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Flashcards in Above-Line deductions and losses Deck (39):
1

Which of the following statements about moving expenses is true?
A.
Mortgage payoff penalties and refitting carpets and draperies are deductible moving expenses.
B.
Temporary living expenses and expenses of getting or breaking a lease are deductible moving expenses.
C.
Pre-move househunting expenses and meal expenses are deductible moving expenses.
D.
Moving household goods and travel expenses (including lodging but not meals) to the new home are deductible moving expenses.

D.
Moving household goods and travel expenses (including lodging but not meals) to the new home are deductible moving expenses.

Answer (D) is correct.
The definition of moving expenses under Sec. 217(b) includes only reasonable expenses of moving household goods and personal effects and of travel (including lodging) from the former residence to the new residence (Publication 521).

2

Clarence, a real estate professional, owned 10 rental properties. Clarence’s real estate activities are his sole occupation, which he works at all year. Throughout 2017, he was involved in the operation of all properties on a regular, continuous, and substantial basis. At the end of the year, his real estate operations resulted in a $75,000 net loss. Clarence’s spouse, Carlette, had received $90,000 in wages in 2017. Their only other income during the year was $5,000 interest. Which of the following statements is true?


A.
Clarence and Carlette may offset their $95,000 income with $25,000 of their real estate loss on their 2017 joint tax return if Clarence actively participated in the real estate activity.

B.
Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2017 joint tax return.

C.
Clarence and Carlette may not offset their $95,000 income with any real estate loss on their 2017 joint tax return.

D.
None of the answers are correct.


Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2017 joint tax return.


Answer B is correct.
Certain real estate professionals may be able to treat rental real estate activities as nonpassive [Code Sec. 469(c)(7)]. To qualify, (1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year must involve real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer must perform more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates. These two requirements must be satisfied by one spouse if a joint return is filed (Publication 925). Assuming that the requirements for the exception are satisfied, the passive activity loss rules are not applied, and Clarence and Carlette may offset their income with the entire $75,000 loss.

3

Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings?


A.
$25,000

B.
$22,500

C.
$0

D.
$40,000

22,500


Answer B is correct.
Any rental activity is a passive activity, whether or not the taxpayer participates in the activity. An individual who actively participates in a rental real estate activity may use up to $25,000 of net losses from the rental real estate activity to offset other income. The $25,000 is reduced by 50% of the amount by which AGI (determined without regard to Social Security, IRA contributions, and passive losses) exceeds $100,000. Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000). Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%] and is therefore $22,500. If Barry does not actively participate, he is not allowed a deduction (Publication 925).

4

e following items are reported on Mr. and Mrs. Spice’s 2017 joint return:
Net profit on Mrs. Spice’s Schedule C of $40,000
Mr. Spice’s paid court-ordered alimony of $5,000
Self-Employment Tax of $5,650 on Mrs. Spice’s Schedule C profit ($2,825 employer’s portion)
Compute their adjusted gross income for 2017.


A.
$32,175

B.
$35,000

C.
$28,880

D.
$40,000


$32,175


Answer A is correct.
Alimony and separate maintenance payments are gross income to the recipient and deductible by the payor. In addition, self-employed individuals can deduct the employer’s portion of FICA taxes paid to arrive at AGI (Publication 17). For 2017, the deduction is for Mrs. Spice. Thus, the Spices’ AGI is equal to $32,175 ($40,000 – $5,000 – $2,825).

B.
$35,000

5

Contributions to an IRA must be made by the due date of the return, without regard to extensions to qualify for return year.





True.


False.





True.


Your answer is correct.
Subject to certain qualifying rules and limitations, an individual who is not an active participant in an employer-maintained retirement plan may make contributions to an IRA that are fully deductible, up to the lessor of $5,500 or 100% of his or her includible compensation. Contributions must be made by the due date of the return, without regard to extensions, to qualify for return year.

6

oe divorced Renee last year. During the current year, per the divorce decree, Joe made the following payments to Renee:


The entire mortgage payment on house jointly owned
$9,600
Tuition for their child
2,800
Child support
6,000
Life insurance premiums on policy owned by Renee
5,400
What is the amount Joe can deduct as alimony on his tax return?


A.
$8,200

B.
$5,400

C.
$10,200

D.
$11,400

0,200


Answer C is correct.
Section 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. Section 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse. The mortgage payment attributable to Renee’s ownership, or $4,800, is deductible as alimony. The life insurance premium payment is deductible as well (Publication 17). Therefore, the total alimony deduction is $10,200.

