teste pratica A1 Flashcards

Question

Susie, John, Luke, and Will provide support for their 80-year-old mother, Joyce. Joyce lives by herself in an apartment in Miami, Florida. Joyce earned $4,000 this year working at her church. Joyce provides 10% of her own support. Susie provides 30% of Joyce’s support, John provides 5% of Joyce’s support, Luke provides 15% of Joyce’s support, and Will provides 40% of Joyce’s support. Under a multiple support agreement, who may claim Joyce as a dependent? A. Susie, Luke, John, and Will B. Susie, Luke, and Will C. Will D. Susie and Will

Answer 1

Choice “B” is correct. Under a multiple support agreement, Susie, Luke, and Will are eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce's support. Choice “A” is incorrect. John did not provide more than 10% of Joyce’s support. Therefore, he is not eligible to claim Joyce as a dependent under a multiple support agreement. Choice “C” is incorrect. Under a multiple support agreement, Susie and Luke are also eligible to claim Joyce as a dependent because they contributed more than 10% of Joyce's support. Choice “D” is incorrect. Under a multiple support agreement, Luke is also eligible to claim Joyce as a dependent because he contributed more than 10% of Joyce's support.

Answer 2

Choice "C" is correct. Both children meet the dependency criteria. The 23-year-old child meets qualifying child rules (CARES). The age limit is met because the 23-year-old is a full-time student. The 33-year-old meets qualifying relative rules (SUPORT). The Andersons have two dependents for tax purposes. Choices "A", "B", and "D" are incorrect based on the above explanation.

Answer 3

Choice “C” is correct. The parent with custody of the child for the greater part of the year may claim the child as a dependent (determined by time, not the divorce decree). Because Molly’s parents have equal custody during the year, the parent with the higher AGI would be eligible to claim Molly as a dependent, which in this case would be James. However, James could waive the right to claim Molly as a dependent. Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

Answer 4

Choice “C” is correct. Jack meets the CARES test for a qualifying child. Jill does not meet the CARES test for a qualifying child because she is 24 and not a full-time student. She fails the age limit test of CARES. Jill also does not meet the SUPORT test because she earns more taxable income than the gross income threshold amount (“U” for under that amount). Betty does not meet the CARES test because she fails the close relative and age limit tests. (The CARES test is for a qualifying child, not a qualifying relative.) Betty also fails the SUPORT test because her taxable income ($6,000) is not under the gross income threshold amount. Therefore, Gail and Mark James can claim one person as a dependent—Jack. Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

Answer 5

Choice "B" is correct. Jane does not meet the qualifications for head of household, surviving spouse, or married filing jointly filing status in Year 2. She is unmarried so the only filing status she qualifies for is single. Choice "A" is incorrect. Jane was only allowed to use married filing jointly in Year 1, the year in which her spouse died. She is unmarried in Year 2, so she is not eligible for married filing jointly filing status. Choice "C" is incorrect. Although a taxpayer may be eligible for surviving spouse filing status in the two years immediately following the spouse's year of death, Jane is not eligible for surviving spouse because she does not maintain a home that is a principal residence for a dependent child for the entire year. Choice "D" is incorrect. Jane would not qualify for head of household because Phil does not meet the requirements to be Jane's dependent. Because Phil's Year 2 taxable gross income is more than $5,050 (2024), he does not meet the gross income test under the "SUPORT" requirements for a dependent relative.

Answer 6

Choice "A" is correct. The requirements that enable a taxpayer to be classified as a "qualifying surviving spouse" are: The taxpayer's spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year; The taxpayer has a child who can be claimed as a dependent; This child lived in the taxpayer's home for all of the current tax year; The taxpayer paid over half the cost of keeping up a home for the child; and The taxpayer could have filed a joint return in the year the spouse died.

Answer 7

Choice "A" is correct. Only one person meets the criteria for either qualifying child or relative for the Rosses. Dale meets the definition of qualifying child. He meets all criteria of CARES. He is under the age limit because he is a full-time student under the age of 24. All other CARES tests are met. Kim does not meet the age test for qualifying child. She also does not meet the qualifying relative criteria because her taxable gross income of $12,000 exceeds the gross income limit under SUPORT. Because Grant is Jim's parent, Grant does not have to live with the Rosses to be a qualifying relative. However, Grant's taxable gross income of $8,000 exceeds the gross income limit, so he is not a qualifying relative. Note that Grant's nontaxable Social Security benefits are not included in gross income for purposes of the qualifying relative gross income test. Choice "B" is incorrect. Kim fails the age test for qualifying child (CARES) and the gross income test for qualifying relative (SUPORT). Grant also fails the gross income test for qualifying relative (SUPORT). Choice "C" is incorrect. Dale meets the CARES criteria for qualifying child for Jim and Kay Ross. Choice "D" is incorrect. Only Dale meets the definition of either qualifying child or qualifying relative for Jim and Kay Ross. Kim does not meet the the age test for qualifying child or the gross income test for qualifying relative. Grant also does not meet the gross income test for qualifying relative.

Answer 8

Choice "C" is correct. A taxpayer may file a married filing jointly tax return in the year that a spouse dies, regardless of when in the tax year the spouse died. There is no requirement that the taxpayer maintain a home for a dependent child or dependent relative. The taxpayer does not meet the qualifications for single, head of household, or surviving spouse filing status in Year 1. Choice "A" is incorrect. Surviving spouse is only available for the two years immediately following the spouse's year of death and requires that the taxpayer maintain a home that is a principal residence for a dependent child for the entire year. Choice "B" is incorrect. Although Jane is unmarried (a widow), she is allowed to use the more advantageous married filing jointly filing status in Year 1, the year her spouse dies. Choice "D" is incorrect. Jane would not qualify for head of household because Phil does not meet the requirements to be Jane's dependent. Because Phil's Year 1 taxable gross income is more than $5,050 (2024), he does not meet the gross income test under the "SUPORT" requirements for a dependent relative.

Answer 9

Choice “B” is correct. Rhett fails both the age limit and residency test for qualifying child status. Choice “A” is incorrect. Rhett does not have to live with Heather for the entire year to meet the qualifying relative test because he is her son. Choice “C” is incorrect. Rhett is not considered a qualifying relative because his gross income exceeds the gross income threshold amount. Choice “D” is incorrect. Rhett is not a qualifying child. He fails both the age limit test and the residency test (CARES).

Answer 10

Choice "C" is correct. Filing status is determined as of the last day of the year. At the end of Year 2, Thompson is not married and does not qualify for any other filing status. Therefore, his status is single. Choice "A" is incorrect. When a spouse dies during the year, the surviving spouse can file married filing jointly for that year under an exception to the end-of-year test. But this question is about Year 2, the year after death. Thompson is single for Year 2. Choice "B" is incorrect. Head of household status could apply in certain circumstances where there is a dependent and surviving spouse status does not apply. That is not the case here. Thompson is single for Year 2. Choice "D" is incorrect. Qualifying surviving spouse status, can be claimed for the two years after year of death. However, it requires the presence of a dependent child, which is not part of the facts here. Thompson is single for Year 2.

Answer 11

Choice “C” is correct. Ryan meets the SUPORT tests for a qualifying relative if the Chambers provide more than half of Ryan’s support. CARES Test (Qualifying Child) SUPORT Test (Qualifying Relative) Close Relative Support (over 50%) test Age Limit Under a specific amount of (taxable) gross income test Residency and Filing Requirements Precludes dependent filing a joint tax return test Eliminate Gross Income Test Only citizens (residents of U.S./Canada or Mexico) test Support Test Relative test Ryan's taxable income ($2,000) is under the gross income threshold amount. He doesn’t file a joint return. He is a citizen of the United States and he lives with the Chambers for the entire year. Choice “A” is incorrect. If Ryan earns $15,000 in self-employment income, he would not meet the “U” test because his taxable income is over the gross income threshold amount. Choice “B” is incorrect. The support test for the qualifying relative test states that the Chambers must pay more than half of the support of Ryan. The fact that Ryan does not provide more than half of his own support is not enough to meet the support test for qualifying relative (SUPORT). Choice “D” is incorrect. Ryan does not meet the CARES test for qualifying child. He is not a close relative and not under the age limit.

Answer 12

Choice "D" is correct. A taxpayer qualifies for surviving spouse filing status for the two years following the year the taxpayer's spouse dies if the taxpayer maintains a household where a dependent child lives for the entire year. Choice "A" is incorrect. A single taxpayer who maintains a home that is the principal residence for a dependent child qualifies for head-of-household filing status. A full-time student under age 24 who does not provide more than half of his or her own support is a qualifying dependent child. A college student living at a university is considered temporarily away from home. The parent's home is considered the child's principal residence. Choice "B" is incorrect. A single taxpayer who provides more than one-half of the support for a qualifying relative and maintains a home that is the principal residence of the qualifying relative qualifies for head-of-household filing status. A dependent parent is not required to live with the taxpayer, provided the taxpayer contributes more than half the cost of maintaining a home that is the principal residence of the parent for the entire year. Choice "C" is incorrect. A married taxpayer who has lived apart from his or her spouse for the last six months of the year and maintains a household where a dependent child lives for more than half the year qualifies for head-of-household filing status.

Answer 13

Choice "A" is correct. Based on the CARES (QC) and the SUPORT (QR) tests, Dave and Pam have three dependents. Lisa: NO. Lisa fails the age limit for QC and exceeds the gross income limitation for QR. Tanya: YES. Tanya meets all tests of QC. She is a full-time student under the age of 24 so she meets the age test. Hannah: YES. Hannah meets all criteria for QR. She fails the age limit test for QC. Ellen: YES. Ellen meets the gross income limitation for QR because the Social Security income is nontaxable and not included for the gross income test. Tanya, Hannah, and Ellen all meet dependency requirements. Choices "C", "B", and "D" are incorrect based on the above explanation.

Answer 14

Choice “D” is correct. Jackie qualifies as her parent’s qualifying child (CARES). Bill qualifies as Jackie’s parents’ qualifying relative (SUPORT). Even though Jackie and Bill file a joint return, they can still be considered dependents because they receive a refund and their tax liability is zero. Choices “A”, “C”, and “B” are incorrect, based on the above explanation.

Answer 15

Choice “A” is correct. The niece meets the SUPORT test for qualifying relative status. The cousin and family friend do not meet the “R” (relative) or “T” (taxpayer lives with individual) tests. All three people whom Blake supports fail the residency test for a qualifying child. Choice “B” is incorrect. Blake’s niece meets the SUPORT tests and therefore counts as a qualifying relative. Choice “C” is incorrect. The cousin does not meet the “R” (relative) or “T” (taxpayer lives with individual) tests for a qualifying relative because Blake’s cousin did not live with him for the entire year. Choice “D” is incorrect. Blake’s family friend does not meet the “R” (relative) or “T” (taxpayer lives with individual) test, because Blake’s family friend does not qualify as a qualifying relative and did not live with him for the entire year.

Answer 16

Choice "B" is correct. The taxpayer should choose the head of household filing status for Year 2. The taxpayer qualifies for this filing status because the taxpayer is unmarried and maintained his or her home as the principal residence for the qualifying child for more than half of the taxable year. The taxpayer does not meet the requirements for a qualifying surviving spouse as a result of the qualifying child moving to live with grandparents in their home on August 30, Year 2. To file as a qualifying surviving spouse, the surviving spouse must pay over half the cost of maintaining a household where a dependent child lives for the whole taxable year. Choice "A" is incorrect. To file a return with qualifying surviving spouse status, the surviving spouse must pay over half of the cost of maintaining a household where a dependent child lives for the whole taxable year. Since the taxpayer's qualifying child moved to live with grandparents in their home on August 30, Year 2 in this example, the taxpayer cannot use the qualifying surviving spouse filing status for Year 2. Choice "C" is incorrect. If a taxpayer's spouse dies during the year, a joint return may be filed for that corresponding year. In this example, the taxpayer's spouse died during Year 1, so the married filing jointly status could not be used in Year 2. Choice "D" is incorrect. In order to use the married filing separately status, a taxpayer must be married. In this example, the taxpayer is a widow(er) and did not remarry before the end of Year 2.

Answer 17

Choice “B” is correct. Jane does not qualify as a dependent for her grandparents as a qualifying child or relative. With respect to her grandparents, Jane's scholarship is treated as support and thus Jane provides more than half of her own support ($12,000 savings + $5,000 scholarship = $17,000; $17,000/$30,000 = 0.57 = 57%). Jane does qualify as a dependent of her parents because she is under 24, a full-time student, and the scholarship does not count as support with respect to her parents. She also meets all other tests of qualifying child for her parents. Choice “A” is incorrect. Jane is a dependent of her parents because she meets all tests for a qualifying child. Choice “C” is incorrect. Jane’s scholarship does count as support for Jane with respect to her grandparents. Because Jane provided more than half of her own support (see the calculation above), Jane’s grandparents cannot claim her as a qualifying child or relative. Choice “D” is incorrect. The scholarship does not count as support for Jane with respect to her parents. Therefore, Jane meets all tests for qualifying child of her parents.

Answer 18

Rules: Payments for the support of a spouse, pursuant to a divorce agreement executed on or before December 31, 2018, are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income by the payor spouse. Child support is not taxable. Property settlements are not taxable. Choice "C" is correct. Only the $25,000 in alimony is included in the gross income of the receiving spouse. Choice "A" is incorrect. This answer option incorrectly includes the payments received in the year for alimony and property settlement for the year [$25,000 + $15,000 = $40,000]. The property settlement ($15,000) is NOT included in the gross income of the receiving spouse. Choice "B" is incorrect. The amount received for alimony ($25,000) is included in the gross income of the receiving spouse. Choice "D" is incorrect. This answer option incorrectly includes all of the payments received in the year. The child support ($10,000) and the property settlement ($15,000) are NOT included in the gross income of the receiving spouse.

Answer 19

Rule: Payments for the support of a spouse (alimony) are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income (AGI) by the spouse making the payments on any divorce agreement executed on or before December 31, 2018. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. To be alimony: Payments must be legally required pursuant to a written divorce or separation agreement, Payments must be in cash or its equivalent. Payments cannot extend beyond the death of the payee-spouse, Payments cannot be made to members of the same household. Payments must not be designated as anything other than alimony, and The spouses may not file a joint tax return. Choice "D" is correct. Alimony received is considered part of income and adjusted gross income. Choice "A" is incorrect. The rental value of parsonages (furnished by churches or synagogues) is excluded from the gross income of a minister and the minister's adjusted gross income. Choice "B" is incorrect. Compensation for injuries or sickness is excluded from gross income and adjusted gross income. Choice "C" is incorrect. A scholarship for tuition is excluded from gross income and adjusted gross income. There are limits or restrictions, such as the student has to be a degree-seeking student and amounts must actually be spent on tuition, fees, books, and supplies, but generally, the amount is excluded.

