R1 M4 - Adjustments Flashcards
(11 cards)
- The maximum student loan interest deduction (above-the-line for AGI) paid on qualified education loans is $2,500
- Moving expenses are only deductible by members of the U.S armed forces on active duty when moving pursuant to military orders.
Which of the following is not a deduction to arrive at adjusted gross income?
A. Alimony payments pursuant to a divorce settlement finalized on or before 12/31/18. B. Trade or business expenses. C. Capital losses in excess of capital gains. D. Mortgage interest.
Explanation
Choice “D” is correct. Mortgage interest is an itemized deduction, not a deduction to arrive at adjusted gross income.
Choice “A” is incorrect. Alimony payments (on divorce agreements finalized on or before December 31, 2018) are an adjustment, which is a deduction to arrive at adjusted gross income. Alimony paid on divorce settlements finalized after December 31, 2018, is not deductible.
Choice “B” is incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
Choice “C” is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income.
Which allowable deduction can be claimed in arriving at an individual’s adjusted gross income?
A. Alimony payment pursuant to a divorce settlement executed on or before December 31, 2018. B. Charitable contribution. C. Personal casualty loss. D. Unreimbursed business expense of an employee.
Choice “A” is correct. Alimony payments are deductible to arrive at adjusted gross income (AGI) if the payments are made pursuant to a divorce settlement executed on or before December 31, 2018.
Choice “B” is incorrect. Charitable contributions are deductible from adjusted gross income as itemized deductions.
Choice “C” is incorrect. Personal casualty losses are deductible from adjusted gross income as itemized deductions if incurred in a federally declared disaster area.
Choice “D” is incorrect. Unreimbursed business expenses of employees are not deductible.
In the current year, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, self-employed health insurance of $6,000, and $5,000 of alimony pursuant to divorce finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income for the year?
A. $55,000 B. $50,000 C. $46,000 D. $40,000
Explanation
Choice “D” is correct. Adjusted gross income is gross income minus adjustments. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. Alimony paid pursuant to a divorce settlement executed on or before December 31, 2018, is deductible by the payor. Alimony paid pursuant to a divorce settlement executed after December 31, 2018, is not deductible. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI of $40,000.
Choice “A” is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution.
Choice “B” is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution.
Choice “C” is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance.
For the current year, Val and Pat White, both age 40, are filing a joint income tax return. Val earned $40,000 in wages and was covered by his employer’s qualified pension plan. Pat was unemployed and received $5,000 in alimony payments (from a divorce agreement executed in 2017) for the first four months of the year before remarrying. The couple had no other income. Each contributed $5,000 to a traditional IRA account. The allowable IRA deduction on their current year joint income tax return is:
A. $10,000 B. $5,000 C. $1,000 D. $0
Choice “A” is correct. In 2024, taxpayers can contribute and deduct up to $7,000 per year to an IRA. The contribution amount is limited to the taxpayer’s earned income (earned income of the married couple if filing a joint return). Alimony paid pursuant to divorce or separation agreements executed before December 31, 2018, is considered earned income for IRA purposes. For couples filing a joint return where at least one spouse is an active participant in a retirement plan, the deductible portion of the contribution is phased out. For a spouse who is an active participant, the phase-out range in 2024 begins at AGI of $123,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2024 begins at $230,000. The couple’s earned income for IRA purposes here is $45,000 ($40,000 salary + $5,000 taxable alimony), which is below both phase-out ranges, so each spouse receives a deduction of the $5,000 contribution actually made.
Choice “B” is incorrect. Pat’s alimony is deemed “earned income” for the IRA contributions. However, even if Pat had no earned income, a spouse with no earned income can deduct up to $7,000, provided the couple’s combined earned income is at least $14,000.
Choice “C” is incorrect. This is the amount of the additional catch-up contribution for taxpayers age 50 and older (2024).
Choice “D” is incorrect. When a taxpayer or taxpayer’s spouse is an active participant in a retirement plan at work, the full deduction is allowed if the earned income of the couple is below the phase-out ranges (as in this case).
For the current year, Jennifer has self-employment net income of $50,000 before any SEP IRA deduction and no other earned income for the year. The total amount of self-employment tax related to Jennifer’s earnings was $7,064. What is the maximum amount Jennifer may deduct for contributions to her SEP IRA for the year?
A. $8,587 B. $9,294 C. $10,000 D. $69,000
Bob and Nancy are married and file a joint return for the current tax year. They are both under age 50 and employed, with wages of $50,000 each. Their total adjusted gross income (AGI) is $131,000. Neither of them is an active participant in a qualified retirement plan at work. What is the maximum traditional IRA deduction they can take for the current year?
A. $0 B. $14,000 C. $8,400 D. $7,000
Explanation
Choice “B” is correct. They may each deduct the maximum amount of $7,000 (2024), which is a total of $14,000. Because Bob and Nancy are not active participants in another qualified plan, their deductible contribution is not phased out.
Choice “A” is incorrect. Zero would be correct if they were phased out of the deduction, but there is no limitation here because neither Bob nor Nancy is an active participant in another qualified plan.
Choice “C” is incorrect. $8,400 would be correct if they were partially phased out of the deduction because one spouse was an active participant in a qualified employer-sponsored retirement plan and the other spouse was not (based on current year AGI phaseout amounts). There is no limitation here because neither Bob nor Nancy is an active participant in a qualified employer-sponsored retirement plan.
Property taxes paid on your primary residence is an itemized deduction, which is a deduction from AGI.
If the property taxes paid was for rental purposes it would be deducted for AGI (Sch E)
Bob and Nancy are married and file a joint return for the current year. They are both under age 50 and employed with wages of $50,000 each. Their total AGI is $250,000. Neither of them is an active participant in a qualified retirement plan at work. What is the maximum Roth IRA contribution they can make for the current year?
A. $0 B. $7,000 C. $14,000 D. $11,200
Explanation
Choice “A” is correct. Their AGI exceeds the current year (2024) phase-out for contributions to a Roth IRA, so they are completely phased out from making any Roth IRA contributions for the year. It is irrelevant that neither of them is covered by a qualified employer-sponsored retirement plan.
Choice “B” is incorrect. $7,000 (2024) would be correct if one of them could contribute to a Roth IRA. But because their AGI exceeds the allowable threshold, they are completely phased out.
Choice “C” is incorrect. $14,000 would be correct if they were both allowed to make the maximum allowed Roth IRA contribution for 2024 ($7,000 × 2 = $14,000). But they are completely phased out.
Choice “D” is incorrect. $11,200 assumes that Bob and Nancy are allowed a partially phased-out Roth contribution. However, their AGI is above the current year threshold for Roth IRA contributions, so they are not allowed to contribute to a Roth IRA.