7

aWhich of the following is a deductible moving expense?


A.
Meals while moving from your old residence to your new residence.

B.
Travel expenses incurred to move members of your household to your new home.

C.
Temporary living expenses while occupying quarters in the area.

D.
Travel expenses, meals, and lodging for pre-move househunting trips.


Travel expenses incurred to move members of your household to your new home.


Answer B is correct.
The definition of moving expenses under Sec. 217(b) includes only reasonable expenses of moving household goods and personal effects and of travel (including lodging) from the former residence to the new residence [Sec. 217(b)(1)]. Indirect moving expenses, including househunting trips, meals during the move, and temporary living expenses, are not deductible (Publication 521).

8

Larry purchased 100 shares of ABC stock on May 31, Year 1, for $100 per share. On October 28, Year 1, he sold the 100 shares for $90 per share. On November 22, Year 1, his wife, Vickie, purchased 100 shares of ABC stock for $80 per share. Vickie held the stock until September 30, Year 2. On that date, she sold the stock for $110 per share. They filed married filing separately on all returns.


A.
Vickie has short-term gain of $3,000 on her Year 2 tax return.

B.
Vickie will have a short-term gain of $3,000 on her Year 2 tax return, and Larry takes the short-term loss of $1,000 on his Year 1 tax return.

C.
Larry has a short-term loss of $1,000 on his Year 1 tax return.

D.
Vickie will have a long-term gain of $2,000 on her Year 2 tax return and Larry will not have any capital loss on his Year 1 tax return.


Vickie will have a long-term gain of $2,000 on her Year 2 tax return and Larry will not have any capital loss on his Year 1 tax return.


Answer D is correct.
Publication 550 states, “You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade, or
Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.” Larry’s unrecognized loss can be used to reduce Vickie’s gain [$11,000 selling price – ($8,000 purchase price + $1,000 Larry’s unrecognized loss) = $2,000 recognized gain]. The holding periods are added together, creating a long-term capital gain.

9


All of the following are requirements for a payment to be alimony (under instruments executed after 1984), except

A.
Payments cannot be a transfer of services.
B.
Payments are not required after death of the recipient spouse.
C.
Payments are required by a divorce or separation instrument.
D.
Payments can be in cash or property.

D.
Payments can be in cash or property.

Answer (D) is correct.
Sec. 215 allows a deduction for alimony or separate maintenance payments (Sec. 71). Sec. 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse. Thus, if the payments are in services or property and not cash, they cannot be considered alimony [Publication 17 and IRC Sec. 215, Sec. 71(b)].

10

Payments to a third party that are in lieu of payments of alimony directly to a former spouse can qualify as alimony.





True.


False.

True.


Your answer is correct.
Payments of cash to a third party made at the written request of the payee spouse will qualify as alimony. Payments are often made on behalf of the payee spouse, such as payments for mortgages, rent, medical costs, or education.

11

All of the following are true about Health Savings Accounts EXCEPT


A.
The taxpayer need not have the insurance for the whole year to contribute the full amount.

B.
The amount that may be contributed to a taxpayer’s Health Savings Account does not depend on the nature of the taxpayer’s coverage and age.

C.
A Health Savings Account can be a tax-exempt trust.

D.
A Health Savings Account can be a custodial account set up with a U.S. financial institution.

B.
The amount that may be contributed to a taxpayer’s Health Savings Account does not depend on the nature of the taxpayer’s coverage and age.


Answer B is correct.
The amount that may be contributed to a taxpayer’s Health Savings Account depends on the nature of the taxpayer’s coverage and age. A Health Savings Account is a tax-exempt trust or custodial account set up with a U.S. financial institution in which money can be saved exclusively for future medical expenses. The taxpayer is no longer required to have the insurance for the whole year to contribute the full amount.

12

The at-risk rules
 
 
A.
Limit a taxpayer’s deductible losses from investment activities.

B.
Apply to business and income-producing activities on a combined basis.
 
C.
Apply at the entity level for partnerships and S corporations.

D.
Limit the type of deductions in income-producing activities.

risk rules
 

A.
Limit a taxpayer’s deductible losses from investment activities.


Answer A is correct.
The at-risk rules are contained in Sec. 465 and limit a taxpayer’s deductible losses from each business and income-producing activity to the amount for which the taxpayer is at risk with respect to that activity. Although originally designed to limit deductible losses from tax shelters, the at-risk rules apply across the board to most activities (Publication 925).