Answer 20

Choice "C" is correct. The wages of $18,000 and unemployment compensation of $3,900 are both includable in gross income on Adler's current year income tax return. Choice "A" is incorrect. Municipal bond interest income is excluded from gross income, and the unemployment compensation must be included in gross income. Choice "B" is incorrect. The unemployment compensation must be included in gross income. Choice "D" is incorrect. Municipal bond interest income is excluded from gross income.

Answer 21

Choice “D” is correct. In general, all income from whatever source derived is included in gross income. However, interest from state and local government bonds (i.e., "municipal" bonds) is not included in gross income. It is important to note, however, that the U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds and therefore interest on such obligations is included in gross income. Choice “A” is incorrect. Interest from municipal bonds is tax-exempt; therefore, the $300 in this problem is not included in the taxpayer's gross income. Choice “B” is incorrect. Interest on municipal bonds is tax exempt, but the U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds and therefore interest on such obligations is included in gross income. Choice “C” is incorrect. Interest from municipal bonds is tax exempt; therefore, the $300 of interest on the municipal bond is not included in the taxpayer's gross income. The U.S. government is not a municipality; thus, U.S. obligations such as Treasury bonds are not municipal bonds, and therefore the $200 of interest on the U.S. Treasury bond is included in the taxpayer's gross income.

Answer 22

Choice "D" is correct. Alimony received based on a divorce agreement executed on or before December 31, 2018, is taxable as gross income to the recipient. Choice "A" is incorrect. Alimony received based on a divorced agreement executed after December 31, 2018, is not taxable as gross income to the recipient. Choice "B" is incorrect. Child support received is not taxable as gross income. Choice "C" is incorrect. Child support received is not taxable as gross income.

Answer 23

Choice "C" is correct. Withdrawals from deductible traditional IRAs (i.e., IRAs for which the contributions were deducted) are taxed as ordinary income. Withdrawals prior to age 59½ are also subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax. Choice "A" is incorrect. Although withdrawals from Roth IRAs are not taxed provided certain rules are met, withdrawals from deductible traditional IRAs are always taxed. Choice "B" is incorrect. Withdrawals from deductible traditional IRAs prior to age 59½ are subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax. Choice "D" is incorrect. Withdrawals from deductible traditional IRAs are taxed as ordinary income, not capital gains.

Answer 24

Choice "A" is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition. Choice "C" is incorrect. Employer-provided medical insurance is a tax-free fringe benefit. Choices "D" and "B" are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember, tax is often paid by the person giving the gift or the estate at death.)

Answer 25

Choice "A" is correct. The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows: Salary 50,000 Inheritance 0 [not taxable] Alimony from ex-spouse (pre-2019 agreement) 12,000 Child support from ex-spouse 0 [not taxable] AGI 62,000 Choice "B" is incorrect. The inheritance and the child support are not included in taxable gross income. Choice "C" is incorrect. The alimony is also taxable, in addition to the salary, because the divorce agreement was executed on or before December 31, 2018. Choice "D" is incorrect. The salary and alimony are taxable, but the child support is not included in taxable gross income.

Answer 26

Choice "B" is correct. Scholarships are nontaxable for degree-seeking students to the extent that the proceeds are spent on tuition, fees, books, and supplies. The $5,000 for teaching courses is taxable compensation for services delivered. Choice "A" is incorrect. The scholarship is not taxable because Klein is a degree-seeking student and used the proceeds for tuition and fees. Choice "C" is incorrect. The $5,000 for teaching courses is taxable compensation for services delivered. Choice "D" is incorrect. The scholarship is not taxable because Klein is a degree-seeking student and used the proceeds for tuition and fees. Furthermore, the $5,000 for teaching courses is taxable compensation for services delivered.

Answer 27

Gross income includes all income unless it is specifically excluded in the tax code. Choice "D" is correct. Wages and all unemployment compensation are not excluded from being taxable; therefore, they are included in the taxpayer's gross income for tax purposes. Wages received 35,000 State unemployment compensation 6,400 Employer's unemployment compensation plan 2,000 43,400 Choice "A" is incorrect. The $6,400 of state unemployment compensation received is included as part of gross income. Choice "B" is incorrect. All forms of unemployment compensation are included as part of gross income. Choice "C" is incorrect. The $2,000 of his former employer's company-paid supplemental unemployment benefit plan is included as part of gross income.

Answer 28

Choice “D” is correct. The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received. Depending on a taxpayer’s level of modified AGI (AGI plus tax-exempt interest plus 50% of Social Security benefits), a taxpayer may include 0% to 85% of Social Security benefits received in gross income. Taxpayers must include in income the lesser of 50% (or 85%, depending on income) of Social Security received or 50% (or 85%, depending on income) of the excess modified AGI over a threshold amount. Eighty-five percent of Social Security benefits received is the maximum amount that is includable in gross income. Choices “A” and “C” are incorrect. If a taxpayer’s only source of income is $10,000 in Social Security benefits, the taxpayer is below the threshold ($25,000 single or $34,000 married) for taxable Social Security benefits. Choice “B” is incorrect. The maximum amount of taxable Social Security benefits is 85% of Social Security benefits received.

Answer 29

Choice “C” is correct. The $2,000 trip is considered an award and is included in Linda’s gross income. Choice “A” is incorrect. The value of employer-provided parking up to $315 per month may be excluded by an employee (2024). Choice “B” is incorrect. Premiums paid by an employer on up to $50,000 of coverage for an employee are excludable from gross income. Choice “D” is incorrect. Up to $5,250 of payments made by an employer on behalf of an employee’s educational expenses may be excluded from gross income. The exclusion applies to both undergraduate and graduate level education.

Answer 30

Choice "A" is correct. The final income tax return of a decedent for the year of death is due at the same time the decedent's return would have been due if the taxpayer was still alive. For a calendar-year taxpayer, the final return is due on April 15 following the year of death, regardless of when during that year the death occurred. Daisy was a calendar-year taxpayer and died in Year 1, so her final income tax return for Year 1 is due by April 15, Year 2. Choice "B" is incorrect. Daisy's Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not one year from her March 1, Year 1 date of death. The return is due by April 15 of the following year regardless of when the taxpayer dies during the year. Choice "C" is incorrect. Daisy's Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not April 15 of Year 1, the year of death. The return is due by April 15 of the following year regardless of when the taxpayer dies during the year. Choice "D" is incorrect. Daisy's Year 1 final income tax return is due by April 15 of Year 2, the year after her death, not December 31 of the year of death.

Answer 31

Choice "B" is correct. Each item listed here is included in gross income except for the state tax refund from a prior year. The taxpayer always claims the standard deduction. This means that the state tax was not deducted in the year it was paid. Under the tax benefit rule, the refund of that tax is not taxable. Wages 22,000 Unemployment compensation 6,000 Pension distribution (100% taxable) 4,000 Total 32,000 Choices "D", "C", and "A" are incorrect per the above rule and per the above computation.

Answer 32

Choice "B" is correct. None of the payments received should be considered alimony income. Hall would only claim alimony income if total receipts from her former spouse exceeded $7,200 (the required child support). In the event of payments consisting of both child support and alimony, child support obligations will be satisfied first. Note also that if the divorce was finalized after December 31, 2018, the alimony payments would not be considered income in any situation. Amount designated as monthly child support 600 Number of months × 12 Amount of required child support 7,200 Payments actually received (5,000) Amount of payments considered alimony 0

Answer 33

Choice “B” is correct. Interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income. Therefore, the city of Atlanta and State of Georgia bond interest is not taxable. The U.S. Treasury and Row Corporation bond interest is taxable. The Ellis Company stock dividend is also taxable. Choices “A” and “C” are incorrect. Interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income. Therefore, the city of Atlanta and State of Georgia bond interest is not taxable. Choice “D” is incorrect. Although interest on municipal bonds (bonds issued by state or local governments) is excluded from gross income, income from interest on U.S. Treasury bonds and interest and dividends from corporations are included in taxable income.

Answer 34

Choice "A" is correct. Taxable interest includes amounts received from general investment accounts as well as interest on federal obligations. Interest received from state and municipal bonds is not taxable.

Answer 35

Choice “D” is correct. The 2-for-1 stock split is not a taxable event. After the split, Jasmin has 200 shares of Pinkstey Corporation stock with a basis of $25/share. Jasmin is taxed in Year 5 on the sale of the stock: $40 x 200 shares = $8000 – $5000 stock basis (200 shares x $25/share) = $3000 long-term capital gain. Choice “A” is incorrect. After the Year 4 stock split, Jasmin owns 200 shares with a $25/share basis ($50 original basis/2). Choice “B” is incorrect. After the Year 4 stock split, Jasmin’s basis in the stock is $25/share ($50 original basis/2). She owns 200 shares after the split. Choice “C” is incorrect. The 2-for-1 stock split is not a taxable event.

Answer 36

Choice “D” is correct. Ania’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Ania’s itemized deductions last year exceeded the standard deduction by $400, then the state income taxes deducted created a tax benefit. Therefore, the $400 refund of the state income taxes received in the current year is taxable. Choice “A” is incorrect. Ania’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Ania’s itemized deductions last year exceeded the standard deduction by $100, then the state income taxes deducted created a tax benefit of $100. Therefore only $100 of the refund of the state income taxes received in the current year is taxable. Choice “B” is incorrect. If Ania claimed the standard deduction in the prior year, then she did not receive a tax benefit for the state income tax deduction. Therefore, none of Ania’s $400 refund in the current year is taxable. Choice “C” is incorrect. Ania's refund under these circumstances is taxable because the original deduction provided a tax benefit. In the prior year, her $1,000 in taxes paid were included in as part of her itemized deductions.

Answer 37

Choice "C" is correct. The maximum amount of taxable Social Security benefits is 85 percent of Social Security benefits received. The amount of Social Security benefits that is taxed depends on whether modified adjusted gross income (AGI plus tax-exempt interest plus 50 percent of the Social Security benefits) is greater than a threshold amount. For higher income taxpayers with modified AGI of more than $34,000 ($44,000 MFJ), up to 85 percent of Social Security benefits received for the year are taxable. Choice "A" is incorrect. Up to 50 percent of Social Security benefits are included in gross income for middle-income taxpayers with modified AGI between $25,000 and $34,000 ($32,000 and $44,000 MFJ), but up to 85 percent of Social Security benefits are included in gross income for higher income taxpayers with modified AGI of more than $34,000 ($44,000 MFJ). Choice "B" is incorrect. The maximum amount of Social Security benefits received that is included in gross income is 85 percent for higher income taxpayers with modified AGI in excess of $34,000 ($44,000 MFJ). Choice "D" is incorrect. No Social Security benefits are taxable for lower income taxpayers with modified AGI of $25,000 or less ($32,000 MFJ). However, up to 50 percent of Social Security benefits are taxable for middle-income taxpayers, and up to 85 percent of Social Security benefits are taxable for higher income taxpayers.

Answer 38

Choice “D” is correct. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable. Choice “A” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie claimed the standard deduction in the prior year, then she did not receive a tax benefit from deducting the state income tax. Therefore, the state tax refund received in the current year is not taxable. Choice “B” is incorrect. The most Kurstie would include in gross income in this case would be the $800 refund. She did not receive $3,000. Choice “C” is incorrect. Kurstie’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Kurstie’s itemized deductions last year exceeded the standard deduction by $200, then the state income taxes deducted created a tax benefit of $200. Therefore, $200 of the state income tax refund received in the current year is taxable, not $800.

Answer 39

Choice “D” is correct. If a divorce settlement provides for a property settlement by a spouse, the spouse gets no deduction for payments made and the payments are not includable in gross income of the spouse receiving the payment. Choice “A” is incorrect. Because the divorce settlement provides for the payments, no deduction is allowable for payments made and the payments are not includable in gross income of the spouse receiving the payment. Choice “B” is incorrect. If a divorce settlement provides for an assumption of debt by a spouse, the amounts are generally nontaxable. Choice “C” is incorrect. If a divorce settlement provides for a property settlement by a spouse, the amounts are generally nontaxable.

Answer 40

Choice “C” is correct. Interest on Series EE Savings Bonds is tax-exempt when it is used to pay for higher education for the taxpayer, a spouse, or dependents. The amount paid for higher education is reduced by any tax free-scholarships received. Because Sue’s $40,000 AGI is under the single phase-out threshold, the interest may be excluded. Choice “A” is incorrect. Sue’s AGI of $240,000 is above the single phase-out threshold for U.S. Series EE Savings Bond interest exclusion. Choice “B” is incorrect. There is no exclusion for U.S. Series EE Savings Bond interest for those using the married filing separately status. Choice “D” is incorrect. The $10,000 in tax-free scholarships reduces the $10,000 of higher education costs to zero. Therefore, Sue’s $10,000 in U.S. Series EE Savings Bond interest is taxable.

Answer 41

Choice "A" is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies when the winner is selected for the award without entering into a contest (i.e., without any action on the individual's part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions "I" and "II" must be met in order for Kent to exclude the award from his gross income. Choice "B" is incorrect. "I" is a necessary condition as well. See explanation above. Choice "C" is incorrect. "II" is a necessary condition as well. See explanation above. Choice "D" is incorrect. "I" and "II" are both necessary conditions. See explanation above.

Answer 42

Choice "A" is correct. The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds). Wages and interest on U.S. Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer's income tax return. Damages for personal injury (i.e., workers' compensation for a job-related injury) are specifically excluded from gross income. Choices "C", "B", and "D" are incorrect, per the above explanation.

Answer 43

Choice "D" is correct. The entire $10,000 withdrawal is taxable ordinary income. Earnings on deductible traditional IRA contributions accumulate tax-free until withdrawn. Distributions of both principal (contributions) and earnings from deductible traditional IRAs are taxable as ordinary income and may be subject to applicable early withdrawal penalties. However, early withdrawal penalties would not apply in this scenario because the taxpayer is over the age of 59½. Choice "A" is incorrect. The $8,000 in earnings is taxable as a result of the withdrawal. However, the taxpayer withdrew $10,000 from the plan, so $2,000 of the principal is also taxable. Choice "B" is incorrect. This answer choice incorrectly allocates the distribution between principal and earnings. The $28,000 account balance consists of 71.43% principal ($20,000 contributions / $28,000 total) and 28.57% earnings ($8,000 earnings / $28,000 total). Therefore, the taxable distribution was incorrectly calculated as follows: $10,000 withdrawal × 28.57% earnings = $2,857. Distributions are only allocated between taxable and nontaxable if the contributions were not deductible when made. Choice "C" is incorrect. The full $10,000 withdrawal is taxable. For a deductible traditional IRA, distributions of contributions and earnings are both taxable.

