CPA Questions: Reg Ch 6

Nikita is a 50-year-old, unmarried nonresident alien of the United States. She had income taxable by the United States during 2020 and was therefore required to file a 2020 U.S. tax return, due April 15, 2021. Nikita died June 30, 2020, of sudden heart failure. On her U.S. individual tax return for 2020, what is the amount of standard deduction that may be claimed on her behalf? A. $0 B. $24,800 C. $6,200 D. $12,400

A. $0 Nonresident aliens do not get the standard deduction

Mark established a Roth IRA at age 40 and contributed $6,000 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark's gross income? A. $0 B. $200,000 C. $120,000 D. $80,000

A. $0 Qualified distributions from a Roth IRA are not included in the taxpayer's gross income and are not subject to the 10% early withdrawal tax. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be (1) made on or after the date an individual attains age 59 1/2; (2) made to a beneficiary (or the individual's estate) on or after the individual's death; (3) attributed to the individual being disabled; (4) used to pay qualified first-time homebuyer expenses; or (5) made upon the birth or adoption of a child. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.

Deet, an unmarried taxpayer, qualified to itemize 2020 deductions. Deet's 2020 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 2020 income tax return? A. $11,000 B. $12,500 C. $2,000 D. $3,500

A. $11,000

On January 2, 2015, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In 2020, 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 pertains to interest paid in 2020: Mortgage interest $17,000 Interest on room construction loan 1,500 Auto loan interest 500 For 2020, how much interest is deductible prior to any itemized deduction limitations? A. $18,500 B. $17,000 C. $19,000 D. $17,500

A. $18,500 The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence secured by a qualified residence to the extent it does not exceed the fair market value of the residence. Thus, the interest on the room construction loan is deductible.

Christopher Scott is a self-employed computer consultant. He earned a net profit of $100,000 in 2020 from his business. During 2020, he paid $2,500 for health insurance coverage for himself and his wife. What is the amount and character of the deduction that the Scotts may claim on their 2020 individual tax return? A. $2,500 deduction to arrive at adjusted gross income. B. $2,500 itemized deduction. C. $1,750 other itemized deduction and $750 itemized deduction subject to the medical expense limitations. D. $1,750 deduction from gross income to arrive at adjusted gross income and $750 itemized deduction subject to the medical expense limitations.

A. $2,500 deduction to arrive at adjusted gross income.

Tana's divorce decree (finalized in 2018) requires Tana to make the following transfers to her former spouse during the current year: 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? A. $3,000 B. $7,000 C. $11,500 D. $9,500

A. $3,000 The $3,000 alimony payment is the only amount included in Tana's alimony deduction.

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

A. A $200 contribution to the taxpayer's church charged by credit card on December 31, Year 1.

Jimet, an unmarried taxpayer, qualified to itemize 2020 deductions. Jimet's 2020 adjusted gross income was $30,000, and he made a $2,000 cash donation directly to a needy family. In 2020, Jimet also donated stock, valued at $3,000, to his church. Jimet had purchased the stock 4 months earlier for $1,500. What was the maximum amount of the charitable contribution allowable as an itemized deduction on Jimet's 2020 income tax return? A. $0 B. $1,500 C $2,000 D. $5,000

B. $1,500

During 2020, student D, who is single, was claimed as a dependent by his parents. D earned $1,500 from a part-time job at a gas station. How much interest or other unearned income would D have to receive at a minimum to require him to file an income tax return for 2020? A. $10,200 B. $351 C. $12,401 D. $1

B. $351 In general, an individual must file an income tax return if his or her gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. But in the case of an individual who is claimed as a dependent on another's tax return, (s)he must file if unearned income exceeds $1,100 or total income exceeds the standard deduction. For such a person, the standard deduction is limited to the greater of (1) $1,100 or (2) the individual's earned income plus $350 [Sec. 63(c)(5)]. Since D was claimed as a dependent by his parents, his standard deduction is limited to his earned income of $1,500 plus $350 ($1,850). Therefore, if D receives $351 of unearned income, his total income will exceed his standard deduction, and he must file a tax return.