13

Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings?
A.
$22,500
B.
$40,000
C.
$0
D.
$25,000

A.
$22,500

Answer (A) is correct.
. An individual who actively participates in a rental real estate activity may use up to $25,000 of net losses from the rental real estate activity to offset other income.

o Social Security, IRA contributions, and passive losses) exceeds $100,000. Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000).
IF Social Security+Retirement contr=>100,000 then $25,000 is reduced 50%

Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%] and is therefore $22,500. If Barry does not actively participate, he is not allowed a deduction (Publication 925).

14

Erica received $40,000 in wages, and her husband Paul had a net loss of $2,000 on his Schedule C. Paul materially participated in his Schedule C activity. They had interest income of $500. Paul also had a $28,000 loss from a rental real estate activity in which he actively participates. How much of the rental loss can they deduct on their current-year joint income tax return?


A.
$25,500

B.
$500

C.
$25,000

D.
$28,000

$25,000


Answer C is correct.
Since Paul is deemed to actively participate in the rental real estate activity and Paul and Erica’s adjusted gross income is less than $100,000, they are allowed to deduct $25,000 against other income (Publication 925).

15


The at-risk rules limit your losses from most activities to your loss or amount at risk, whichever is less. The at-risk rules must be applied before the passive activity rules.





True.


False.




True.


Your answer is correct.
The passive loss rules apply only if the taxpayer has usable basis after application of the basis rule limitations (applied first) and the at-risk rules limitations (applied second). A taxpayer is at risk if (s)he is personally liable for repayment of a loan borrowed for use in the activity or if (s)he pledged property as security for a loan (Sec. 465).

16


David and Jane divorced in the current year. They have two children, ages 6 and 11. The divorce decree requires David to pay $800 a month to Jane and does not specify the use of the money. According to the decree, the payments will stop after the children reach age 19 or graduate from high school, whichever comes first. David may deduct the payments as alimony.





True.


False.


False.


Your answer is correct.
Section 71(c) requires that, if a payment to a former spouse will be reduced when a child attains a certain age, that payment shall be treated as an amount payable for the support of the child. Child support payments are not deductible as alimony.

17

Focus Questions Review
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Question 4:
Rich and Lisa moved in May of the current year because Lisa was starting a new job in June. The following distances relate to the move:


Miles from former home to former job
10
Miles from new home to former job
57
Miles from new home to new job
7
Miles from former home to new job
51
Rich and Lisa have met the distance test for deducting their moving expenses.





True.


False.


False.


Your answer is correct.
Section 217 allows a deduction only if the taxpayer’s new principal place of work is at least 50 miles farther from the old residence than was the former principal place of work.


Former home to new job
51 miles
Less former home to former job
(10 miles)


Difference
41 miles


Rich and Lisa have failed to meet the distance test for deducting moving expenses as the new principal place of work is only 41 miles farther from the old residence than was the former principal place of work.

18


Fred lived in Michigan and attended a local university. Upon graduation, he secured a job in Houston, Texas. This will be Fred’s first full-time job. Fred’s moving expenses are not deductible.





True.


False.

False.


Your answer is correct.
Section 217(c) requires the taxpayer’s new principal place of work to be at least 50 miles farther from his or her former residence than the former principal place of work was. However, if the taxpayer had no former principal place of work, the new place of work must be at least 50 miles from his or her former residence. There are no other requirements concerning a former place of work.

19

the current year, the Aloha Gardens apartment complex had rental losses of $40,000. Which of the following is true?


A.
Kathy has an interest as a limited partner in the property. Her nonpassive income for the year is $50,000. She may offset her portion of the rental loss against her nonpassive income up to $25,000.

B.
John’s estate has a 20% interest in the property. John was actively involved in managing the complex from 2007 until his death in 2012. His estate may offset its portion of the rental loss against any nonpassive income.

C.
Steve and his wife Barbara each have a 5% interest in the property and manage the apartments. They had nonpassive income of $30,000 for the year. They may offset their share of the rental loss against their nonpassive income.

D.
T Trust has a 40% interest in the property. The trustee is active in managing the apartments. The trust may offset its portion of the rental loss against other income earned during the year.