Answer 44

Choice "C" is correct. Gross income includes employee achievement awards not in the form of tangible personal property. Tangible personal property does not include lodging. Gross income also includes treasure troves to the extent of its value in United States currency. Choice "A" is incorrect. Gross income includes treasure troves to the extent of its value in United States currency. Choice "B" is incorrect. Gross income includes treasure troves. Choice "D" is incorrect. Gross income does not include inheritances.

Answer 45

Choice "B" is correct. The annuity contract is a fixed-period annuity with payments received over 10 years. The original investment in the annuity contract is $100,000 so $10,000 of each annuity payment is nontaxable return of capital ($100,000 / 10 years). The annual annuity payment is $12,000, so $2,000 is included in gross income ($12,000 payment − $10,000 return of capital). Choice "A" is incorrect. The taxpayer must include $2,000 of the first payment, the excess over the $10,000 return of capital, in gross income. Choice "C" is incorrect. The $10,000 is nontaxable return of capital. The remaining $2,000 of the $12,000 annual payment is included in gross income. Choice "D" is incorrect. Only $2,000 of the $12,000 is included in gross income. The other $10,000 is nontaxable return of capital.

Answer 46

Choice “A” is correct. Gambling winnings are included in gross income. Gambling losses are deductible to the extent of gambling winnings, but are deducted on Schedule A and not calculated as part of gross income. Choices “D”, “B”, and “C” are incorrect, based on the above explanation.

Answer 47

Choice “D” is correct. $215,000 (the amount received for disability pay and punitive damages) is taxable. The $15,000 disability pay is taxable because the insurance was paid by Kim’s employer as a nontaxable fringe benefit. If Kim had paid the disability insurance premiums after tax, then the benefits received would not be included in gross income. The $200,000 received for punitive damages is fully taxable. The $5,000 reimbursement for medical expenses paid by Kim and the health insurance premiums are not included in gross income. The $10,000 received for damages for personal physical injury is also not taxable. Choices “C”, “B”, and “A” are incorrect, based on the above explanation.

Answer 48

Choice "C" is correct. Except for interest from state and local government bonds, interest income is fully taxable, so the $10 is included in income. Since Clark did not itemize deductions on his Year 8 federal income tax return, he did not deduct any state income taxes last year. Under the tax benefit rule, the refund is not taxable this year because Clark did not deduct the tax last year.

Answer 49

Choice “D” is correct. Alimony pursuant to a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Child support is not taxable to the recipient and not deductible by the payor. Because the total payment decreases to $10,000 once Fred and Wilma’s child turns 18, the $2,000 decrease is deemed child support. The fact that Fred pays the law school in accordance with the divorce agreement on Wilma’s behalf does not change the fact that $10,000 is considered alimony. Choice “A” is incorrect. Alimony paid according to a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Choice “B” is incorrect. Alimony paid in accordance with a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Child support is not taxable to the recipient and not deductible by the payor. Because the total payment decreases to $10,000 once Fred and Wilma’s child turns 18, the $2,000 decrease is deemed child support. Choice “C” is incorrect. The fact that Fred pays the law school in accordance with the divorce agreement on Wilma’s behalf does not change the fact that $10,000 is considered alimony.

Answer 50

Choice “A” is correct. The $1,000 cash dividend from Bears Inc. is taxable. The $500 FMV of the property received as a dividend from Tigers Inc. is taxable. Because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable. Consequently, the total taxable dividends equal $1,000 + $500 + $750 = $2250. Choice “B” is incorrect. Because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable. Choice “C” is incorrect. The property distribution is valued at the FMV of the property received as a dividend, rather than the adjusted basis. Also, because Larry had the option to receive cash instead of the stock dividend from Lions Inc., the $750 FMV of the stock dividend is taxable. Choice “D” is incorrect. The $500 FMV of the property received as a dividend from Tigers Inc. is taxable as are cash dividends in lieu of stock.

Answer 51

Choice “A” is correct. Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments. Her investment in the annuity is $70,000 and her return of capital for each annuity payment is $70,000/192 = $364.58. The return of capital portion of each annuity payment is not taxable (not included in gross income). Mary must include the excess received ($500.00 – 364.58) of $135.42 in her gross income. Choice “B” is incorrect. This is equal to the amount that is a nontaxable return of investment on the annuity, rather than the taxable income portion of each payment. Choice “C” is incorrect. Mary is not subject to tax on the portion of the payment that is a return of investment. This is calculated using the IRS life expectancy tables and excess amounts are recognized ratably over that period. Choice “D” is incorrect. Based on IRS tables, Mary is expected to receive 192 (16 years x 12 months) annuity payments. Her investment in the annuity is $70,000. Therefore her return of capital for each annuity payment is $70,000/192 = $364.58, which is not taxable. She must include the excess $135.42 in her gross income.

Answer 52

Choice "B" is correct. The facts state that cash collections from customers were $100,000 and as a cash basis taxpayer this is the amount of Mosh's gross taxable income for the year. Choices "A" and "C" are incorrect. See explanation above. Choice "D" is incorrect. $90,000 is the amount of sales that would be Mosh's taxable income if Mosh were an accrual basis taxpayer.

Answer 53

Choice "D" is correct. Among the requirements for payments to be classified as alimony are the following: Payment must be in cash or its equivalent. Payments cannot extend beyond the death of the payee-spouse. Payments must be legally required pursuant to a written divorce (or separation) agreement. Payments cannot be made to members of the same household. Payments must not be designated as anything other than alimony. The spouses may not file a joint tax return. The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions). Alimony paid is not deductible and alimony received is not considered taxable income for all divorce or separation agreements executed after December 31, 2018.

Answer 54

Choice "C" is correct. Generally, a premature distribution prior to age 59 1/2 from a traditional IRA is subject to a 10 percent penalty tax. Certain exceptions to this tax are available and are contained in the mnemonic "HIM DEAD TED." Homebuyer (first time): Distribution used toward the purchase of a first home within 120 days of distribution ($10,000 maximum exclusion) Insurance (medical if unemployed and with 12 consecutive weeks of unemployment compensation) Medical expenses in excess of percentage of AGI floor Disability (permanent or indefinite disability, but not temporary disability) Education (college tuition, fees, books, etc.) Adoption or birth of child made within one year from the date of birth or adoption ($5,000 maximum exclusion) Disaster: Qualified natural disaster ($22,000 maximum per disaster) Terminal illness or death Emergency expenses (for personal or family emergency, up to $1,000 per year) Domestic abuse victims (lesser of $10,000 or 50 percent of retirement account) The amount removed from the IRA qualifies under the "H" penalty tax exception above because the $10,000 withdrawal was used toward the purchase of their first home within 120 days of distribution. However, the question states that contributions to the IRA had been previously deducted on Mrs. Williams' individual tax return, therefore, this is a distribution from a deductible traditional IRA. Distributions from a deductible traditional IRA are taxable to the recipient as ordinary income and thus would be included in the Williamses' taxable gross income in the year of distribution. Choice "A" is incorrect. The amount qualifies for an exception to the premature distribution penalty tax. Choice "B" is incorrect. The amount qualifies for an exception to the penalty tax and would be included in the Williamses' gross income. Choice "D" is incorrect. The distribution would be included in the Williamses' gross income.

Answer 55

Choice "D" is correct. If Mary dies after receiving 10 full years of annuity payments, she will have received 120 payments (10 years × 12 months). Mary's IRS life expectancy was 16 years (16 years × 12 months = 192 months). For the first 192 payments, Mary will have a return of capital of $364.58 ($70,000/192 months). Therefore, after 10 full years of payments she will have recovered $43,750 ($364.58 × 12 × 10, rounded) of the $70,000 investment in the annuity. The unrecovered portion ($70,000 – $43,750 = $26,250) can be deducted on Mary's final tax return as an itemized deduction. Choices "A", "B", and "C" are incorrect, based on the above explanation.

Answer 56

Choice "B" is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property. Choice "A" is incorrect. Income also can be received in property, not only cash. Choice "C" is incorrect. Income also can be constructively received, not only actually. Choice "D" is incorrect. Income also can be constructively received in property, not only actually in cash.

Answer 57

Choice “D” is correct. All five statements are true in regard to the exclusion of U.S. Series EE savings bond interest. Choices “B”, “A”, and “C” are incorrect, based on the above explanation.

Answer 58

Choice "A" is correct. The $20,000 wages and $500 interest earned and received before Daisy died should be included in her taxable gross income on her Year 1 final federal income tax return. The $1,500 of interest income received after Daisy's death by her estate should be included on the estate's Year 1 federal income tax return. Choice "B" is incorrect. The $500 interest earned before Daisy died is also included on her Year 1 final federal income tax return, in addition to her $20,000 in wages. Choice "C" is incorrect. A cash-basis taxpayer's income earned and received before the date of death is included in the taxpayer's final federal income tax return. Choice "D" is incorrect. Only the $20,000 wages and $500 interest earned and received before Daisy died is included on her Year 1 final federal income tax return. The $1,500 interest earned after her date of death should be included on the estate's Year 1 federal income tax return.

Answer 59

Choice "B" is correct. Punitive damages received in a personal injury case are fully taxable, except in a wrongful death case where state law has limited wrongful death awards to punitive damages. Damages that are awarded as a result of physical personal injury are not taxable and should be excluded from gross income. Therefore, Sullivan should only include the $2,000,000 of punitive damages in his gross income and not the $200,000 of damages for physical personal injury. Choice "A" is incorrect. This answer choice incorrectly includes the $200,000 personal injury damages award in Sullivan's gross income and excludes the $2,000,000 in punitive damages. The punitive damages are fully taxable and should be included in gross income. The amount received as compensation for personal injury is not taxable and should be excluded from Sullivan's gross income. Choice "C" is incorrect. This answer choice incorrectly excludes both the personal injury damages award as well as the punitive damages award. The $2,000,000 that Sullivan received in punitive damages is fully taxable and should be included in his gross income. Choice "D" is incorrect. This answer choice incorrectly includes both the $200,000 damages award and the $2,000,000 in punitive damages in Sullivan's gross income. The punitive damages should be included, but the damages award for personal physical injury is not taxable.

Answer 60

RULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period. Choice "A" is correct. The facts indicate that a repair was completed prior to year end but not yet invoiced. If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued at year end. Services have been performed, but they have not been paid for, as they have not even been invoiced yet. Choice "B" is incorrect. If the repair was completed after year end, then the expense is not accruable, as the benefit of the services hasn't been received as of year end. The fact that the repair was invoiced prior to year end does not impact the situation. Choice "C" is incorrect. If a repair was completed and paid for prior to year end, no accrual is appropriate. On the accrual basis, the expense is taken in the year the repair is completed and the benefit is received. In this case, the account payable was also paid in the same year, but this has no effect on the expense. Choice "D" is incorrect. The facts indicate that the work is to be completed at a date later than year end. Therefore, the expense is not accruable at year end, as the benefit of the repair hasn't been received as of year end. It is reasonable that a signed contract for the repair work exists, but this has no effect on the accrual.

Answer 61

Choice “D” is correct. If a taxpayer withdraws money from an IRA before the age of 59½, is unemployed, and has received 12 consecutive weeks of unemployment compensation under federal or state law, and purchases medical insurance, there is no penalty for the early withdrawal. Pam is subject to an early withdrawal penalty because she is fully employed. Choice “A” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for medical expenses in excess of 7.5 percent of AGI. Choice “B” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for college tuition, fees, books, supplies, and equipment and the student attends school at least half-time. Choice “C” is incorrect. There is no penalty on a premature distribution from an IRA (before age 59½) if the distribution was used to pay for a first-time home purchase. The maximum exclusion is $10,000 and the home purchase must be within 120 days of the distribution.

Answer 62

Choice "B" is correct. $2,000. Death benefit 150,000 Amount received in the current year 12,000 Less: Return of principal ($150,000 ÷ 15 years) (10,000) Taxable interest 2,000

Answer 63

Choice “A” is correct. Ryan will pay income tax on the entire withdrawal ($80,000 × 25% = $20,000). The distribution was taken before Ryan was age 59 1/2, so he will pay a 10 percent early withdrawal penalty on the portion of the distribution that he did not roll over to the Roth IRA ($20,000 × 10% = $2,000). Choices “C”, “B”, and “D” are incorrect, based on the above explanation.

Answer 64

Choice "D" is correct. The value of the use of a company car is a taxable employee fringe benefit. Carson is the employee who received the benefit from his employer, even if his spouse, Mary, used the car. Mary is not an employee of the company, so the use of the company car is not a taxable employee fringe benefit to Mary. Choice "A" is incorrect. Carson is the employee who received the benefit from his employer, so the value of the employee fringe benefit is taxable to Carson. Choice "B" is incorrect. Carson is the employee who received the benefit from his employer, so the value of the employee fringe benefit is taxable to Carson, not Mary. Choice "C" is incorrect. The value of the use of a company car is a taxable employee fringe benefit that is taxable to the employee, Carson.

Answer 65

Choice "D" is correct. One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Other conditions include, for post-1989 bonds, the taxpayer is over age 24 when issued and is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or dependents. Choice "A" is incorrect. There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds. Choice "B" is incorrect. The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child. Choice "C" is incorrect. The owner must be at least 24 years old before the bonds issue date.

Answer 66

Choice “D” is correct. Based on IRS tables, Mary is expected to receive 192 (16 years × 12 months) annuity payments. Mary will recover her investment over the life expectancy stated in the IRS tables, or the first 192 annuity payments. After the 192nd payment, all of the annuity payment is taxable. Choice “A” is incorrect. Mary will recover her nontaxable return of investment ratably over her life expectancy based on the IRS tables, which is 192 months. After the 192nd payment, all of the annuity payment is taxable. Choice “B” is incorrect. Based on IRS tables, Mary is expected to receive 192 (16 years × 12 months) annuity payments. Her investment in the annuity is $70,000. Therefore, her return of capital for each annuity payment is $70,000 / 192 = $364.58. This amount is recovered ratably over that period and, after the 192nd payment, all of the annuity payment is taxable. Choice “C” is incorrect. This is equal to the amount which will be included in taxable income for the first 192 payments. After that, all of the annuity payment is taxable.

