stocks and bonds

Married filing joint taxpayers may deduct no more than $____________ in total state and local taxes.

$10,000

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

$250,000 acquisition loan

or mortgages obtained in 2020, homeowners may deduct interest on up to $_________ of acquisition indebtedness.

$750,000

For mortgages obtained in 2020, homeowners may deduct interest on up to $ _________

$750000

Gary incurred $5,200 in qualified medical expenses in 2020. His AGI for the year is $50,000. Gary will be able to deduct $___________ as an itemized deduction for medical expenses.

1,450

Holly is single and reports taxable income of $240,000 ($260,000 AGI - $20,000 itemized deductions) before the deduction for qualified business income. She has no capital gains or dividends included in taxable income. Holly's engineering consulting service generates $20,000 of qualified business income. She paid $5,000 in wages during the current year and has no qualified property. What is Holly's deduction for qualified business income? 0 2,500 4,000 1,1250

2,500 ($20,000 QBI x 20%) = $4,000 limited to the greater of: 1.(50% x $5,000) = $2,500

When a taxpayer's charitable contributions exceed the AGI ceiling limitation for the year, the excess contributions can be carried forward for_______ years.

5

The deduction for qualified business income cannot exceed the greater of: (i)_______________ percent of the wages paid with respect to the qualified trade or business, or (ii) the sum of ___________________ percent of the wages with respect to the qualified trade or businesses plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property in the qualified trade or businesses.

50% ; 25%

The overall limitation for cash charitable contribution deductions for individual taxpayers is ____% of AGI. The limit is reduced to _________% for ordinary gain property other than cash, and _______% for long-term capital gain property.

60 ; 50 ; 30

Which of the following statement(s) is NOT true about deductions? A. Deductions exist for certain business expenses. B. All deductions are available to all taxpayers without consideration of their income.

All deductions are available to all taxpayers without consideration of their income.

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

Most expenses generated by business activities Expenses generated by rental and royalty activities

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

Most expenses generated by business activities Expenses generated by rental and royalty activities

Which of the following characteristics are required for a business expense to be deductible? (Check all that apply.) Ordinary Repetitive Directly related to business activity Critical for business success Necessary

Ordinary Directly related to business activity necessary

Which of the following medical costs would be deductible as qualified medical expenses? (Check all that apply.) Plastic surgery to reduce scarring after a dog bite Health insurance premiums paid with after tax dollars Chiropractic services Liposuction to improve appearance Prescription medications

Plastic surgery to reduce scarring after a dog bite Health insurance premiums paid with after tax dollars Chiropractic services Prescription medications

Which of the following descriptions BEST defines business activities? Profit-motivated, but not requiring a high level of effort from the taxpayer Motivated primarily by personal enjoyment, but does not requires a high level of effort from the taxpayer Motivated primarily by personal enjoyment and requires a high level of effort from the taxpayer Profit-motivated and requiring a high level of effort from the taxpayer

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

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

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

Which of the following are Deductions for AGI? Student loan interest State income tax

Student loan interest

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

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

Which of the following is CORRECT concerning the deduction of qualified medical expenses for the 2020 tax year? The expenses are fully deductible. The expense can be increased by 7.5% of AGI. Most individuals are able to deduct medical expenses. The expenses must be reduced by 7.5% of AGI.

The expenses must be reduced by 7.5% of AGI.

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

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

Which of the following can Self-Employed taxpayers NOT deduct as Deductions For AGI? A. The employer's portion of Self-Employment tax. B. The income tax paid on the income earned by the self-employed.

The income tax paid on the income earned by the self-employed.

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

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

Which of the following statements is INCORRECT regarding charitable donations of capital gain property? The taxpayer must include the appreciation of the asset in gross income. To qualify as capital gain property, the asset must have been owned by the taxpayer for more than one year. To qualify as capital gain property, the asset must have appreciated in value.

The taxpayer must include the appreciation of the asset in gross income.

Basic standard deduction is greater for married taxpayers filing jointly and those supporting a family (head of household) than it is for married taxpayers filing separately and unmarried taxpayers not supporting a family. T/F

True

Business losses are fully deductible as Deductions for AGI, whereas capital losses are only deductible as Deductions for AGI limited to $3,000. T/F

True

Deduction For AGI are preferable to Deductions From AGI, since all taxpayers can take them whether they itemize or not. T/F

True

Which one of the following items is NOT a qualified medical expense? MRI for the diagnosis of a bodily injury Prescription medication for the cure of an illness Vaccinations for the prevention of a disease Vitamins for promoting good health

Vitamins for promoting good health

Which of the following terms does NOT describe a casualty that could be deductible for tax purposes if it occurs in a federally-declared disaster area? Unusual Unexpected Weaken Sudden