C.
Steve and his wife Barbara each have a 5% interest in the property and manage the apartments. They had nonpassive income of $30,000 for the year. They may offset their share of the rental loss against their nonpassive income.


Answer C is correct.
In the case of rental real estate activities in which an individual actively participates, up to $25,000 of losses from such activities are allowed each year against nonpassive income [Sec. 469(i)]. Active participation requires only participation such as making management decisions on lease terms, tenant approvals, repair versus replacement decisions, etc., even if an agent handles day-to-day matters. An individual is not treated as actively participating in a rental real estate activity if the individual’s and spouse’s interests are less than 10% of all interests in the activity [Sec. 469(i)(6)(A)]. Since Steve and his wife together own 10% of the property and manage the apartments, they qualify for allowing up to $25,000 of rental real estate losses against nonpassive income (Publication 925). Their share of the losses is $4,000 ($40,000 × 10%).

20


Employer contributions to an Archer MSA are

A.
Included in income.
B.
Not included in the income of the employee unless made through a cafeteria plan and included on the employee’s W-2.
C.
Not included in the income of the employee and not included on the employee’s W-2.
D.
None of the answers are correct.

B.
Not included in the income of the employee unless made through a cafeteria plan and included on the employee’s W-2.

Answer (B) is correct.
Archer MSAs (formerly called Medical Savings Accounts) are like IRAs created to defray unreimbursed medical expenses. Contributions to the account by an individual are deductible from adjusted gross income, and contributions made by the employer are excluded from income (unless made through a cafeteria plan). Employee contributions must be reported on the employee’s W-2. Earnings of the fund are not included in taxable income for the current year (Publication 17).

21

During the current year, Amanda, who is single, received $110,000 in salary and realized a $30,000 loss from her rental real estate activities in which she actively participates. She contributed $2,000 to an IRA. What is the amount that Amanda may claim as loss from her current-year real estate activities?
A.
$21,000
B.
$25,000
C.
$30,000
D.
$20,000

D.
$20,000

Answer (D) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000. Amanda’s adjusted gross income exceeds $100,000 by $10,000 [Sec. 469(i)(3)]. Therefore, the $25,000 allowance is reduced by $5,000 ($10,000 × 50%). This leaves $20,000 of losses that can be deducted (Publication 925).

22


Heathcliff and Gertrude file a joint income tax return for the current year. During the current year, Heathcliff received wages of $120,000 and taxable Social Security benefits of $5,000. Gertrude actively participated in a rental real estate activity in which she had a $30,000 loss. They had no other income during the current year. How much of the rental loss may they deduct on their current-year income tax return?

A.
$12,500
B.
$25,000
C.
$0
D.
$15,000

The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. Heathcliff and Gertrude’s adjusted gross income exceeds $100,000 by $20,000. Therefore, the $25,000 allowance is reduced by $10,000 ($20,000 × 50%). This leaves $15,000 of losses that can be deducted (Publication 925).




23


Derek is a self-employed carpenter and is also an employee of Krispy, Inc. His self-employment net income is $35,000, and he received a W-2 for salaries and wages of $50,000. He is covered by his employer’s pension plan. Derek is not eligible to take a deduction for an IRA, but he can deduct the employer’s portion of his self-employment tax and 70% of his health insurance premiums for 2017.





True.


False.

False.


Your answer is correct.
Section 162(l)(1) allows a deduction from gross income by self-employed persons of 100% of amounts paid during the year for health insurance for themselves, spouses, and dependents. The deduction may not exceed the taxpayer’s net earned income derived from the business (in this case, $35,000 of Derek’s self-employment net income) for which the insurance plan was established, minus the employer’s portion deduction (50%) of self-employment tax.

24



Question: 3
Mrs. Domino made deductible contributions to traditional individual retirement accounts for several years. Mrs. Domino decides to withdraw $10,000 from one of her accounts in 2015. Mrs. Domino is 61 years old. How does this transaction affect Mrs. Domino’s tax return for 2015?

A.
Mrs. Domino does not have to report anything because she is older than 59 1/2 years.
B.
Mrs. Domino must report all of the distribution received but can elect to use the 10-year option.
C.
Mrs. Domino does not have to report any amount because this was not withdrawn from a Roth IRA.
D.
Mrs. Domino must report the entire amount of $10,000.