Answer 67

Choice "C" is correct. The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income. Choice "A" is incorrect. The $1,000 interest on state government obligations is normally not taxable. Choice "B" is incorrect. The $600 interest on state income tax refund and the $800 interest on federal government obligations is also taxable. Choice "D" is incorrect. The $800 interest on federal government obligations is also taxable.

Answer 68

Rule: Generally, unless an exception applies, retirement money cannot be withdrawn without penalty until the individual reaches the age of 59 ½. If retirement funds (without an exception) are withdrawn before the age of 59 ½, the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax that applies to all distributions of traditional IRA funds). Choice "B" is correct. The taxpayer is under the age of 59 ½, and the facts do not indicate that an exception applies; therefore, the taxpayer is subject to the 10% penalty on the IRA distribution in addition to the regular income tax. The regular income tax that applies is the marginal rate (the rate for the next dollar of taxable income). The effective tax rate is simply the total tax divided by the total taxable income. In this case, the taxpayer would have to pay the regular tax on the distribution at the 35% marginal rate PLUS the 10% penalty on early distribution without an exception. The calculation to arrive at the total tax associated with the withdrawal follows: Regular Income Tax 30,000 × 35% 10,500 Penalty Tax 30,000 × 10% 3,000 Total Tax 13,500 Choice "A" is incorrect. This answer option assumes the effective income tax rate (rounded, assuming 33.33%) applied to the $30,000 distribution. It uses the incorrect tax rate (the marginal rate should be used) and omits the inclusion of the applicable 10% penalty tax. [$30,000 × 33.33% = $10,000] Choice "C" is incorrect. This answer option assumes the effective income tax rate (rounded, assuming 33.33%) applied to the $30,000 distribution plus the applicable 10% penalty tax [($30,000 × 33.33%) + ($30,000 × 10%) = $13,000]. It uses the incorrect tax rate (the marginal rate should be used). Choice "D" is incorrect. This answer option includes the $30,000 distribution multiplied by the marginal tax rate, but it omits the inclusion of the applicable 10% penalty tax. [$30,000 × 35% = $10,500]

Answer 69

Choice "B" is correct. Employer contributions to a qualified traditional defined contribution retirement plan and earnings on the amounts contributed are not taxable income to the employee until distributed. Choice "A" is incorrect. The plan earnings in Year 1 are not taxable income to the employee until distributed. Choice "C" is incorrect. The employer contribution of $600 in Year 1 is not taxable income to the employee until distributed. Choice "D" is incorrect. The $850 employer contribution and plan earnings in Year 1 are not taxable income to the employee until distributed.

Answer 70

Choice “D” is correct. Alimony payments paid according to a divorce agreement executed on or before December 31, 2018, are included in gross income. Alimony paid based on a divorce settled after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Child support and cash from property settlements are not included in gross income. Because this divorce was finalized in 2016, the alimony is included in gross income of the recipient. Choice “A” is incorrect. $130,000 would be correct if the cash settlement from the property settlement was included in gross income, but it is not. Choice “B” is incorrect. Zero is not correct because the alimony payments are included in gross income. Choice “C” is incorrect. $142,000 would be correct if the cash settlement from the property settlement and the child support were included in gross income, but they are not.

Answer 71

Choice "A" is correct. Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

Answer 72

Choice “B” is correct. $1,350 is included in Elizabeth’s gross income. The U.S. Treasury bond certificate interest ($500) plus the interest on the state tax refund ($200) plus the corporate bond interest ($600) plus the amount received for opening a new savings account ($50) equals $1,350. Interest on obligations of a possession of the United States, such as Puerto Rico, is tax-exempt. Choice “A” is incorrect. Interest on obligations of a possession of the United States, such as Puerto Rico, is tax-exempt. Choice “C” is incorrect. Although interest on state and municipal bonds is not taxable, interest on a state tax refund is included in taxable income. Choice “D” is incorrect. Interest on U.S. Treasury bonds and state tax refunds are taxable unless specifically excluded by law.

Answer 73

Choice "A" is correct. Alimony received pursuant to a divorce agreement executed on or before December 31, 2018 is included in taxable gross income; child support is not. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Because this divorce was finalized in 2012, the alimony is included in gross income. Joe was to receive $3,000 per month in alimony for the remaining six months of the year (July - December), for a total of $18,000. Child support is non-taxable as are lump-sum property settlements made pursuant to a divorce. When total payments received do not equal the total due, the amounts are first allocated to child support. Thus, of the $15,000 paid by Merrill, $6,000 is first allocated to child support. The remaining $9,000 would constitute alimony and would be taxable income to Joe. Choice "B" is incorrect. The $15,000 must first be allocated between the types of payments received. Any amounts are first used to satisfy any child support requirement, and the remainder would be classified as alimony. Choice "C" is incorrect. This answer includes the total amount received, $15,000 payments (child support and alimony) and the property settlement. Lump-sum property settlements are not taxable to the recipient in a divorce. Choice "D" is incorrect. This answer includes both the $9,000 (discussed above) and the property settlement (which is non-taxable).

Answer 74

Choice "C" is correct. Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the federal refund itself is not taxed. Choice "A" is incorrect. Interest income from U.S. obligations is generally taxable. Choice "B" is incorrect. Interest income on a federal tax refund is taxable, even though the refund itself is not taxed. Choice "D" is incorrect. Interest income from U.S. obligations is generally taxable. Interest income on a federal tax refund is taxable, even though the refund itself is not taxed.

Answer 75

Choice "B" is correct. I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship. II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.

Answer 76

Choice "D" is correct. The employer's reimbursement of 80 percent of the taxpayer's moving expenses is considered a fringe benefit. Unless the fringe benefit is specifically excluded from taxation, the value of the reimbursement is considered taxable income of the employee. As such, the reimbursement will increase the employee's taxable income. Furthermore, the portion of the expenses that was not reimbursed is not deductible by the employee. Moving expenses are only deductible if they are incurred by members of the U.S. Armed Forces moving pursuant to a military order. Choice "A" is incorrect. The moving expenses are not deductible by the taxpayer. Moving expenses are not deductible unless the taxpayer is a member of the U.S. Armed Forces, and the costs are related to a move made as a result of a military order. The employer's reimbursement of 80 percent of the taxpayer's moving costs is indeed included in the taxpayer's gross income as the reimbursement constitutes a taxable fringe benefit. Choice "B" is incorrect. The employer's reimbursement of 80 percent of the taxpayer's moving expenses is considered a fringe benefit and is included in the employee's gross income, which will increase the employee's taxable income. Furthermore, the moving expenses are only deductible if the taxpayer is a member of the U.S. Armed Forces, and the costs are related to a move made as a result of a military order. Choice "C" is incorrect. The employer's reimbursement of 80 percent of the taxpayer's moving expenses is considered a fringe benefit. An employer's reimbursement is not considered a nontaxable fringe benefit; thus, it is included in the employee's gross income and will increase the employee's taxable income. The moving expenses are indeed nondeductible because only moving expenses incurred by members of the U.S. Armed Forces are deductible.

Answer 77

Choice “A” is correct. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. Since the accountant received services valued at $550, the accountant must report income of $550. Choice “B” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of services received and the fair market value of services rendered does not result in additional income or expense. Choice “C” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received, not the fair market value of services rendered. Choice “D” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of services received and the fair market value of services rendered does not result in additional income or expense.

Answer 78

Choice "A" is correct. The first $50,000 of group term life insurance is a nontaxable fringe benefit. Amounts exceeding this are taxable based on IRS tables. The total group term life insurance here is $200,000 (twice the salary of $100,000). The amount exceeding $50,000 is $150,000. The cost given here is $2.76 per $1,000 of insurance. $150,000 / $1,000 = 150; 150 × $2.76 = $414. So the total amount included in gross income is $100,414 ($100,000 + $414). Choice "B" is incorrect. $100,552 includes the entire $200,000 of the group term life insurance instead of only $150,000. Choice "C" is incorrect. $100,276 only includes $100,000 of the group term life insurance instead of $150,000. Choice "D" is incorrect. $100,000 does not include any of the taxable amount of group term life insurance.

Answer 79

Choice "A" is correct. Alimony includes only payments received in cash or its equivalent (e.g., the payment of bills on behalf of the ex-spouse). Alimony received pursuant to a divorce executed on or before December 31, 2018, is included in gross income of the recipient. Choice "B" is incorrect. The painting would not be included in alimony because it is not a payment in cash or its equivalent. Choice "C" is incorrect. The amount of alimony ordered by the court does not determine the amount of alimony that is considered gross income for tax purposes. Choice "D" is incorrect. Neither the painting nor the use of the beach house would count as alimony because they are not payments in cash or its equivalent.

Answer 80

Choice "B" is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year. Choice "A" is incorrect. The amount of the tax benefit in the prior year, not $0, is included in income in the current year. Choice "C" is incorrect. Only the amount of the tax benefit in the prior year, not the entire state tax refund, is included in income in the current year. Choice "D" is incorrect. The amount of the tax benefit in the prior year is included in income in the current year. It is not necessary to amend the prior year's return.

Answer 81

Choice "A" is correct. Trade date. Gain or loss on a year-end sale of listed stock arises on the trade date. Rule: Whether on the cash or accrual method of accounting, taxpayers who sell stock or securities on an established securities market must recognize gains and losses on the trade date, rather than on the settlement date. Choices "B", "C", and "D" are incorrect, per the above rule.

Answer 82

Choice "A" is correct. Alimony paid pursuant to a divorce or separation agreement executed before December 31, 2018 would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child's status (e.g., reaching a certain age); 2) it is paid solely for the support of minor children; and 3) it is payable by decree, instrument, or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% × $10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary. Note that for all divorce or separation agreements executed after December 31, 2018, the alimony is neither taxable to the recipient nor deductible by the payor. Choice "B" is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or $2,000, child support, which is nontaxable to Mary. Choice "C" is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary. Choice "D" is incorrect. Only $8,000 would be alimony per the divorce decree (80% × $10,000).

Answer 83

RULE: Alimony payments to a former spouse pursuant to a divorce settlement executed on or before December 31, 2018, are adjustments to arrive at AGI. Child support payments are not alimony and are not deductible. Property settlements are not alimony and are not deductible. Alimony paid in a divorce settlement executed after December 31, 2018, is not deductible. Choice "C" is correct. Only the amount of alimony ($3,000) is allowed as Tana's alimony deduction. Choice "A" is incorrect. The basis of property division of stock ($4,000) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible. Choice "B" is incorrect. The fair market value of property division of stock ($6,500) is not alimony and is not deductible, but the $3,000 in alimony paid is deductible. Choice "D" is incorrect. The fair market value of property division of stock ($6,500) and the child support ($2,000) are not alimony and are not deductible, but the $3,000 in alimony paid is deductible.

Answer 84

Choice "B" is correct. Alimony paid to a former spouse based on a divorce agreement executed on or before December 31, 2018, is an adjustment to gross income. Choice "A" is incorrect. Child support paid to a former spouse is never an adjustment to AGI. Choice "C" is incorrect. Alimony paid to a former spouse based on a divorce agreement executed after December 31, 2018, is not an adjustment to AGI. Choice "D" is incorrect. Child support paid to a former spouse is never an adjustment to AGI.

Answer 85

Choice "D" is correct. In 2024, taxpayers can contribute and deduct up to $7,000 to a traditional IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion of a traditional IRA contribution is phased out. For a spouse who is an active participant, the phase-out range in 2024 begins at $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 Smiths' income of $50,000 (Mike $40,000 + Jane $10,000) is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total. Choices "C", "A", and "B" are incorrect, per the above explanation.

Answer 86

Choice "B" is correct. The $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. The taxpayer's AGI of $25,000 is below the phase-out threshold for unmarried taxpayers, so the deduction is not phased out. Choice "A" is incorrect. The adjustment for education loan interest (an above-the-line deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all qualified education loan interest is allowed as part of the adjustment. Therefore, the total amount paid of $1,000 is an allowable adjustment. Choice "C" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. Only the disallowed portion (in this case there is no disallowed portion) is a nondeductible item of personal interest. Choice "D" is incorrect. Allowable education loan interest paid is deductible as an adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported as the less-advantageous itemized deduction.

Answer 87

Choice "B" is correct. Accounting services are considered an SSTB for purposes of the qualified business income deduction. Choice "A" is incorrect. A manufacturing firm is a qualified trade or business (QTB) and not an SSTB. Choice "C" is incorrect. An engineering firm is specifically excluded from the definition of an SSTB. Choice "D" is incorrect. Architectural services are specifically excluded from the definition of an SSTB.

Answer 88

Choice "D" is correct. An individual who is a U.S. resident may be subject to the 3.8 percent net investment income tax on net investment income above statutory AGI threshold amounts. Choice "A" is incorrect. A domestic C corporation is not subject to the net investment income tax. Choice "B" is incorrect. A limited partnership is not subject to the net investment income tax. Partnership investment income and expenses passed through to the individual partners may be subject to the net investment income tax on the partners' individual income tax returns. Choice "C" is incorrect. A nonresident alien is not subject to the net investment income tax.

Answer 89

Choice "C" is correct. The retirement savings contribution credit is a non-refundable credit. The EIC and child tax credit could result in a refunded amount beyond the actual tax liability, depending upon the taxpayer's income levels. In addition, if excess Social Security is paid, the taxpayer can receive a refund of those amounts regardless of the income tax liability being reduced to zero.

Answer 90

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).

Answer 91

Choice "A" 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 "B" is incorrect. The $46,000 is the $57,000 subtracting everything but the $6,000 self-employed health insurance. Choice "C" is incorrect. The $55,000 is the $57,000 gross income subtracting only the $2,000 IRA contribution. Choice "D" is incorrect. The $50,000 is the $57,000 subtracting only the $5,000 alimony and the $2,000 IRA contribution.

Answer 92

Choice "A" is correct. A QTB and an SSTB are treated the same for taxpayers under the taxable income thresholds for the QBI deduction. Choice "B" is incorrect. The QBI deduction is not limited to 50 percent of wages if the taxpayer is under the taxable income limitations. Choice "C" is incorrect. For taxpayers under the taxable income limitations, the QBI deduction is allowed if the taxpayer is a QTB or an SSTB. Choice "D" is incorrect. The QBI deduction is not phased out for an SSTB if the taxpayer is under the taxable income limitations.

Answer 93

Choice "B" is correct. The earned income credit is refundable. The lifetime learning credit, elderly and/or permanently disabled credit, and retirement savings contribution are not refundable credits.