Charles Wolfe purchased the following long-term investments at par during 2020: $20,000 general obligation bonds of Burlington County (wholly tax-exempt) $10,000 debentures of Arrow Corporation Wolfe financed these purchases by obtaining a $30,000 loan from Union National Bank. For 2020, Wolfe made the following interest payments: Union National Bank $3,600 Qualified residence interest on home mortgage 3,000 Credit card interest 500 Wolfe's net investment income for the year was $10,000. What amount can Wolfe utilize as interest expense in calculating itemized deductions for 2020? A. $4,700 B. $4,200 C. $7,100 D. $6,600

B. $4,200 The IRC allows a deduction for certain interest paid or accrued during the year on indebtednesses. Investment interest is deductible up to the taxpayer's net investment income for the year. Personal or consumer interest is disallowed. Qualified residence interest is deductible. The IRC disallows a deduction for interest on debt incurred to purchase or carry tax-exempt securities. Since Wolfe used two-thirds of the loan from Union National Bank to purchase tax-exempt securities, two-thirds of the interest on this loan is disallowed as a deduction. Wolfe may deduct Union National Bank ($3,600 × 1/3) $1,200 Interest on home mortgage 3,000 Interest deduction $4,200

Zachary owns 40% of an S Corporation that pays him $70,000 of wages, $10,000 of dividends, and allocates him $89,000 of income. What is Zachary's qualified business income (QBI)? A. $70,000 B. $89,000 C. $159,000 D. $99,000

B. $89,000

Which of the following taxpayers must file a return for 2020? A. A single taxpayer, claimed as a dependent by his parents, who earns $2,000 from a part-time job and has no unearned income. B. A taxpayer who files as a head of household with one dependent child and who earns $19,650. C. Married taxpayers filing jointly who have income of $19,600 for the year and one child who is a dependent. D. A single taxpayer, age 67, with interest and dividend income of $12,400.

B. A taxpayer who files as a head of household with one dependent child and who earns $19,650.

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? A. As a $500 deduction to arrive at AGI for the year B. As a $1,000 deduction to arrive at AGI for the year C. As a $1,000 itemized deduction D. As a nondeductible item of personal interest

B. As a $1,000 deduction to arrive at AGI for the year

How may taxes paid by an individual to a foreign country be treated? A. As an other itemized deduction B. As a credit against federal income taxes due C. As an adjustment to gross income D. As a nondeductible expense

B. As a credit against federal income taxes due

The Tax Cuts and Jobs Act added a new deduction for qualified business income (QBI) of pass-through entities that will be available for tax years beginning after December 31, 2017, and before January 1, 2026. Which of the following comments is not correct regarding the QBI deduction? A. Taxpayers with taxable income above the lower threshold are subject to limitations based on W-2 wages and/or the unadjusted basis in acquired qualified property B. For the most part, the deduction is 21% of a taxpayer's QBI from a partnership, S Corporation, or sole proprietorship C. The QBI deduction is available to taxpayers who elect the standard deduction D. The W-2 wage limit begins to phase in if the taxpayer's taxable income exceeds the threshold amount of $163,300 ($326,600 for a joint return)

B. For the most part, the deduction is 21% of a taxpayer's QBI from a partnership, S Corporation, or sole proprietorship

Fred Harvey, a cash-basis taxpayer, elected to itemize his deductions on his 2019 income tax return. Harvey plans to itemize again in 2020, and the following information relating to his state income taxes is available: Taxes withheld in 2020 $2,500 Refund received in 2020 of 2019 tax 500 Assessment paid in 2020 of 2018 tax 700 The above information should be reported by Harvey in his 2020 tax return as A. State and local income taxes of $2,700. B. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500. C. State and local income taxes of $3,200. D. State and local income taxes of $2,500.

B. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500.

