GSTTI-2020-FedTaxLawUpdates (3 hours) Flashcards
(15 cards)
Tim and Heather, a couple filing jointly, have Alternative Minimum Taxable Income (AMTI) of $1,051,800 in 2020. Because their AMTI exceeds the 2020 exemption phase-out threshold amount they must reduce their Alternative Minimum Tax (AMT) exemption of $113,400 by what amount?
A. $1,250
B. $3,750
C. $5,000
D. $7,900
B. $3,750
EXPLANATION
A taxpayer’s exemption phases out if his or her AMTI exceeds the thresholds indicated below. More
specifically, the exemption is reduced by 25% of the amount by which his or her AMTI exceeds the applicable threshold for his or her filing status.
For 2020, the phase-out threshold for the exemption increases to
$1,036,800 for joint filers,
$518,400 for individual filers and
$84,800 for estates and trusts.
Which of the following is a false statement regarding a Flexible Spending Account (FSA) (also known as a flexible spending arrangement)?
A. The taxpayer does not have to pay taxes on money put into an FSA that he or she uses to pay for certain out-of-pocket health care costs
B. The taxpayer can use funds in his or her FSA to pay for copayments and deductibles
C. The taxpayer can use FSA funds to pay for insurance premiums
D. Employers may make contributions to the taxpayer’s FSA
C. The taxpayer can use FSA funds to pay for insurance premiums
EXPLANATION
FSAs are available only with job-based health plans. Employers may make contributions to a taxpayer’s FSA.
However, a taxpayer cannot spend FSA funds on insurance premiums.
Violette buys a family health insurance coverage plan in 2020. The annual deductible for the family plan is $5,500. To be eligible to pair this family plan with her Health Savings Account (HSA) and allow her to contribute tax-advantaged dollars to the account the family plan must qualify as a high deductible health plan (HDHP). To qualify as an HDHP, Violette’s family coverage plan must have an out-of-pocket limit for the minimum annual deductible of what amount?
A. $1,400
B. $2,800
C. $6,900
D. $7,100
B. $2,800
EXPLANATION
HSAs can pair with high deductible plans (HDHP). As long as the taxpayer holds an HSA eligible high deductible health plan (HDHP) he or she can contribute tax-advantaged dollars to the account up to the annual limit.
In 2020 the out-of-pocket limits for HDHP minimum annual deductibles are $1,400 for self-only coverage or $2,800 for family coverage and annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) cannot exceed $6,900 for self-only coverage and $13,800 for family coverage.
John, 42, has both a traditional IRA and a Roth IRA. His taxable income is $57,000. Therefore, during 2020 he can only contribute a total of what amount to both of his IRAs?
A. $0
B. $1,000
C. $5,500
D. $6,000
D. $6,000
EXPLANATION
For 2020, the taxpayer’s total contributions to all of his or her traditional and Roth IRAs cannot be more than:
➢ $6,000.
➢ The taxpayer’s taxable compensation for the year.
If the taxpayer was age 50 or older before 2021, the maximum amount that can be contributed to his or her traditional
IRA for 2020 will be the smaller of the following amounts:
➢ $7,000.
➢ The taxpayer’s taxable compensation for the year.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement
Arrangements (IRAs) increased for 2020. If the taxpayer is covered by a retirement plan at work, his or her deduction
for contributions to a traditional IRA is reduced (phased out) if modified AGI is:
➢ More than $104,000 but less than $124,000 for a married couple filing a joint return or a qualifying widow(er),
➢ More than $65,000 but less than $75,000 for a single individual or head of household, or
➢ Less than $10,000 for a married individual filing a separate return.
Jordan, age 42, received a $10,000 eligible rollover distribution from her retirement plan. Her employer withheld $2,000 from her distribution. Within 60 days, Jordan decides to roll over the $8,000, but she does not contribute the $2,000 withheld by her employer to the new plan. Jordan will report what amount as taxable income on her tax return?
A. $0
B. $1,000
C. $2,000
D. $10,000
C. $2,000
EXPLANATION
If the taxpayer decides not to roll over the entire amount of the distribution (including any amount withheld) he or she will report the difference as taxable income.
NOTE:
The taxpayer must also pay the 10% additional tax on early distributions on the withheld amount unless he or she qualifies for an exception. If the taxpayer rolls over the full amount of any eligible rollover distribution, he or she receives the entire distribution would be tax-free and the taxpayer would avoid the 10% additional tax on early distributions.