D.
Mrs. Domino must report the entire amount of $10,000.

Answer (D) is correct.
if A taxpayer made only deductible contributions to Traditional IRA, the taxpayer has no basis in her IRA
Any distributions are fully taxable

25

Passive activities rules apply to

A closely held corp
B Partnerships
C S Corporations
D Grantor Trust

A closely held corp

passive rules apply
Individuals
Estates
Trust-(not grantor trust)
Personal Service corp
Closely held corp

26


Which one of the following is not an adjustment to total income in arriving at adjusted gross income?

A.
Certain contributions to a medical savings account.
B.
Interest paid on student loans.
C.
Portion of health insurance of self-employed persons.
D.
Contributions to a Roth IRA.

D.
Contributions to a Roth IRA.

Answer (D) is correct.
Sec. 408A(c)(1) disallows any deduction for contributions made to a Roth IRA (Publication 17).

27

Stacy were divorced in February of the current year. Requirements of the divorce decree and Stacy’s performance follow:
Transfer title to their residence to Rick. Stacy’s basis was $95,000, the fair market value was $105,000, and the residence was subject to a mortgage of $90,000.
Make the mortgage payments of $1,000 per month (beginning in March) for the remaining 20 years or until Rick dies, if sooner.
Pay Rick $500 per month (beginning in March) for 6 years or until Rick dies, if sooner. Of this amount, $200 is designated as child support.
Stacy’s current-year alimony deduction is


A.
$15,000

B.
$13,000

C.
$3,000

D.
$18,000

B.
$13,000


Answer B is correct.
Section 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. Section 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse (Publication 17). The transfer of title to the residence is not considered alimony since it is not a payment in cash. The mortgage payments are considered alimony [Sec. 71(c)]. Even though they are made to a third party, they are for the benefit of Rick. The $500 monthly payment includes $200 of child support that is not includible as alimony [Sec. 71(c)]. Stacy’s current-year alimony deduction is $13,000 [($1,000 + $300) × 10 months].

28

Susie was paid $150 for serving as a juror. Susie’s employer continued to pay Susie
her salary while she served on the jury, so she is required to turn the jury duty pay over to her employer. How should Susie account for the jury duty pay?
 
 
A.
Exclude the $150 from gross income.

B.
Include the $150 in taxable income.

C.
Deduct the $150 from gross income.
 
D.
Deduct the $150 as an itemized deduction.

C.
Deduct the $150 from gross income.


Answer C is correct.
Jury duty pay must be included in gross income, but if it must be given to an employer because the employer continues to pay salary while the individual is serving on the jury, the amount of jury duty pay turned over to the employer can be deducted as an adjustment to gross income (Publication 17).

29

When funds from an Archer MSA are distributed for qualified medical expenses, these funds are


A.
Always included in the income of the taxpayer.

B.
Generally excluded from the income of the taxpayer.

C.
Allocated between contributions made by the employer and the employee, and only the amount attributed to the contributions of the employee are included in income of the taxpayer.

D.
Generally included in the income of the taxpayer


Generally excluded from the income of the taxpayer.


Answer B is correct.
Distributions for qualified medical expenses incurred for the benefit of the individual, a spouse, or dependents are generally excluded from income. Qualified medical expenses usually are unreimbursed expenses that would be eligible for the medical expenses deduction (Publication 17).

30

All of the following are true about Archer MSAs EXCEPT


A.
Archer MSAs allow individuals who are self-employed to make tax-deductible contributions towards medical expenses.

B.
The Archer MSA deduction is included with other medical expenses.

C.
Archer MSAs can be rolled into a Health Savings Account tax-free.

D.
Archer MSAs were previously called Medical Savings Accounts.


The Archer MSA deduction is included with other medical expenses.


Answer B is correct.
The deduction for an Archer MSA is not included with other medical expenses and is not subject to the 7.5% limitation. Archer MSAs (previously called Medical Savings Accounts) allow individuals who are self-employed or employed by a small employer and who are covered by a high-deductible health insurance plan to make tax-deductible contributions to an Archer MSA and use those funds accumulated to pay medical expenses. An Archer MSA can be rolled into a Health Savings Account tax-free.

31


James and Mary divorced in the current year. They have two children, ages 10 and 12. The divorce decree requires James to pay $500/month to Mary and does not specify the use of the money. According to the decree, the payments will be reduced by $100/month after the children reach 18. James may deduct the total payments as alimony.