Jim and Nancy Walton, both age 55, had adjusted gross income of $25,000 in 2020. During the year, they paid the following medical-related expenses: Over-the-counter medicines $400 Prescription drugs 300 Doctor fees 830 Health club membership (recommended by the family doctor for general health care) 800 Medical care insurance 280 How much may the Waltons use as medical expenses in calculating itemized deductions for 2020? A. $110 B. $1,410 C. $0 D. $465

C. $0 The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers' general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included. Medical care insurance $ 280 Doctor fees 830 Prescription drugs 300 Total expenses $1,410 Less: 7.5% of AGI (1,875) Allowable medical expense deduction $ 0

In 2020, Welch paid the following expenses: Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000 Physical therapy after spinal surgery 2,000 Premium on an insurance policy that covers reimbursement for the cost of prescription drugs 500 In 2020, Welch recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Welch's 2020 income tax return for medical expenses? A. $4,000 B. $3,500 C. $1,000 D. $500

C. $1,000 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 - $1,500 reimbursement) + $500].

Matthews was a cash-basis taxpayer whose records showed the following: 2020 state and local income taxes withheld $1,500 2020 state estimated income taxes paid December 30, 2020 400 2020 federal income taxes withheld 2,500 2020 state and local income taxes paid April 15, 2021 300 What total amount was Matthews entitled to claim for taxes on her 2020 Schedule A of Form 1040? A. $2,200 B. $4,700 C. $1,900 D. $1,500

C. $1,900 For a cash-basis, calendar-year taxpayer, state and local income taxes paid or withheld during the year are fully deductible as itemized deductions. Federal income taxes are not deductible. State and local income taxes paid in the next calendar year are deductible in the next year.

Kirk Bennett, a cash-basis taxpayer, is a self-employed accountant. During 2020, he established a qualified defined contribution retirement plan of which he will be the only beneficiary. In examining his records for 2020, the following information is available: Earned income from self-employment $57,000 Interest income 6,000 Dividend income 4,000 Net long-term capital gains 10,000 Gross income $77,000 Kirk deducted $4,027 of self-employment tax on his tax return. What is the maximum amount that Kirk can deduct as a contribution to his qualified retirement plan for 2020? A. $11,400 B. $57,000 C. $10,595 D. $14,250

C. $10,595 Under IRC, the maximum amount that can be deducted for a contribution on behalf of a self-employed individual is the lesser of $57,000 or 25% of the self-employed individual's earned income from the trade or business. Kirk's only income which qualifies as earned income is $57,000. The employer portion of payroll tax rate times the net earnings from self-employment reduces the earned income amount. The income is further reduced by the contribution deduction based on a 20% rate used for sole owners. The maximum deduction allowed is calculated as follows: Earned income $57,000 Less: Self-employment tax adjustment (4,027) Net earnings $52,973 Contribution rate × .20 Allowable deduction $10,595

Moore, a single taxpayer, had $50,000 in adjusted gross income for 2020. During 2020, she contributed $23,000 in cash to her church. She had a $10,000 charitable contribution carryover from her 2019 church contribution. What was the maximum amount of properly substantiated charitable contributions that Moore could claim as an itemized deduction for 2020? A. $10,000 B. $23,000 C. $30,000 D. $33,000

C. $30,000 The limitation for certain cash contributions paid in 2020 has been suspended for taxpayers who itemize deductions. Taxpayers may deduct up to the amount by which their contribution base (AGI without regard to NOL carrybacks) exceeds the deduction for other charitable contributions. Moore's charitable cash contribution deduction in 2020 is limited to 100% of AGI ($50,000), less deductions for other noncash contributions made. As there are no other contributions in 2020, the $23,000 cash contribution to the church may be deducted. The 2019 carryover of $10,000 is limited to 60% of AGI, or $30,000. Only $7,000 ($30,000 - $23,000) of the carryover may be deducted in 2020. The remaining $3,000 is carried over to 2021.