Weakened

Bruce is a CPA who operates his tax service business as a sole proprietorship. He files a joint tax return with his wife. Their tax return reported $330,000 in net profit from his tax business and $300,000 in taxable income before the deduction for qualified business income (QBI). Will Bruce's tax business be deemed a qualified trade or business for purposes of the QBI deduction? NO YES

YES; Since their taxable income is below the $326,600 threshold for MFJ, the business is eligible for the QBI deduction.

sabella, age 50, pays $500 each month for health insurance premiums with after-tax dollars. She is not self-employed. During 2020, she also incurred $200 in doctor bills and $50 in over-the-counter medications. Her AGI is $45,000. What amount will she be able to deduct as an itemized deduction after the AGI floor is applied? $1,700 $2825 $0 $6,200

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

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

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

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

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

The system of shifting itemized deductions into one year such that the amount of itemized deductions exceeds the standard deduction for the year, and then deducting the standard deduction the next year is known as ______________ itemized deductions.

bunching

The deduction of investment interest is limited to a taxpayer's net _______________________

investment income

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

ordinary income

The intent of the terms ordinary and necessary when referring to deductible business expenses means the expenses must be ______. repetitive in nature rather than one-time expenses less than the revenues generated by the activity appropriate and helpful for generating a profit critical for generating a profit, not just helpful

appropriate and helpful for generating a profit

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

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

In order to be deductible, business expenses must be ________ and, _______ for the business activity.

ordinary, necessary

The intent of the terms ordinary and necessary when referring to deductible business expenses means the expenses must be ______. repetitive in nature rather than one-time expenses critical for generating a profit, not just helpful less than the revenues generated by the activity appropriate and helpful for generating a profit

repetitive in nature rather than one-time expenses

Activities that are profit-motivated and require a relatively high level of involvement from the taxpayer are referred to as __________ activities

trade

Bruce is a CPA who operates his tax service business as a sole proprietorship. He files a joint tax return with his wife. Their tax return reported $361,600 in taxable income and $375,000 in profit from the tax service, before the deduction for qualified business income (QBI). How much of the income from Bruce's tax services is eligible for the QBI deduction? $0 $235,040 $326,600 $243,750

$246,750 Reason: Since their taxable income is above the $326,600 threshold for MFJ but below $426,600, the phase-out rules apply. ($361,600 - $326,600) = $35,000 ÷ $100,000 phase out = 35% is not eligible for the QBI deduction. $243,750 is eligible ($375,000 × 65%).

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

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

Patrick has an adjusted gross income of $120,000 in the current year. He donated $50,000 in cash to a public charity, capital gain property with a basis of $15,000 and a fair market value of $35,000 to a public charity, and publicly traded stock with a basis of $12,000 and a fair market value of $25,000 to a private non-operating foundation. Patrick's deductible contribution for the current year is ______. $50,000 in cash to the public charity, $35,000 in property to the public charity, and $24,000 in stock to the private non-operating foundation. $1,000 in cash to the public charity, $35,000 in property to the public charity, and $24,000 in stock to the private non-operating foundation. $50,000 in cash to the public charity, $15,000 in property to the public charity, and $12,000 in stock to the private non-operating foundation. $50,000 in cash to the public charity, $10,000 in property to the public charity, and $0 in stock to the private non-operating foundation.

$50,000 in cash to the public charity, $10,000 in property to the public charity, and $0 in stock to the private non-operating foundation

Patrick has an adjusted gross income of $160,000 in the current year. He donated $30,000 in cash to a public charity, capital gain property with a basis of $15,000 and a fair market value of $40,000 to a public charity, and publicly traded stock with a basis of $20,000 and a fair market value of $35,000 to a private nonoperating foundation. The amount that Patrick can deduct for the stock donation to the private nonoperating foundation is ______. $10,000 $8,000 $32,000 $20,000

$8,000 He can deduct the $30,000 in cash, $40,000 of the capital gain property (up to $160,000 x 30%) to the public charity, and up to $8,000 of the stock to the private foundation ((AGI x 30%) - contributions subject to the 30% limit or $48,000 - $40,000).

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

$800

Which of the following terms describes business expenses that would be deductible by the taxpayer? (Check all that apply.) Repetitive in nature Appropriate Crucial Authorized Helpful Necessary Ordinary

Appropriate Helpful Necessary Ordinary

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

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

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

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

Which of the following are deductions From AGI? A. Penalty on early withdrawal of savings B. Charitable contribution

Charitable Contribution

Which of the following expenses is most easily bunched, or accelerated, into one year, so that the itemized deductions can be used in one year and the standard deduction can be used the following year? Mortgage interest expense Gambling losses Charitable contributions State income taxes

Charitable contributions

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

education ; for

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

federal declared ; casualty

When a taxpayer's charitable contributions exceed the AGI ceiling limitation for the year, the excess contributions can be carried forward for _______ years.

five

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

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

Investment interest expense is deducted ____________ AGI while self-employed business expenses are deducted _____________ AGI.

from ; for