Answer 94

Choice "D" is correct. The legal fees and agency fee would be qualifying expenses for the tax credit (medical expenses do not qualify). Choice "A" is incorrect. Medical expenses are not eligible for the credit. Choice "B" is incorrect. The agency fee is also a qualifying expense. Choice "C" is incorrect. $5,000 of the $16,000 of total expenses are not eligible.

Answer 95

Choice “B” is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate under the "kiddie tax" rules. Because Wilson is under the age of 24 and is a full-time college student who does not support himself, his net unearned income over the allowable threshold is taxed at his parents' marginal rate. Choice “A” is incorrect. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate under the "kiddie tax" rules. Choice “C” is incorrect. Because Willy supports himself fully, his income is not subject to the “kiddie tax.” Choice “D” is incorrect. Because Walker is over the age of 24, his income is not subject to the “kiddie tax.”

Answer 96

Choice "D" is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year's tax liability paid in four equal installments. Choice "A" is incorrect. 110% of the prior year's tax liability is only required if AGI is in excess of $150,000. Choices "B" and "C" are incorrect. There is always an option to pay 90% of the current year's tax.

Answer 97

Choice "C" is correct. An employee who has had Social Security tax withheld in an amount greater than the maximum for a particular year may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. Choice "A" is incorrect. The employee may not seek reimbursement of the excess if the excess resulted from correct withholding by two or more employers. Choice "B" is incorrect. The employee may not claim the excess as a credit against income tax, if that excess was withheld by one employer. The employer must adjust the excess for the employee. Choice "D" is incorrect. The excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax.

Answer 98

Rule: The basic formula for determination of net rental income or loss follows: Gross rental income Prepaid rental income Rent cancellation payments Improvements in lieu of rent (Rental expenses) Net rental income (loss) If security deposits are held separately and not available to be applied to last month's rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received. Choice "C" is correct. The calculation of gross income for the year follows: Current rents 30,000 Advance rents for the next year 10,000 Security deposits held in a segregated account − Lease cancellation payments 15,000 Gross income from the rental activity 55,000 Choice "A" is incorrect. This answer option incorrectly includes only the current rents and the advance rents as part of gross income, when lease cancellation payments also must be included. Choice "B" is incorrect. This answer option incorrectly includes only the current rents as part of gross income, when advance rents and lease cancellation payments also must be included. Choice "D" is incorrect. This answer option incorrectly includes all of the payments collected for the rental activity in the year, when the security deposits that are held in a segregated account are excluded from gross income.

Answer 99

Choice "A" is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty. Choice "B" is incorrect. The penalty for underpayment of estimated taxes is not assessed on the full amount of the income tax liability, only the unpaid amount after withholdings to the extent it exceeds $1,000. Choice "C" is incorrect. If the balance of tax due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes. Choice "D" is incorrect. This $200 would be subject to a failure to pay penalty, but if the balance due after withholdings is not over $1,000, there is no penalty for underpayment of estimated taxes.

Answer 100

Choice "D" is correct. The expenses for care of a spouse who is disabled and unable to take care of himself or herself are eligible for the credit, up to a maximum expenditure of $3,000. Choice "A" is incorrect. The child must be under age 13, not age 18, to be a qualifying child for purposes of the child and dependent care credit. Choice "B" is incorrect. The maximum child and dependent care credit is 35 percent of eligible expenses, with a phase-out for excessive AGI. The maximum qualifying expenditures is $6,000 for two or more dependents, so the maximum credit is $2,100 ($6,000 × 35%). Choice "C" is incorrect. The child need not be a direct descendant of the taxpayer for there to be a credit. To be a qualifying child, the child must merely be a dependent of the taxpayer.

Answer 101

Choice "A" is correct. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2. Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or $11,000 is deductible in Year 2. Choices "B", "C", and "D" are incorrect. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers.

Answer 102

Choice "C" is correct. Business expenses include work uniforms for the taxpayer and taxpayer's employees, subscriptions for periodicals for patient use, and continuing education expenses. Choice "A" is incorrect. Business expenses do not include custodial fees for self-employed retirement accounts. Choice "B" is incorrect. Business expenses do not include investment expenses. Choice "D" is incorrect. Business expenses include subscriptions for periodicals for patient use.

Answer 103

Choice "D" is correct. Baum should report $281,750 as the total amount of self-employment income in the current year, calculated as follows: Gross business receipts 350,000 Cost of goods sold (35,000) Rent expense (28,000) Liability insurance premium (5,250) Total self-employment income $281,750 Choices "B", "A", and "C" are incorrect. The deductions for one-half of self-employment tax and self-employment health insurance are adjustments from total gross income. They are not deducted from self-employment earnings.

Answer 104

Choice "C" is correct. To avoid penalties, a taxpayer who owes $1,000 or more in tax payments after withholdings will need to have paid in the lesser of: 90% of the current year's tax ($50,000 x 90%) = $45,000, or 100% of the previous year's tax ($30,000 x 100%) = $30,000 However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000). Choice "A" is incorrect. $50,000 is 100% of the current year's tax, which is sufficient, but more than required. Choice "B" is incorrect. $45,000 is 90% of this year's tax, which is sufficient, but we are looking for the minimum amount. Choice "D" is incorrect. $30,000 is 100% of last year's tax. This would be sufficient if the previous year's income were $150,000 or less.

Answer 105

Choice "A" is correct. Only a portion of the student's interest income is subject to the kiddie tax. Net unearned income of a dependent child is taxed at the parent's marginal rate ("kiddie tax"). Choice "B" is incorrect. The student's salary income is earned income, so it is not subject to the kiddie tax. Choice "C" is incorrect. Only a portion of the interest income, not the salary income, is subject to the kiddie tax. Choice "D" is incorrect. A portion of the student's interest income is subject to the kiddie tax.

Answer 106

Choice "D" is correct. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self-employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation is taxable income to the individual on their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).

Answer 107

Choice "A" is correct. Both I and II. I. Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax. II. Generally, payment of 110% of the prior year's tax liability avoids the penalty for underpayment of estimated tax when the taxpayer's AGI from the prior year exceeds $150,000. If the taxpayer's AGI is $150,000 or less, payment of 100% of the prior year's tax liability avoids the penalty for underpayment of estimated tax. Note: Payment of the lesser of the two above will provide "safe harbor" to the taxpayer. Choices "B", "C", and "D" are incorrect per the above explanation.

Answer 108

Choice "A" is correct. Once the QBI deduction is calculated based on the taxpayer's eligibility, the overall deduction is limited to the lesser of the combined QBI deductions or 20 percent of the taxpayer's taxable income in excess of net capital gain. Choice "B" is incorrect. Once the QBI deduction is calculated based on the taxpayer's eligibility, the overall deduction is limited to the lesser of the combined QBI deductions (not 50 percent of the combined QBI) or 20 percent of the taxpayer's taxable income in excess of net capital gain. Choice "C" is incorrect. The wage and property limitation determines the calculation of the QBI deduction but is not the overall limitation to the QBI deduction. Choice "D" is incorrect. Taxable income limitations based on filing status determine the calculation of the QBI deduction. The overall limitation to the deduction, however, is the lesser of the combined QBI deductions or 20 percent of the taxpayer's taxable income in excess of net capital gain.

Answer 109

Choice "B" is correct. A shareholder in an S corporation can be an employee of the corporation. The individual shareholder-employee would receive a salary for the services rendered to the S corporation; therefore, the payments should be classified as deductible wages reportable on Form W-2. Choice "A" is incorrect. The S corporation would not classify the payments as nondeductible dividends reportable on Form 1099-DIV. Payments made to a shareholder of an S corporation for services rendered to the S corporation would be classified as deductible wages reportable on Form W-2 since the shareholder can receive a salary from the S corporation as compensation. Choice "C" is incorrect. A partnership would classify the payments to the partner as guaranteed payments reportable on Schedule K-1, rather than nondeductible partnership distributions. Choice "D" is incorrect. Unlike S corporations, a partner in a partnership cannot be an employee of the partnership, so a partner cannot receive a salary for the services rendered. Instead, the partnership gives the partner a guaranteed payment as compensation for the services rendered. Guaranteed payments are reported on the partner's Schedule K-1 and included in ordinary income on the partner's individual income tax return, rather than being reported as wages.

Answer 110

Choice "A" is correct. The answer is calculated as follows: Gross revenue 275,000 Rent expense (24,000) Wages paid to employees (60,000) Wages paid to Marty — [considered a draw, not an expense] Payroll taxes for employees (5,000) Supplies expense (10,000) Insurance expense (8,000) Depreciation expense (15,000) Business meals (2,000) [only 50% deductible] Health insurance for employees (5,000) Health insurance for Marty — [not deducted on Sch. C, 100% is an adjustment for AGI] Business bad debt loss (allowance) — [direct write-off only for accrual basis taxpayers] State income taxes for the business — [not deducted on Sch. C, an itemized deduction] Schedule C $146,000 Choices "D", "C", and "B" are incorrect, per the above calculation. Note that while state and local business taxes are fully deductible on Schedule C, state and local income taxes are always a personal expense that can only be deducted on Schedule A.

Answer 111

Choice "C" is correct. Only $2,000 of Maxʹs $3,000 Roth IRA contribution is eligible for the credit. The retirement savings contribution credit is a nonrefundable credit for contributions of up to $2,000 to either a traditional or Roth IRA by an eligible taxpayer. Max is an eligible taxpayer because he is at least 18 years old by the end of the year, he is not a full-time student, and he is not a dependent of another taxpayer. Choice "A" is incorrect. The credit is available for contributions to either a traditional or Roth IRA, but only up to $2,000. Choice "B" is incorrect. A taxpayer is not eligible for the credit if the taxpayer is a dependent of another taxpayer. Choice "D" is incorrect. A taxpayer must be at least 18 years old, not 21 years old, by the end of the tax year to be eligible for the credit.

Answer 112

Choice "D" is correct. Generally, the taxpayer's qualified business income deduction is equal to 20% of the taxpayer's qualified business income. This deduction is limited if the taxpayer's taxable income before the qualified business income deduction for married taxpayers filing jointly exceeds $383,900 (2024). In this case, because the taxpayer's taxable income before the qualified business income deduction is only $300,000, the taxpayer's qualified business income deduction is not limited and will be equal to 20% of their qualified business income. The taxpayer's qualified business income consists of the $250,000 of ordinary business income allocated from the partnership. Thus, the taxpayer's qualified business income deduction equals 20% of that amount, or $50,000. Choice "A" is incorrect. The taxpayer's qualified business income deduction is not limited by the W-2 wage or property limitations because the taxpayer's taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. As such, the taxpayer will calculate their qualified business income deduction by multiplying their qualified business income by 20%. The taxpayer's qualified business income equals their $250,000 share of income from the partnership. As a result, the couple's qualified business income deduction will equal $50,000 ($250,000 × 20%). This answer choice is incorrect because the answer choice assumes the limitation does apply, and as such, limits the qualified business income deduction to the greater of 50% of the W-2 wages (equal to $37,500) or 25% of the W-2 wages plus 2.5% of the basis of the partnership's property (equal to $21,250). Choice "B" is incorrect. The taxpayer's qualified business income deduction is not limited by the W-2 wage or property limitations because the taxpayer's taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. As such, the taxpayer will calculate their qualified business income deduction by multiplying their qualified business income by 20%. The taxpayer's qualified business income equals their $250,000 share of income from the partnership. As a result, the couple's qualified business income deduction will equal $50,000 ($250,000 × 20%). Choice "C" is incorrect. The taxpayer's qualified business income deduction is not limited by the W-2 wage limitation because the taxpayer's taxable income before the qualified business income deduction does not exceed $383,900 (MFJ) in 2024. For the same reason, the taxpayer's deduction is also not limited by the W-2 wage and property limitation. This answer choice is incorrect not only because it assumes the limitation applies, but it also applies the limitation incorrectly. The correct answer is determined by multiplying their qualified business income by 20%. The taxpayer's qualified business income equals their $250,000 share of income from the partnership. As a result, the couple's qualified business income deduction will equal $50,000 ($250,000 × 20%).

Answer 113

Choice "A" is correct. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). Choice "B" is incorrect. This amount is 20 percent of taxable income: $300,000 × 20% = $60,000. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). Choice "C" is incorrect. This amount is the basic QBI deduction of 20 percent of the $50,000 QBI. However, a single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). Choice "D" is incorrect. This amount is 50 percent of the W-2 wages: $10,000 × 50% = $5,000. A single taxpayer with taxable income before the QBI deduction of $241,950 or more (2024) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB). The W-2 wage limitation does not apply.

Answer 114

Choice "B" is correct. Although Seth is covered by a plan, the second factor (the income limitation) is not exceeded, thus, both Seth's and Sheila's contributions should be deductible. In addition, both should qualify for a portion of the credit. Choices "D", "A", and "C" are incorrect based upon the above explanation.

Answer 115

Choice "C" is correct. The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $69,000 (2024) or 20 percent of net earnings. "Net earnings" is defined as net self-employment income minus 50 percent of self-employment (S/E) taxes. Net self-employment income 50,000 50% of self-employment taxes (3,532) [$7,064 × 50%] Self-employment earnings before SEP IRA 46,468 Times 20% × .20 Calculated SEP IRA Deduction 9,294 The 20 percent of self-employment earnings is less than the maximum of $69,000 (2024), so the SEP IRA deduction is $9,294. Choice "A" is incorrect. This amount ignores the fact that the maximum annual deductible amount for self-employed individuals to a SEP IRA plan is the lesser of $69,000 (2024) or 20 percent of net earnings. In this case, 20 percent of net earnings of $9,294 is less than the $69,000 maximum. Choice "B" is incorrect. This amount ignores the reduction for one-half of self-employment taxes. Choice "D" is incorrect. This amount assumes that 100 percent of the self-employment tax was an allowable reduction to the "net earnings" figure, which it is not. Only 50 percent of the total amount is an allowable reduction.

Answer 116

Choice "A" is correct. The net unearned income of a dependent child under age 18 is taxed at the parents' marginal rate under the "kiddie tax" rules. Net unearned income is calculated by taking the child's unearned income and reducing it by the dependent child's allowable standard deduction of $1,300 plus an additional $1,300 that is taxed at the child's marginal tax rate (2024). Chris' net unearned income taxed at his parents' marginal rate is $400 ($3,000 interest income – $1,300 standard deduction – $1,300 taxed at child's marginal rate). Choice "B" is incorrect. The $1,700 uses only the $1,300 standard deduction, but the next $1,300 would be taxed at the child's marginal rate. Choice "C" is incorrect. The $0 indicates that nothing is taxed at the parents' marginal rate. Taxing net unearned income at the parents' marginal rate is the whole idea of the "kiddie tax." Choice "D" is incorrect. The $3,000 indicates that the entire $3,000 interest income is taxed at the parents' marginal rate.