A Section 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. Which of the following statements is false regarding the manner in which the Tax Cuts and Jobs Act expanded these plans?
A. Under the Tax Cuts and Jobs Act, tax-free distributions up to $10,000 from Section 529 plans can be made for tuition at elementary and secondary schools, whether public, private, or religious
B. Under the Tax Cuts and Jobs Act, rollovers of funds from Section 529 plans to ABLE accounts, special savings accounts for the benefit of a qualified disabled individual, can be made on a tax-free basis
C. Under the Tax Cuts and Jobs Act, Section 529 plans can only be used to cover costs for college
D. Under the Tax Cuts and Jobs Act, home schooling families are allowed to use Section 529 plan funds towards educational expenses
C. Under the Tax Cuts and Jobs Act, Section 529 plans can only be used to cover costs for college.
INTERESTING NOTE:
The Setting Every Community Up for Retirement Enhancement (SECURE) Act expands Section 529
education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up
to $10,000 of qualified student loan repayments (including those for siblings); and private elementary,
secondary, or religious schools beginning January 1, 2020.
In 2020, Brent’s tax return shows a $108,000 bottom-line Schedule C profit, an $8,000 self-employment tax deduction and a $20,000 SEP-IRA deduction. In this case, his qualified business income (QBI) equals $80,000, calculated as $108,000 minus the $8,000 and minus the $20,000. Generally, Brent, who is a single filing taxpayer, qualifies for a Qualified Business Income (QBI) Deduction for what amount?
A. $0
B. $16,000
C. $20,000
D. $21,600
B. $16,000
EXPLANATION
Under the Tax Cuts and Jobs Act these entities will be
taxed at their individual tax rates less a 20% deduction for qualified business income (QBI), subject to certain wage limits and exceptions. Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded. The new deduction, referred to as the Section 199A deduction or the deduction for qualified business income, is available for tax years beginning after December 31, 2017.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act modified the tax rates and brackets that the taxpayer will use to figure the Tax for Certain Children Who Have Unearned Income (Kiddie Tax) on his or her 2020 unearned income. Under the SECURE Act, all a child’s net unearned income over a threshold amount is taxed using the brackets and rates for which of the following?
A. Capital gains
B. Child’s parents
C. Estates and trusts
D. Partnerships
B. Child’s parents
EXPLANATION
The Tax Cuts and Jobs Act changed the Kiddie Tax, which taxes a child’s unearned income at the tax rates of the child’s parents. Starting in 2018, however, the Kiddie Tax was based on the much higher tax rates for estates and trusts. This significantly increased the tax rates that apply to the taxable portion of college grants, scholarships and fellowships and to military survivor benefits of Gold Star families. It also caused low- and middle-income children to be taxed at much higher rates than their parents.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act repeals the change to the Kiddie Tax, reverting to the rules that were in effect before 2018. This change is effective for tax years that begin after December 31, 2019. However, the legislation allows taxpayers to elect to have the change apply retroactively to the 2018 and/or 2019 tax years. Taxpayers will probably have to file amended Federal income tax returns to claim a refund of the excess tax.
Which of the following is an incorrect statement regarding Bonus Depreciation?
A. Bonus Depreciation is useful to very large businesses spending more than the Section 179 spending limit
B. Businesses with a net loss in a given tax year qualify to carry-forward the Bonus Depreciation to a future year
C. Bonus Depreciation only covers new equipment
D. When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation
C. Bonus Depreciation only covers new equipment
EXPLANATION
The definition of property eligible for 100% bonus depreciation was expanded to include used qualified property acquired and placed in service after September 27, 2017, pending other applied factors.
Isaac and Cynthia are married filing jointly taxpayers. Their modified adjusted gross income (MAGI) for 2020 is $53,000. They have three children and qualify for the full Child Tax Credit for each, which means they get a $6,000 credit (3 x $2,000 = $6,000). They complete their Form 1040 and determine their Federal income tax bill is just $1,000, leaving them with $5,000 in unused credit. Isaac and Cynthia qualify to claim the Additional Child Tax Credit and can generally receive a maximum income tax refund for what amount?