True.


False.

False.


Your answer is correct.
Section 71(c) requires that, if a payment to a former spouse will be reduced when a child attains a certain age, that payment shall be treated as an amount payable for the support of the child. Child support payments are not deductible as alimony. Therefore, James may only deduct $400 as alimony ($500 payment – $100 child support).

32

In the current year, Heidi, a self-employed individual, had net profits from her Schedule C business of $125,000. Besides her Schedule C deductions, Heidi took an $8,831 deduction for her Social Security taxes, and her deduction for self-employed health insurance was $650. Heidi also realized a $30,000 loss from her rental real estate activity in which she actively participated. What is Heidi’s deductible rental real estate loss for the current year?


A.
$25,000

B.
$12,825

C.
$12,500

D.
$12,175

$12,825


Answer B is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. The health insurance, however, must be subtracted from her net profits, for a total of $124,350 ($125,000 – $650). Heidi’s adjusted gross income exceeds $100,000 by $24,350. Therefore, the $25,000 allowance is reduced by $12,175 ($24,350 × 50%). This leaves $12,825 of losses that can be deducted (Publication 925).

33

Erica received $40,000 in wages, and her husband Paul had a net loss of $2,000 on his Schedule C. Paul materially participated in his Schedule C activity. They had interest income of $500. Paul also had a $28,000 loss from a rental real estate activity in which he actively participates. How much of the rental loss can they deduct on their current-year joint income tax return?


A.
$25,500

B.
$500

C.
$25,000

D.
$28,000

25,000


Answer C is correct.
Since Paul is deemed to actively participate in the rental real estate activity and Paul and Erica’s adjusted gross income is less than $100,000, they are allowed to deduct $25,000 against other income (Publication 925).

34

e divorced Renee last year. During the current year, per the divorce decree, Joe made the following payments to Renee:


The entire mortgage payment on house jointly owned
$9,600
Tuition for their child
2,800
Child support
6,000
Life insurance premiums on policy owned by Renee
5,400
What is the amount Joe can deduct as alimony on his tax return?


A.
$8,200

B.
$5,400

C.
$10,200

D.
$11,400

0,200C.
$10,200


Answer C is correct.
Section 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. Section 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse. The mortgage payment attributable to Renee’s ownership, or $4,800, is deductible as alimony. The life insurance premium payment is deductible as well (Publication 17). Therefore, the total alimony deduction is $10,200.

35

the current year, the Aloha Gardens apartment complex had rental losses of $40,000. Which of the following is true?


A.
Kathy has an interest as a limited partner in the property. Her nonpassive income for the year is $50,000. She may offset her portion of the rental loss against her nonpassive income up to $25,000.

B.
John’s estate has a 20% interest in the property. John was actively involved in managing the complex from 2007 until his death in 2012. His estate may offset its portion of the rental loss against any nonpassive income.

C.
Steve and his wife Barbara each have a 5% interest in the property and manage the apartments. They had nonpassive income of $30,000 for the year. They may offset their share of the rental loss against their nonpassive income.

D.
T Trust has a 40% interest in the property. The trustee is active in managing the apartments. The trust may offset its portion of the rental loss against other income earned during the year.

C.
Steve and his wife Barbara each have a 5% interest in the property and manage the apartments. They had nonpassive income of $30,000 for the year. They may offset their share of the rental loss against their nonpassive income.


Answer C is correct.
In the case of rental real estate activities in which an individual actively participates, up to $25,000 of losses from such activities are allowed each year against nonpassive income [Sec. 469(i)]. Active participation requires only participation such as making management decisions on lease terms, tenant approvals, repair versus replacement decisions, etc., even if an agent handles day-to-day matters. An individual is not treated as actively participating in a rental real estate activity if the individual’s and spouse’s interests are less than 10% of all interests in the activity [Sec. 469(i)(6)(A)]. Since Steve and his wife together own 10% of the property and manage the apartments, they qualify for allowing up to $25,000 of rental real estate losses against nonpassive income (Publication 925). Their share of the losses is $4,000 ($40,000 × 10%).