Answer 117

Choice "B" is correct. Baker can deduct $1,200 in total expense on Form 1040 Schedule C, calculated as follows: Direct educational expenses 700 [cost of the course] Daily expenses for 5-day seminar 500 [$100 per day × 5] Total educational expenses 1,200 Rule: If foreign travel is primarily personal in nature (e.g., a vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country. Choice "A" is incorrect, as the expenses for the five-day period Baker attended the seminar were directly related to being in Spain for the additional period of time and are allowable business deductions. Choices "C" and "D" are incorrect, per the above rule.

Answer 118

Choice “C” is correct. First, determine the eligible expenses. Only expenses for Becky will qualify because Matt is not under 13 years of age. Of the $10,000 spent, only $5,000 will qualify. The maximum eligible expenses for one dependent is $3,000. The eligible expenses are also limited to the lowest earned income of either spouse. That would be Mary's $2,500. Because of Frank and Mary's combined income level, the credit rate of 20 percent applies. The credit is 20 percent of $2,500, or $500. Choices "B", "D", and "A" are incorrect, per the above explanation.

Answer 119

Choice "C" is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, or income from an S corporation. The only amounts here that qualify are the $8,000 sole proprietorship income and the $10,000 from the general partnership. Choices "A", "D", and "B" are incorrect, based on the above explanation.

Answer 120

Choice "D" is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, income from an S corporation, or income as a limited partner from a limited partnership. The only amount here that qualifies is the $98,000 sole proprietorship income. Choices "A", "C", and "B" are incorrect, based on the above explanation.

Answer 121

Choice “C” is correct. Alimony paid pursuant to a divorce or separation agreement executed on or before December 31, 2018, is an adjustment, which is a deduction for AGI. Choice “A” is incorrect. Mortgage interest paid on your primary residence is an itemized deduction, which is a deduction from AGI. Choice “B” is incorrect. State and local income taxes are an itemized deduction, which is a deduction from AGI. Choice “D” is incorrect. Charitable contributions of property are an itemized deduction, which is a deduction from AGI.

Answer 122

Choice “B” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, rental real estate income, or income from an S corporation. The only amount here that qualifies is the $10,000 from the general partnership. Choices “C”, “A”, and “D” are incorrect, based on the above explanation.

Answer 123

Choice "B" is correct. The regular alimony payments are deductible because the divorce was executed prior to 2019, but the amount that is contingent on the child being under the age of 18 is deemed to be child support. Because this contingent amount is $10,000, only the other $20,000 ($30,000 – $10,000) is deemed to be true deductible alimony. The residence was a property settlement and is not part of deductible alimony. Choice "A" is incorrect. This amount includes the child support and the property settlement, neither of which are deductible. Choice "C" is incorrect. This is simply the reduction of the regular alimony payments when the child becomes 18. Choice "D" is incorrect. The regular alimony payments not allocated to child support are deductible because the divorce was executed prior to 2019.

Answer 124

Choice “D” is correct. Alimony paid on a divorce or separation agreement executed on or before December 31, 2018 is deductible as a for AGI deduction. The regular alimony payments are deductible, but the child support is not. The residence was a property settlement and is not part of deductible alimony. Choice “A” is incorrect. This amount includes the child support and the property settlement, both of which are not deductible. Choice “B” is incorrect. The regular alimony payments are deductible because the divorce was executed prior to 2019. Choice “C” is incorrect. This amount includes the child support, which is not deductible.

Answer 125

Choice “D” is correct. This deduction is not allowed if the taxpayer is a dependent of another taxpayer. Choice "A" is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible. Choice “B” is incorrect. $55,000 of AGI is below the single phase-out for the student loan interest expense adjustment. Choice “C” is incorrect. $120,000 of AGI is below the MFJ phase-out for the student loan interest expense adjustment.

Answer 126

Choice “B” is correct. Salaries and wages paid to employees are deductible business expenses on Schedule C of Form 1040. Choice “A” is incorrect. Because Jason is a cash basis taxpayer, he has not reported the income from Mrs. Jones. Therefore, the fact that she hasn’t paid him does not create a deductible expense for Jason. Choice “C” is incorrect. Charitable contributions are deducted on Schedule A as an itemized deduction. Choice “D” is incorrect. Country club dues are not deductible business expenses.

Answer 127

Choice “A” 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 “B” 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. $11,200 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. Choice “D” is incorrect. $7,000 would be correct if only one of them were allowed to deduct the IRA contribution. They can both take the deduction.

Answer 128

Choice “B” is correct. Alimony paid pursuant to a divorce decree executed prior to 2019 is deductible as a for AGI deduction. Deductible alimony must be paid in cash or cash equivalent. The expenses paid on behalf of the former spouse qualify as cash equivalents, so all $30,000 alimony has been paid. Deductible alimony only includes amounts that cannot extend beyond the death of the payee. The mortgage will not qualify because this would still be payable after the death of the payee. Choice “A” is incorrect. This only includes the amounts paid in cash, but the expenses paid will qualify as a cash equivalent. Choice “C” is incorrect. This includes all amounts paid, but the mortgage will not qualify because it would still be payable after the death of the payee. Choice “D” is incorrect. This includes the cash payments and the mortgage. The expenses paid will qualify as a cash equivalent. The mortgage will not qualify because it would still be payable after the death of the payee.

Answer 129

Choice “C” is correct. $110,000 of AGI is above the current year student loan interest expense AGI limitation for a single taxpayer. Choice “A” is incorrect. $135,000 of AGI is below the current year student loan interest expense AGI limitation for a married taxpayer. Choice “B” is incorrect. This deduction is not allowed if the taxpayer is a dependent of another taxpayer. But there is no requirement that the taxpayer cannot have a dependent of his or her own. Choice “D” is incorrect. There is a limitation of $2,500 on the deduction. $1,000 is well below this limit, so it is all deductible.

Answer 130

Choice “B” is correct. Property taxes paid on your primary residence is an itemized deduction, which is a deduction from AGI. Choice “A” is incorrect. Alimony paid pursuant to a divorce or separation agreement executed on or before December 31, 2018, is an adjustment, which is a deduction for AGI. Choice “C” is incorrect. Business rent on a self-employed business is deductible on Schedule C. This is before the calculation of AGI. Choice “D” is incorrect. One half of self-employment tax is an adjustment, which is a deduction for AGI.

Answer 131

Choice “B” is correct. Only business expenses are deductible against business income on Schedule C. Therefore, Charlie’s net self-employment income = $92,000. $150,000 gross income – $1,000 supplies – $40,000 wages – $2,000 advertising – $3,000 utilities – $12,000 rent = $92,000. The charitable contributions are deductible on Schedule A as an itemized deduction. The estimated self employment tax is not deductible on Schedule C. However, one half of self-employment tax paid is deductible as an adjustment to AGI. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018. Choice “A” is incorrect. Only business expenses are deductible against business income on Schedule C. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. Choice “C” is incorrect. The estimated self-employment tax is not deductible on Schedule C. However, one-half of self-employment tax paid is deductible as an adjustment to AGI. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018. Choice “D” is incorrect. Only business expenses are deductible against business income on Schedule C. The charitable contributions are deductible on Schedule A as an itemized deduction. The estimated self-employment tax is not deductible. However, one half of self-employment tax paid is deductible as an adjustment to AGI. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018.

Answer 132

Choice "A" is correct. For tax years beginning after December 31, 2020, a net operating loss cannot be carried back, but can be carried forward indefinitely. Choices "B", "D", and "C" are incorrect. These are different carryback and carryforward provisions for tax years before 2021.

Answer 133

Choice “C” is correct. Real estate taxes and mortgage interest are either deducted on the rental schedule E or as an itemized deduction (subject to limitations). Therefore, real estate taxes will be deductible whether the Griffins rent their cabin or not. Choice “A” is incorrect. Only the rental portion of the utilities is deducted on Schedule E. Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The rental portion is deducted on Schedule E. The personal use portion of the utilities expense is not deductible. Choice “B” is incorrect. Depreciation is only deductible as a rental expense on Schedule E. If the Griffins had rented their cabin out for fewer than 15 days, then the cabin would be treated as a personal residence. As a personal residence, depreciation is not deductible. Therefore, depreciation is not deductible under all rental circumstances. Choice “D” is incorrect. Because the Griffins rented their cabin for more than 15 days and used the cabin for the greater of (1) 14 days or (2) more than 10% of the rental days, their cabin is treated as a personal/rental residence. The Griffins would include the rental income received in their gross income on Schedule E.

Answer 134

Choice “C” is correct. When a person is behind in child support and alimony, payments are allocated completely to child support first until the full obligation is met. Any additional amounts are allocated to alimony. The alimony is deductible because the divorce was executed prior to 2019. However, only the amount allocated to alimony is deductible. The first $12,000 fulfills the child support in arrears. The next $6,000 is allocated to the current-year’s child support. The remaining $7,000 ($25,000 – $12,000 – $6,000) is then allocated to the alimony in arrears and is deductible in the current year. Choices “A”, “D”, and “B” are incorrect, based on the above explanation.

Answer 135

Choice “A” is correct. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence. Therefore, the rental income is excluded from gross income and mortgage interest and real estate taxes are deductible as itemized deductions on schedule A (subject to limitations). Choices “B” and “C” are incorrect. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence. Therefore, repairs, utilities, depreciation, and other allowed rental expenses are not deductible. Choice “D” is incorrect. Because the Groves rented their beach house for fewer than 15 days, it is treated as a personal residence and the rental income is excluded from gross income. Mortgage interest and real estate taxes are deductible as itemized deductions on schedule A (subject to limitations).

Answer 136

Choice “A” is correct. Self-employment income is subject to federal income tax and self-employment tax. The self-employment tax is made up of Social Security (12.4%) and Medicare (2.9%), for a total of 15.3%. Choice “B” is incorrect. All self-employment income is subject to the 2.9% Medicare tax, but Social Security tax is subject to the 12.4% tax only up to a certain threshold. Choice “C” is incorrect. Income from self-employment is reported on Schedule C of Form 1040. Choice “D” is incorrect. One half of self-employment tax is deductible as a deduction, or adjustment, for AGI deduction.

Answer 137

Choice “A” is correct. Although both of these items are business related, neither one of them is deductible directly on Schedule C. They are both considered adjustments and are deductible on Form 1040. Choices “D”, “C”, and “B” are incorrect, based on the above explanation.

Answer 138

Choice “B” 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 “A” 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. $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. Choice “D” 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.

Answer 139

Choice “A” is correct. Nancy may deduct the maximum amount of $7,000 because she is not covered by a qualified employer-sponsored retirement plan and their AGI is less than $230,000 (2024). Bob’s deduction is limited because he is covered by a qualified employer-sponsored retirement plan and their AGI is $8,000 into the phase-out range of $123,000 to $143,000 (2024). Because they are $8,000 into the $20,000 range, 40% of Bob’s deduction is phased out. $7,000 × 40% = $2,800. Therefore, Bob can only deduct $4,200 ($7,000 – $2,800). The total deduction is $11,200 (Nancy $7,000 + Bob $4,200). Choice “B” is incorrect. $7,000 (2024) would be correct if only one of them were allowed to deduct the IRA contribution. Nancy can take the full deduction and Bob can take a partial deduction. Choice “C” is incorrect. $14,000 would be correct if they were both allowed the entire deduction ($7,000 × 2 = $14,000). Bob and Nancy are partially phased out because Bob participates in a qualified employer-sponsored retirement plan. Choice “D” is incorrect. Zero would be correct if they were completely phased out of the deduction. But there is only a partial limitation here.

Answer 140

Choice "B" is correct. If a vacation residence is rented for fewer than 15 days per year, it is treated as a personal residence. The rental income ($2,500 in this case) is excluded from income. A Schedule E is not filed for this property (i.e., no income is reported, the taxes are reported as itemized deductions, and the maintenance and utilities are not deductible), so the effect on AGI is zero. Choice "A" is incorrect. This assumes that all of the items shown are reported net on Schedule E: $2,500 – $1,000 – $2,000 = ($500). The rental income is excluded from income, the maintenance and utilities are not deductible, and the property taxes are reported on Schedule A as an itemized deduction. Choice "C" is incorrect, per the above explanation. Choice "D" is incorrect. This assumes that the property taxes are reported as itemized deductions but that the rental income ($2,500) less the maintenance and utilities ($2,000) are reported net on Schedule E. The rental income is excluded from income, and the maintenance and utilities are not deductible.

Answer 141

Choice "A" is correct. Moving expenses are only deductible by members of the U.S. armed forces on active duty when moving pursuant to military orders.

Answer 142

Choice "A" is correct. Janice's quilting activity is not engaged in for profit (a hobby), so she cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). She is still required to include the $200 income from the activity in her taxable gross income. Choice "B" is incorrect. A $1,350 loss would include a deduction for all the expenses related to her quilting activity but not include the $200 from the custom quilt sale in her taxable gross income. The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the quilting activity because the activity is not engaged in for profit (a hobby). Choice "C" is incorrect. A $1,150 loss would include a deduction for all the expenses related to her quilting activity ($200 income – $1,350 expenses = $1,150 net loss). The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the quilting activity because the activity is not engaged in for profit (a hobby). Choice "D" is incorrect. Janice's quilting activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the income from the activity is still included in taxable gross income.

Answer 143

Choice "B" is correct. Larry's antique cars activity is not engaged in for profit (a hobby), so he cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). He is still required to include the $2,500 income from the activity in his taxable gross income. Choice "A" is incorrect. Larry's antique cars activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the income from the activity is still included in taxable gross income. Choice "C" is incorrect. Taxable income of $500 would include deduction for all the expenses related to his antique cars activity ($2,500 income – $2,000 expenses = $500 net income). The income from the activity is included in his taxable gross income but no deduction is allowed for the expenses related to the antique cars activity because the activity is not engaged in for profit (a hobby). Choice "D" is incorrect. Taxable income of $2,000 would include a deduction for the car show expenses but not the restoration and maintenance costs ($2,500 income – $500 car show expenses = $2,000). The income from the activity is included in taxable gross income but no deduction is allowed for the expenses related to the antique cars activity because the activity is not engaged in for profit (a hobby).