Poole, 45 years old and single, is in the 12% tax bracket. He had 2020 adjusted gross income of $50,000. The following information applies to Poole: Medical expenses $18,000 Standard deduction 12,400 The relevant tax brackets are Income//Tax ≤ $9,875//10% $9,875 to $40,125//12% Poole wishes to minimize his income tax. What is Poole's 2020 total income tax rounded to the nearest dollar? A. $4,315 B. $3,643 C. $4,093 D. $5,803

C. $4,093 Taxable income is defined as adjusted gross income minus the standard deduction (or total itemized deductions, if greater). For a single taxpayer in 2020, the basic standard deduction is $12,400. Qualifying medical expenses in excess of 7.5% of AGI may be deducted as an itemized deduction. Poole's income tax is computed as follows: Medical expenses $18,000 Less: 7.5% of AGI ($50,000 × .075) (3,750) Allowable medical expenses $14,250 Use the greater of Allowable itemized deductions or $ 14,250 Standard deduction 12,400 AGI $ 50,000 Itemized deductions (14,250) Taxable income $ 35,750 Tax Computation: First: $9,875 × .10 $ 988 Balance: $25,875 × .12 3,105 Income tax $ 4,093

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2020, the rental apartment was fully occupied, and Gow received $7,200 in rent. During the year ended December 31, 2020, Gow paid the following: Real estate taxes $6,400 Painting of rental apartment 800 Annual fire insurance premium 600 In 2020, depreciation for the entire house was determined to be $5,000. What amount should Gow include in his adjusted gross income for 2020? A. $800 B. $2,900 C. $400 D. $100

C. $400 Ordinary and necessary expenses paid or incurred during the tax year for the production of income are deductible for AGI. This includes deduction for depreciation on property held for production of income. Personal expenses are not deductible as rental expense. Insurance, taxes, and depreciation must be allocated between rental and personal expense. Gross rental income $ 7,200 Less: Rental expense Maintenance and repair $ 800 Depreciation ($5,000 × 1/2) 2,500 Real estate tax ($6,400 × 1/2) 3,200 Insurance ($600 × 1/2) 300 (6,800) Net rental income $ 400 The interest and taxes attributable to the apartment Emil occupies are deductible as an itemized deduction.

Jamal and Ronee Smith, both age 49, are married and filed a joint return for 2020. Jamal earned a salary of $100,000 in 2020 from his job at Sunshine Corporation. Ronee earned $7,000 from her part-time job at Rain Corporation. On March 1, 2020, Jamal contributed $6,000 to a Roth IRA for himself. What is the maximum contribution Ronee may make in 2020 to her Roth IRA? A. $1,000 B. $13,000 C. $6,000 D. $0

C. $6,000 Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for joint filers with adjusted gross income (AGI) between $196,000 and $206,000. Since the Smiths' AGI does not exceed $196,000, Ronee is permitted her maximum contribution of $6,000 (for taxpayers under the age of 50) for a total yearly IRA contribution of $12,000 for the married couple.

Forrest, a single taxpayer, has a taxable income of $318,200. He considers investing in some entities to earn extra income. In which of the following entities should Forrest invest so that he may be able to claim the Sec 199A deduction? A. A tax services partnership B. A limited liability partnership that performs brokerage services C. An S corporation that performs architecture services D. A C Corporation that performs engineering services

C. An S corporation that performs architecture services

Dale received $1,000 in 2020 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2020. In Dale's 2020 income tax return, the $1,000 jury duty fee should be A. Claimed in full as an itemized deduction B. Claimed as an other itemized deduction C. Deducted from gross income in arriving at adjusted gross income D. Included in taxable income without a corresponding offset against other income

C. Deducted from gross income in arriving at adjusted gross income

Which of the following statements about qualified business income (loss) is correct under Sec 199A? A. If the net amount of qualified income, gain, deduction, and loss is greater than zero, the deduction must be carried over to the next year B. If the net amount of qualified income, gain, deduction, and loss is less than zero, the loss must be carried back to the prior year C. If the net amount of qualified income, gain, deduction, and loss is less than zero, then the loss must be carried over to the next year D. The net amount of qualified income, gain, deduction, and loss is always greater than zero