36

Rick and Stacy were divorced in February of the current year. Requirements of the divorce decree and Stacy’s performance follow:
Transfer title to their residence to Rick. Stacy’s basis was $95,000, the fair market value was $105,000, and the residence was subject to a mortgage of $90,000.
Make the mortgage payments of $1,000 per month (beginning in March) for the remaining 20 years or until Rick dies, if sooner.
Pay Rick $500 per month (beginning in March) for 6 years or until Rick dies, if sooner. Of this amount, $200 is designated as child support.
Stacy’s current-year alimony deduction is


A.
$15,000

B.
$13,000

C.
$3,000

D.
$18,000

.
$13,000


Answer B is correct.
Section 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. Section 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse (Publication 17). The transfer of title to the residence is not considered alimony since it is not a payment in cash. The mortgage payments are considered alimony [Sec. 71(c)]. Even though they are made to a third party, they are for the benefit of Rick. The $500 monthly payment includes $200 of child support that is not includible as alimony [Sec. 71(c)]. Stacy’s current-year alimony deduction is $13,000 [($1,000 + $300) × 10 months].

C.
$3,000

37


Question: 1
In the current year, Heidi, a self-employed individual, had net profits from her Schedule C business of $125,000. Besides her Schedule C deductions, Heidi took an $8,831 deduction for her Social Security taxes, and her deduction for self-employed health insurance was $650. Heidi also realized a $30,000 loss from her rental real estate activity in which she actively participated. What is Heidi’s deductible rental real estate loss for the current year?

A.
$12,175
B.
$12,500
C.
$25,000
D.
$12,825

D.
$12,825

Answer (D) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. The health insurance, however, must be subtracted from her net profits, for a total of $124,350 ($125,000 – $650). Heidi’s adjusted gross income exceeds $100,000 by $24,350. Therefore, the $25,000 allowance is reduced by $12,175 ($24,350 × 50%). This leaves $12,825 of losses that can be deducted (Publication 925).

38

Ron and Stacy are divorced in 2015. He pays her $50,000 of alimony in 2016, $39,000 in 2017, and $28,000 in 2018. What is the amount of recapture that Ron must include in his 2018 income?

A.
$1,000
B.
$0
C.
$1,500
D.
$15,000

. compute recapture, you can use this worksheet:
1: Determine Recapture for Year 2
1. Insert alimony paid in year 2 = $______
2. Insert alimony paid in year 3 = $______ plus $15,000 = $ ______
3. Then, subtract line 2 from line 1 (not less than zero) $______
2: Determine Recapture Base for Year 1
4. Insert alimony paid in year 2 = $ ______
5. Insert result in line 3 above (year 2 recapture) = $ ______
6. Then subtract line 5 from line 4 (not less than zero) = $______
7. Insert alimony paid in year 3 = $ ______
8. Then, add lines 6 and 7 = $ ______
9. Then divide line 8 by 2 = $ ______
10. The floor for recapture is 15,000
11. Then add line 9 to line 10 = $ ______
3: Determine Recapture for Year 1
12. Insert alimony paid in year 1 = $ ______
13. Insert result from line 11 above = $ ______
14. Then, subtract line 13 from line 12 (not less than zero) = $ ______
4: Determine Total Recapture
15. Insert result from line 3 = $ ______
16. Insert result from line 14 = $ ______
17. Then, add line 15 to line 16 = $ ______
$1,500

Answer (C) is correct.
The recapture is computed as follows:
Alimony paid in 2nd year: $39,000
Alimony paid in 3rd year: $28,000
Add $15,000 floor to 28,000: $43,000
Line 1 minus line 3: $0
Alimony paid in 1st year: $50,000
Adjusted alimony paid in 2nd year (line 1 minus line 4): $39,000
Total alimony from 2nd and 3rd years: $67,000
Divide line 7 by 2: $33,500
Add $15,000: $48,500
Line 5 minus line 9: $1,500
Alimony recapture (line 10 plus line 4): $1,500

39


Question: 4
Which of the following is a true statement concerning losses from passive activities?

A.
Losses from one passive activity may offset income from another passive activity.
B.
The rules apply to losses but not credits.
C.
Losses from each passive activity are not deductible, regardless of income earned in other passive activities.
D.
The losses may offset passive income, such as interest and dividends, but not business income or earned income.


Losses from one passive activity may offset income from another passive activity.

Answer (A) is correct.
In general, losses from passive activities may not offset nonpassive income such as salary, interest, dividends, or active business income (Sec. 469). However, deductions from one passive activity may offset income from the same passive activity, and losses from one passive activity may generally offset income from another passive activity (Publication 925).