Answer 144

Choice "A" is correct. A taxpayer with self-employment income is permitted a deduction equal to 50 percent of the self-employment tax paid by the taxpayer in the year in determining her adjusted gross income. Since the taxpayer paid $7,000 of self-employment tax in the current year, the taxpayer is permitted to deduct $3,500 (equal to 50 percent of the $7,000). Choice "B" is incorrect. Because the taxpayer earns self-employment income and pays self-employment tax, the taxpayer is permitted to deduct 50 percent of the self-employment tax paid in the current year as an adjustment in determining adjusted gross income. The taxpayer's self-employment tax for the current year is $7,000. As a result, the taxpayer is permitted to deduct 50 percent of that amount, $3,500, as an above-the-line deduction. Choice "C" is incorrect. The taxpayer cannot deduct the full amount of the self-employment tax for the year; rather, the taxpayer's self-employment tax deduction is limited to 50 percent of the taxpayer's self-employment tax. As such, the taxpayer will deduct $3,500 as an adjustment in determining her adjusted gross income. Choice "D" is incorrect. The taxpayer's self-employment tax deduction is equal to 50 percent, not 10 percent, of the taxpayer's self-employment tax. As such, the taxpayer will take a deduction of $3,500 in determining her adjusted gross income.

Answer 145

Choice "A" is correct. The basic calculation for the QBI deduction is 20% × QBI. The deduction is subject to limitations. Choice "B" is incorrect. The basic calculation for the QBI deduction is 20% × QBI. Choice "C" is incorrect. The basic calculation for the QBI deduction is 20% × QBI. Choice "D" is incorrect. The basic calculation for the QBI deduction is 20% × QBI.

Answer 146

Choice "C" is correct. Earnings from self-employment are subject to the income tax as well as federal self-employment tax. Thus, Juan must pay self-employment tax on the earnings of the business. Choice "A" is incorrect. No self-employment tax is owed if self-employment income, after multiplying by 92.35 percent, is less than $400. However, Juan's self-employment income exceeds this threshold, and thus Juan is not exempt from either of the two components of the self-employment tax (the Medicare tax and the Social Security tax). Choice "B" is incorrect. There is no provision exempting a proprietorship from self-employment taxes for its first three years of operations. Choice "D" is incorrect. Because Juan is the proprietor of a sole proprietorship (as opposed to an employee of an employer), the flower shop will not pay Juan a wage, and thus will not withhold either income taxes or FICA taxes from that wage.

Answer 147

Choice "B" 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 "A" is incorrect. Unreimbursed business expenses of employees are not deductible. 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. Charitable contributions are deductible from adjusted gross income as itemized deductions.

Answer 148

Choice "B" is correct. One half of the self-employment tax is deductible to arrive at adjusted gross income. Choice "A" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income. Choice "C" is incorrect. Self-employment tax is not deductible in determining self-employment income. Choice "D" is incorrect. Self-employment tax is partially deductible to arrive at adjusted gross income.

Answer 149

Choice "D" is correct. A partnership calculates net ordinary business income or loss and passes each partner's distributive share through on Schedule K-1. Guaranteed payments paid to partners for services provided or for the use of capital, without regard to partnership income or profit and loss sharing ratios, are an allowable deduction to the partnership and are also separately reported on Schedule K-1 for inclusion on the partner's tax return. Choice "A" is incorrect. Advertising expenditures incurred by the partnership are deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on Schedule K-1. Choice "B" is incorrect. Depreciation of assets used in the business is deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on Schedule K-1. Choice "C" is incorrect. Salaries paid to non-partner employees are deducted from revenues to arrive at net ordinary business income or loss at the partnership level. Each partner's distributive share of the net income or loss is then reported on Schedule K-1.

Answer 150

Choice "B" is correct. The second residence is treated as a personal/rental residence and expenses must be prorated between personal and rental use. A residence is treated as a personal/rental residence if it is rented for more than 14 days, and is used for personal purposes for the greater of (1) more than 14 days, or (2) more than 10 percent of the rental days. In this case, 10 percent of the rental days is 20 days (200 rental days × 10 percent). The 200 rental days are more than 14 days and the 50 personal use days are more than 20 days (10 percent of the rental days), so the requirements for personal/rental residence are met. Choice "A" is incorrect. A deduction is allowed for depreciation, which is allocated to rental use based on the rental period/total annual usage (200 rental days/250 total days). The deduction for depreciation is limited to net rental income after deduction of other rental expenses. Choice "C" is incorrect. Only an allocated portion of mortgage interest and taxes are deductible as rental expenses. Mortgage interest and taxes are allocated to rental use based on the rental period/total annual period (200 rental days/365 total days). The remaining mortgage interest and taxes may be deducted on Schedule A if the taxpayer itemizes deductions. Choice "D" is incorrect. Rental use expenses are only deductible to the extent of rental income.

Answer 151

Choice "C" is correct. Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until the tax period to which the interest relates. In other words, the interest must be both paid and incurred in order to be deducted. Choices "D", "B", and "A" are incorrect, per the above rule.

Answer 152

Taxpayers may deduct student loan interest (above-the-line for AGI) paid on qualified education loans up to a maximum of $2,500 for the tax year. There is a phase-out for the deduction and other minor restrictions, such as a married couple being required to file joint returns to take the deduction. Choice "D" is correct. There is no limitation of the number of years that the interest may be deducted, other than that the interest may be deducted only when paid. Choices "A", "C", and "B" are incorrect, based on the above explanation.

Answer 153

Choice "C" is correct. $30,000 QBI × 20% = $6,000. W-2 wage and property limits do not apply to single taxpayers with taxable income before the QBI deduction below the taxable income threshold of $191,950 (2024). Choice "A" is incorrect. $20,000 is the overall taxable income limitation: $100,000 taxable income – $0 net capital gains = $100,000 × 20% = $20,000. The basic QBI deduction of $6,000 is less than the overall limitation of $20,000, so the limit does not apply. Choice "B" is incorrect. The QBI deduction is 20 percent of the $30,000 QBI, not 50 percent. Choice "D" is incorrect. The W-2 wage and property limitations do not apply to taxpayers with taxable income before the QBI deduction below the taxable income threshold. Therefore, the deduction for QBI is not limited to $5,000 (W-2 wages of $10,000 × 50% = $5,000).

Answer 154

Choice "B" is correct. Generally, personal expenses are not allowed as deductions on the Schedule C. Schedule C items should be only those related to the operation of the business itself. Health insurance for himself and his family is an adjustment to arrive at adjusted gross income because he is self-employed. Choice "A" is incorrect. Business tax items are deductible expenses which should be reported on Schedule C. Choice "C" is incorrect. Salaries and commissions paid to others as part of the business are expenses allowed on Schedule C. Choice "D" is incorrect. Depreciation on business assets is an allowable deduction on Schedule C.

Answer 155

Choice "D" is correct. Qualified mortgage interest paid is deductible on Schedule A as an itemized deduction. Choices "B", "C", and "A" are incorrect. Each of these items is an adjustment to gross income to arrive at adjusted gross income.

Answer 156

Choice "C" is correct. The amount of income earned by a taxpayer's child does not determine whether the child qualifies for the purposes of the taxpayer's earned income credit. The other three choices represent three of the required tests that must be met for a taxpayer's child to qualify for the earned income credit. First, the child must have a qualifying relationship with the taxpayer. Second, the child must be under 19, or under 24 and a full-time student. Finally, the child must live with the taxpayer in the taxpayer's main home for more than half of the year. Choice "A" is incorrect. To qualify as a child for purposes of the earned income credit, the child must be under 19 years old (or under 24 and a full-time student). In addition to meeting this age test, the child must have a qualifying relationship with the taxpayer wishing to claim the earned income credit and must meet certain residency requirements. The child is not required to meet an income test in order to qualify as a child for purposes of the earned income credit. Choice "B" is incorrect. To qualify as a child for purposes of the earned income credit, the child must live with the taxpayer in the taxpayer's main home for more than half of the year. In addition to meeting this residence test, the child must have a qualifying relationship with the taxpayer wishing to claim the earned income credit and must meet certain age requirements. The child is not required to meet an income test in order to qualify as a child for purposes of the earned income credit. Choice "D" is incorrect. To qualify as a child for purposes of the earned income credit, the child must have a qualifying relationship with the taxpayer wishing to claim the credit. The child must be the taxpayer's child (adopted, step, and foster included), grandchild, sibling (step included), or a descendant of one of the above. In addition to having a qualifying relationship with the taxpayer, the child must meet certain age and residency requirements. The child is not required to meet an income test to qualify as a child for purposes of the earned income credit.

Answer 157

Choice "B" is correct. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. There is a limitation on the amount of the credit an individual can obtain. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Note that the only correct response to this question is choice "B"; however, also note that the other option for treating the taxes paid to the foreign country is not included as an answer option. Choice "A" is incorrect. Although taxes paid by an individual to a foreign country are allowable itemized deductions, they are not subject to a 2% floor. Choice "C" is incorrect. An adjustment is not allowed for taxes paid by an individual to a foreign country. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead. Choice "D" is incorrect. A taxpayer may claim a credit against federal income taxes due for foreign income taxes paid to a foreign country or a U.S. possession. In lieu of this credit, an individual might find it better to deduct the taxes as an itemized deduction instead.

Answer 158

Choice "C" is correct. The full child tax credit is available for MFJ taxpayers with AGI up to $400,000. The eligible children must be under the age of 17. The two Koz children qualify for the child tax credit of $2,000 each ($4,000 total). Choices "A", "D", and "B" are incorrect. See explanation above.

Answer 159

Choice "A" is correct. Mortgage interest is an itemized deduction, not a deduction to arrive at adjusted gross income. Choice "B" 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 "C" 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 "D" 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.

Answer 160

Choice "A" is correct. The lifetime learning credit is an education credit that can offset an individual taxpayerʹs tax liability but does not result in a refund if the credit amount is more than the taxpayerʹs tax liability. Choice "B" is incorrect. The American opportunity credit is a higher education credit. Forty percent of the allowable credit is refundable, subject to certain restrictions. Choice "C" is incorrect. The earned income credit is a refundable credit for lower-income taxpayers. Choice "D" is incorrect. The child tax credit for a dependent child may be refundable, but the amount that can be refunded is limited. A child tax credit for a non-child dependent is nonrefundable.

Answer 161

Choice "C" is correct. Jennifer's activity is not engaged in for profit (a hobby), so she cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). She is still required to include the $1,000 gross income from the activity in her taxable income. Choice "A" is incorrect. A $300 decrease would include a deduction for all the expenses related to her dog show activity ($1,000 gross income – $1,300 expenses = $300 loss). The gross income from the activity is included in taxable income but no deduction is allowed for the expenses related to the dog show activity because the activity is not engaged in for profit (a hobby). Choice "B" is incorrect. A $100 decrease would include a deduction for the dog food and veterinary fees, but not the travel to the dog shows ($1,000 gross income – $300 dog food expense – $800 veterinary fees = $100 loss). The gross income from the activity is included in taxable income but no deduction is allowed for the expenses related to the dog show activity because the activity is not engaged in for profit (a hobby). Choice "D" is incorrect. The dog show activity is not engaged in for profit, so no deduction is allowed for the expenses related to the activity. However, the gross income from the activity is still included in taxable income.

Answer 162

Choice "D" is correct. Prepaid rent is income when received even for an accrual-basis taxpayer. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month's rent is also rental income. Choice "A" is incorrect. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month's rent is also rental income. Choice "B" is incorrect. The $30,000 is in substitution of rental payments and is thus rental income. Choice "C" is incorrect. The $5,000 prepaid for the last month's rent would also be rental income.

Answer 163

Choice "B" is correct. Any amount of "alimony" that is dependent on a child reaching the age of 18, will be considered child support (which is not deductible) for tax purposes. Accordingly, only the $7,000 is deductible as alimony. Note that alimony paid on divorce settlements executed after December 31, 2018, is not deductible. Choices "A" and "D" are incorrect. The property division is considered to be a property settlement and is not considered to be alimony. Accordingly, neither the basis, fair market value, nor realized gain has any effect on the alimony deduction. Choice "C" is incorrect as it includes the amount deemed to be child support.

Answer 164

Choice "B" is correct. The $200 cash received plus the $350 fair value of the bookcase received must be included in income by Perle, for a total of $550. The income is based on the value in money or fair value of property received by Perle, not the $600 billed. Choice "A" is incorrect. The income is based on the total value received by Perle, not the $600 billed. Choice "C" is incorrect. The $350 fair value of the bookcase received is also income for Perle. Choice "D" is incorrect. Perle must report taxable income as a result of this transaction.

Answer 165

Choice "B" is correct. The taxpayer's Schedule C net profit is $78,000. The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to nonbrokers and parking fines are nondeductible. Commission income $100,000 Auto rentals (2,000) Referral fees to other brokers (20,000) Schedule C net profit $ 78,000 Choice "A" is incorrect. Schedule C net profit of $77,800 deducts the auto rentals, legal referral fees to other brokers, and parking fines. The parking fines are nondeductible. Choice "C" is incorrect. Schedule C net profit of $69,800 deducts all of the listed expenses. The illegal referral fees to nonbrokers and parking fines are nondeductible. Choice "D" is incorrect. Schedule C net profit of $70,000 deducts the auto rentals and both the legal and illegal referral fees. The illegal referral fees to nonbrokers are nondeductible.

Answer 166

Choice "B" is correct. Guaranteed payments to partners are deductible on Form 1065 to arrive at partnership ordinary income. On Schedule K-1, guaranteed payments are shown as income and flow through as ordinary income. Choices "D", "C", and "A" are incorrect. Each of these does not address both rules correctly.

Answer 167

Choice “B” is correct. The net investment income (NII) tax is 3.8 percent of the lesser of (1) the taxpayer’s net investment income; or (2) the excess of modified AGI over a threshold amount. Choices “A” and “D” are incorrect. The tax rate is equal to 3.8 percent rather than 2.8 percent. Choice “C” is incorrect. The tax is levied on the lesser amount rather than the greater amount.

Answer 168

Choice "B" is correct. The taxpayer rented his primary residence for less than 15 days during the year, so he is not required to include the rental income on his income tax return, nor is he allowed to deduct the commissions and advertising expenses related to the rental activity. He is still allowed to deduct the mortgage interest and real estate taxes as itemized deductions. Choice "A" is incorrect. The net income from rental of the taxpayer's residence, excluding the prorated portion of mortgage interest and real estate taxes, is $8,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year. Choice "C" is incorrect. The net income from rental of the taxpayer's residence, including a prorated portion of mortgage interest and real estate taxes, is $7,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year. Choice "D" is incorrect. The taxpayer is not required to include the $10,000 of rental income on his income tax return because he rented his residence for less than 15 days during the year.