A. $1,000
B. $1,400
C. $4,200
D. $5,000
C. $4,200
EXPLANATION
The portion of the Child Tax Credit that is refundable after 2017 and before 2026 is still referred to as the Additional Child Tax Credit (ACTC) but is limited to $1,400 per qualifying child, and this amount is indexed for inflation, up to the $2,000 base credit amount. The earned income threshold for the refundable portion of the credit was decreased from $3,000 to $2,500.
In 2020, Wesley Pickett has a modified adjusted gross income (MAGI) of $58,500. During the year he paid $5,000 of student loan interest. What amount can Wesley deduct from his taxable income for the interest paid on his student loan?
A. $0
B. $1,000
C. $2,500
D. $5,000
C. $2,500
EXPLANATION
The American Taxpayer Relief Act made permanent the Student Loan Interest Deduction. Generally, the amount a
taxpayer may deduct is the lesser of $2,500 or the amount of interest he or she actually paid. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school.
Which of the following is true regarding the changes to the taxpayer’s deduction for state and local income and property taxes under the Tax Cuts and Jobs Act?
A. Foreign real property taxes can still be deducted
B. The Tax Cuts and Jobs Act limits the taxpayer’s deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 if he or she uses married filing separate status)
C. The taxpayer cannot choose to deduct state and local sales taxes instead of state and local income taxes
D. The taxpayer can claim an itemized deduction for an unlimited amount of personal state and local income and property taxes
B. The Tax Cuts and Jobs Act limits the taxpayer’s deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 if he or she uses married filing separate status)
EXPLANATION
Under previous tax law the taxpayer could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. He or she could also choose to forego any deduction for state and local income taxes and instead deduct state and local general sales taxes. The Tax Cuts and Jobs Act limits the taxpayer’s deduction for state and local income and property taxes to a combined total of $10,000 ($5,000 if he or she uses married filing separate status). Foreign real property taxes can no longer be deducted. However, the taxpayer can still choose to deduct state and local sales taxes instead of state and local income taxes.
Curtis and Norma are married and file jointly. Curtis contributed $1,000 to his 401(k) plan in 2020. Norma contributed $1,000 to an IRA in 2020. Their 2020 combined adjusted gross income is $33,500. What amount are Curtis and Norma eligible to claim for the Credit for Qualified Retirement Savings Contributions (Saver’s Credit) on their income tax return?
A. $0
B. $100
C. $500
D. $1,000
D. $1,000
EXPLANATION
A taxpayer can claim the credit for 50%, 20% or 10% of the first $2,000 ($4,000 if married filing jointly) contributed during the year to a retirement account. Therefore, the maximum credit amounts that can be claimed are $1,000, $400 or $200 per person. The maximum credit a married couple filing jointly can claim together is $2,000. The applicable percentage is determined by the taxpayer’s filing status and adjusted gross income (AGI).
The credit may be used against the taxpayer’s regular and alternative minimum tax liability. For 2020, the maximum applicable percentage is 50%, which is completely phased out when AGI exceeds $65,000 for joint filers, $48,750 for head of household filers, and $32,500 for single and married filing separately filers. The applicable percentage is the percentage as determined in accordance with a table.
Which of the following items can a taxpayer deduct as a charitable contribution?
A. Out-of-pocket expenses the taxpayer incurs when serving a qualified organization as a volunteer
B. Dues, fees, or bills paid to country clubs, lodges, fraternal orders, or similar groups
C. Tuition
D. Cost of raffle, bingo, or lottery tickets
A. Out-of-pocket expenses the taxpayer incurs when serving a qualified organization as a volunteer
The Fixing America’s Surface Transportation (FAST Act) requires the IRS to advise the State Department about seriously delinquent taxpayers. The State Department may then refuse to issue or renew a passport for a seriously delinquent taxpayer; the Secretary of State is also permitted to revoke any passport previously issued to a seriously delinquent taxpayer. For purposes of this law, a “seriously delinquent” tax debt is defined as “an unpaid, legally enforceable Federal tax liability” greater than what amount, including interest and penalties in 2020?
A. $10,000
B. $26,000
C. $47,500
D. $53,000
D. $53,000
EXPLANATION
For purposes of the law, a “seriously delinquent tax debt” is defined as “an unpaid, legally enforceable Federal tax liability” when a debt greater than $53,000 for 2020, including interest and penalties, has been assessed and a notice of lien or a notice of levy has been filed. The limit is adjusted each year for inflation and cost of living. The limit is not per year but cumulative meaning that it is the total tax debt that matters.