C. If the net amount of qualified income, gain, deduction, and loss is less than zero, then the loss must be carried over to the next year

In 2020, 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 A. Deductible personal interest B. Deductible qualified residence interest C. Nondeductible interest D. Investment interest expense

C. Nondeductible interest

Which of the following requirements must be met in order for a single individual to qualify for an additional standard deduction? Must be age 65 or older or blind//Must support dependent child or aged parent A. Yes//Yes B. No//No C. Yes//No D. No//Yes

C. Yes//No

During 2020, William Clark was assessed a deficiency on his 2019 federal income tax return. As a result of this assessment, he was required to pay $1,120, determined as follows: Additional tax$ 900 Late filing penalty 60 Negligence penalty 90 Interest 70 What portion of the $1,120 qualifies as itemized deductions for 2020? A. $70 B. $914 C. $14 D. $0

D. $0 Federal income taxes and penalties are not deductible. The $70 of interest paid on the amounts owed to the IRS is considered personal interest and is not deductible. Therefore, none of the amount is deductible in 2020.

In 2020, Smith paid $6,000 to the tax collector of Big City for realty taxes on a two-family house owned by Smith's mother. Of this amount, $2,800 covered back taxes for 2019, and $3,200 covered 2020 taxes. Smith resides on the second floor of the house, and his mother resides on the first floor. In Smith's itemized deductions, on his 2020 return, what amount was Smith entitled to claim for realty taxes? A. $6,000 B. $3,200 C. $3,000 D. $0

D. $0 Smith does not own the house; none of his payments can be deducted and the payments are treated as a gift to his mother

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal? A. $10,000 B. $10,500 C. $13,000 D. $13,500

D. $13,500 IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. 30,000 * 35% = 10,500 30,000 * 10% = 3,000 10,500 + 3,000 = 13,500

Paul and Lois Lee, both age 50, are married and filed a joint return for 2020. Their 2020 adjusted gross income was $126,000, including Paul's $121,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could the Lees contribute to IRAs for 2020 to take advantage of their maximum allowable IRA deduction in their 2020 return? A. $0 B. $13,000 C. $6,000 D. $14,000

D. $14,000 The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,000 or the taxpayer's compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up contribution is allowed in addition to the $6,000 per year IRA contribution limit. If one spouse is eligible to make deductible IRA contributions, that spouse may contribute up to $14,000 if a joint return is filed and both taxpayers are age 50 or over. Furthermore, the Lees may deduct their IRA contribution for AGI.

In 2020, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony per a 2018 divorce agreement. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income? A. $55,000 B. $50,000 C. $46,000 D. $40,000

D. $40,000 57,000 (4,000) (6,000) (5,000) (2,000) 40,000

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? A. $17,500 B. $15,500 C. $7,500 D. $5,500

D. $5,500 5,000 dentist and eye doctor fees + 500 contact lenses

Which of the following is not an itemized deduction? A. Gambling losses up to the amount of gambling winnings B. Medical expenses C. Real estate tax D. Employee business expense

D. Employee business expense

The 2020 deduction by an individual taxpayer for interest on investment indebtedness is A. Limited to investment interest paid in 2020 B. Limited to the taxpayer's 2020 interest income C. Limited to the taxpayer's 2020 net investment income D. Not limited

D. Not limited

With regard to tax recognition of alimony paid in 2020 per a 2018 divorce, which one of the following statements is true? A. The divorced couple may be members of the same household when payments are made B. Payments may be made in cash or property C. If the payor spouse pays premiums for insurance on his life as a requirement under the divorce agreement, the premiums are alimony if the payor spouse owns the policy D. Payments must terminate at the death of the payee spouse

D. Payments must terminate at the death of the payee spouse