Answer 169

Choice "C" is correct. In an S corporation, the income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson's basis in the S Corporation stock. Choice "A" is incorrect. This answer is the amount of the taxable dividend received from the C corporation, which is 40 percent of the $70,000 total dividends. Choice "B" is incorrect. This is the correct answer of $160,000 reduced by the $28,000 distribution. The $28,000 will not reduce taxable income, but will reduce Carson's basis in the S Corporation stock. Choice "D" is incorrect. This is the correct answer of $160,000 increased by the $28,000 distribution. The $28,000 will not increase taxable income, but will reduce Carson's basis in the S Corporation stock.

Answer 170

Choice "D" is correct. Aston's share of ordinary income is $10,000 (50 percent partnership percentage × $20,000 partnership ordinary income). Choice "A" is incorrect. Ordinary income does not include long-term capital gains. Choice "B" is incorrect. Ordinary income does not include distributions. Choice "C" is incorrect. Ordinary income does not include distributions or long-term capital gains.

Answer 171

Choice "C" is correct. The total tax payments applied against the $5,000 current year regular tax liability is $8,000, which includes $6,000 current year estimated tax payments, $1,000 current year withholding, and $1,000 paid with current year extension. Overpayment = $5,000 current year tax liability − $8,000 tax payments = $3,000. Choice "A" is incorrect. The amount of the overpayment is $3,000, not $1,000. All of the tax payments are applied against the current year regular tax liability. Choice "B" is incorrect. The amount of the overpayment is $3,000, not $0. All of the tax payments are applied against the current year regular tax liability. Choice "D" is incorrect. The amount of the overpayment is $3,000, not $2,000. All of the tax payments are applied against the current year regular tax liability.

Answer 172

Choice "B" is correct. I. A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income. II. Since the 25 percent interest is calculated with respect to partnership profits, it is not a guaranteed payment. Choices "C", "A", and "D" are incorrect, per the above explanation.

Answer 173

Choice "B" is correct. Each shareholder reports his/her pro rata share of the S corporation's taxable income in his or her gross income. The distributions are not taxable to the extent the shareholders' basis exceeds the distribution (and increased for any income reported by them during the year). Choices "A" and "D" are incorrect. Choice "A" only includes the distribution, which is not taxable in this case as the shareholder's basis exceeds the distribution. Choice "D" includes both the shareholder's pro rata share of the taxable income and the distribution. The distribution is not taxable in this situation. Choice "C" is incorrect. Each shareholder's share of taxable income (non-separately stated) is reported in the shareholder's gross income.

Answer 174

Choice "B" is correct. The Tillers may claim a child tax credit of $2,000 for each of the children since the children are both under age 17. The credit is partially refundable and is not limited to the amount of their tax liability. The Tillers' AGI is below the AGI phaseout thresholds so they are entitled to the full child tax credit of $4,000. Choice "A" is incorrect. They are entitled to the full $2,000 tax credit for both children since their AGI is below the AGI phase-out threshold amounts. Choice "C" is incorrect. The credit is refundable and therefore not limited to the amount of their tax liability. Choice "D" is incorrect. They are eligible for the credit for both of the children.

Answer 175

Choice "B" is correct. The taxpayer receives a $14,000 qualified business income deduction, which is 20 percent of the $70,000 qualified business income. The net increase in the taxpayer's taxable income from the partnership income is $56,000 ($70,000 – $14,000). Choice "A" is incorrect. The taxpayer's taxable income is increased by the $70,000 share of partnership income, but it is also decreased by a $14,000 qualified business income deduction ($70,000 × 20%). The net increase in the taxpayer's taxable income is $56,000 ($70,000 – $14,000). Choice "C" is incorrect. $14,000 is the amount of the qualified business income deduction ($70,000 × 20%), which decreases the taxpayer's taxable income. The net increase in the taxpayer's taxable income from the partnership income is $56,000 ($70,000 – $14,000). Choice "D" is incorrect. The taxpayer's taxable income is increased by the $70,000 share of partnership income, and decreased by a $14,000 qualified business income deduction ($70,000 × 20%), for a net increase in taxable income of $56,000.

Answer 176

Choice "C" is correct. Tom & Sharlene's gross income is calculated as follows: Net self-employment income 32,500 Tom's wages 67,000 Interest 1,500 Gain from sale 15,000 Total gross Income 116,000 Note: Sharlene's salary is not included as income as 100% of the net self-employment activity is taxable to her. Her salary is considered a draw and is not an allowable business deduction against the gross income of the self-employment activity.

Answer 177

Choice "A" is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, of the current year, only the interest relating to December of the current year can be deducted in the current year. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month. Choice "B" is incorrect. Because $2,000 of the interest relates to the current year, this amount is deductible in the current year. Choice "C" is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until next year. Choice "D" is incorrect. This is the amount that cannot be deducted until the following year, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in the following year, you would get the question wrong despite understanding the rule.

Answer 178

Choice “D” is correct. The net unearned income of a dependent child under 18 years of age (or a child age 18–24 who does not provide over half of his or her own support and is a full-time student) is taxed at the parents' marginal rate. The net unearned income is calculated by taking the child’s net unearned income (in this case, interest) and subtracting the allowable standard deduction for dependents of $1,300 plus an additional $1,300 taxed at the child's marginal rate (2024). Andre’s net unearned income is $400 ($3,000 unearned income – $1,300 standard deduction – $1,300 taxed at child's marginal rate). Therefore, $400 is taxed at his parents' marginal rate and $7,600 (less Andre’s standard deduction) is taxed at Andre’s marginal tax rate. Note that because Andre has both earned income and unearned income, his standard deduction is the greater of: (1) $1,300; or (2) earned income + $450 ($5,000 + $450 = $5,450). Choices “B”, “C”, and “A” are incorrect. The “kiddie tax” applies only to unearned income in excess of $2,600, not total income or total earned income, as calculated in the above explanation.

Answer 179

Choice "A" is correct. The taxpayer's adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner's individual income tax return to the extent of the partner's tax basis in the partnership interest. In this case, the partner's basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner's basis is reinstated in future years. Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950. Salary $122,000 Capital gain dividends (LTCG) $3,700 STCL from partnership (2,750) Net LTCG 950 AGI 122,950 Choice "B" is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer's basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for net capital losses, after netting all capital gains and losses together. Choice "C" is incorrect. AGI of $119,400 incorrectly deducts all $6,300 of the STCL from the partnership. Choice "D" is incorrect. AGI of $122,000 only includes the salary, not the capital gain dividends or the STCL from the partnership.

Answer 180

Choice "C" is correct. Qualified charitable contributions of property are an itemized deduction subject to AGI limitations. Choice "A" is incorrect. Educator expenses are an adjustment toward AGI. Choice "B" is incorrect. Moving expenses are an adjustment allowed in calculating adjusted gross income and are only deductible by members of the armed forces moving pursuant to military order. Choice "D" is incorrect. Regular maintenance is not an itemized deduction. In addition, if the repair was due to a casualty loss, it would only be deductible as an itemized deduction if attributable to a federal disaster.

Answer 181

Choice "C" is correct. The starting point is the lesser of adjusted basis or decrease in FMV. Here, that is the $250,000 adjusted basis. The computation is then as follows: Smaller loss 250,000 Insurance recovery (200,000) Taxpayer's loss 50,000 Less $100 (100) Eligible loss 49,900 10% AGI limitation (10,000) Deductible loss 39,900 Choices "D", "A", and "B" are incorrect, per the above explanation.

Answer 182

Choice "D" is correct. Appreciated property held longer than one year is considered capital gain property. The fair market value of capital gain property is deductible as a charitable contribution. Capital gain property given to a public charity, such as a church, is limited to 30% of AGI. Therefore, Taylor's gift would be limited to $27,000 (30% of $90,000). The FMV of $25,000 is under the AGI limitation and is the allowed itemized deduction. Choice "A" is incorrect. The $11,000 is the difference between the $25,000 fair market value of the land and the $14,000 original cost. It is thus the appreciation of the land before the date of donation. The appreciation of appreciated property is not the amount of the charitable contribution deduction. Choice "B" is incorrect. The $14,000 is the original cost of the asset. The maximum deduction for appreciated property is the fair market value of the property, not the original cost. Choice "C" is incorrect. Taylor has income in Year 13 of $90,000; therefore, at least a portion of a deduction for the land can be deducted, even if the fair market value of the land exceeded the defined limits for the year.

Answer 183

Choice "D" is correct. The itemized deduction for investment interest expense is limited to net taxable investment income. The $1,000 interest from a municipal bond is nontaxable. The taxpayer's taxable investment income consists of the $2,000 taxable interest from a U.S. Treasury bond. Therefore the taxpayer's investment interest expense deduction is limited to $2,000. Choice "A" is incorrect. The taxpayer's investment interest expense deduction is limited to the taxable investment income of $2,000, not the total investment income of $3,000. Choice "B" is incorrect. The taxpayer can deduct only $2,000 of the $4,000 investment interest expense. The investment interest expense deduction is limited to the taxable investment income of $2,000. Choice "C" is incorrect. The taxpayer's investment interest expense deduction is limited to the taxable investment income of $2,000, not the nontaxable municipal bond interest income of $1,000.

Answer 184

Choice "A" is correct. The deduction for cash contributions to a public charity, such as a church, is limited to 60 percent of AGI. Jeffrey's AGI limit for the current year would be $55,000 × 60% = $33,000. The current year contributions of $19,500 plus the charitable contributions carryover from the previous year of $5,000 = $24,500. The total of $24,500 is less than the $33,000 AGI limit, so the deduction is not limited. Choice "B" is incorrect. Jeffrey is not limited to only his carryover contributions. Choice "C" is incorrect. This is the maximum allowed using a 50 percent of AGI limitation ($55,000 × 50% = $27,500). However, 50 percent is the limitation for ordinary income property contributions, not cash contributions, which use a 60 percent of AGI limitation. This answer choice is also above the amount of the actual deductions and Jeffrey cannot deduct more than he actually contributed. Choice "D" is incorrect. Jeffrey is able to deduct his carryover contributions from the prior year as well.

Answer 185

Choice "B" is correct. An individual's losses on transactions entered into for personal purposes are deductible only if the losses qualify as casualty or theft losses. Casualty and theft losses are limited to nationally declared disaster areas. In addition, the individual must itemize deductions and the loss must exceed 10 percent of AGI plus $100 per casualty. Choice "A" is incorrect. If the losses can be characterized as hobby losses, none of the loss is deductible. Choice "C" is incorrect. Losses entered into for personal purposes other than casualty losses are not deductible in any amount. Choice "D" is incorrect. If no part of the transaction was entered into for profit, none of the related loss is deductible.

Answer 186

Choice "B" is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of the AGI floor are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction. Home mortgage interest 5,200 State taxes paid 2,000 Medical expenses 1,500 Total itemized deductions 8,700 Choice "A" is incorrect. This is the total of all items listed, three of which (the IRA contributions, alimony, and child support) should not be included. Choice "C" is incorrect. This answer includes the interest, state taxes paid, and the child support. It does not include the medical expenses (as is proper) and should not include the child support. Choice "D" is incorrect. This answer includes only the interest paid on the mortgage and the state taxes. The medical expenses in excess of the AGI floor are also deductible on Schedule A.

Answer 187

Choice "A" is correct. The deduction for investment interest expense is limited to net taxable investment income. The noninterest investment expenses are not deductible; therefore, net investment income is equal to $10,000. All $5,000 of the investment interest expense is deductible because it is less than $10,000. Taxable investment income includes: (i) interest and dividends (if taxed at ordinary income tax rates), (ii) rents (if the activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv) net short-term capital gains, and (v) net long-term capital gains if the taxpayer elects not to claim the net capital gains reduced tax rate. Choices "C", "B", and "D" are incorrect per the above explanation.

Answer 188

Choice "B" is correct. In order to qualify for the additional standard deduction, an individual must be age 65 or older or blind by the end of the tax year. He or she does not have to support a dependent child or aged parent.

Answer 189

Choice "C" is correct. Interest paid on debt not used to acquire or substantially improve a home is not deductible. This is true even if the debt is secured by a home. Choice "A" is incorrect. Personal interest is not deductible. It is also called consumer interest. Choice "B" is incorrect. Interest paid on debt secured by a home mortgage is not deductible if not used to acquire or substantially improve the home. Choice "D" is incorrect. Interest paid on a debt secured by a home mortgage is not classified as investment interest.

Answer 190

Choice "A" is correct. Because both Bob and Nancy are 65 or older, they are entitled to the additional standard deduction of $1,550 (2024) each in addition to the regular amount. $29,200 + $1,550 + $1,550 = $32,300 Choice "B" is incorrect. This answer choice is the standard deduction of $29,200 plus an additional standard deduction of $1,950, which is the amount for one single taxpayer age 65 or older. Bob and Nancy are taxpayers who are married filing jointly and are entitled to two additional standard deductions of $1,550 each since they are both age 65 or older. Choice "C" is incorrect. This answer choice is the standard deduction of $29,200 plus only one additional standard deduction of $1,550. Bob and Nancy are entitled to two additional standard deductions since they are both age 65 or older. Choice "D" is incorrect. This answer choice is the regular standard deduction amount for married filing jointly taxpayers and does not include any additional standard deductions. Bob and Nancy are entitled to two additional standard deductions since they are both age 65 or older.

Answer 191

Choice "D" is correct. Mary can claim $5,500 as a charitable contribution deduction. Cash to church $2,000 Used furniture to thrift shop (FMV) 500 Publicly traded stock (cost basis) 3,000 $5,500 The used furniture donated to a thrift shop is ordinary income property because it is a personal use asset that has depreciated in value. The publicly traded stock is also ordinary income property because the stock was held for less than one year. The amount of the deduction for ordinary income property is the lesser of the property's adjusted basis or its fair market value (FMV) at the time it is contributed. All of the contributions were made to public charities, so the AGI limitations are 60 percent for the cash contribution and 50 percent for the ordinary income property contributions. The AGI limitations are $30,000 ($50,000 AGI × 60%) for the cash contribution and $25,000 ($50,000 × 50%) for the property contributions. The amount of the contributions are well below the AGI limitation amounts, so the charitable contribution deduction is not limited. Choice "A" is incorrect. The $6,500 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis. Choice "B" is incorrect. The $6,000 amount uses the $4,000 FMV for the publicly traded stock, rather than the lower $3,000 cost basis, and does not include the FMV of the used furniture. Choice "C" is incorrect. The $5,000 amount does not include the FMV of the used furniture contributed to the hospital's thrift store.

Answer 192

Choice "C" is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is not investment interest and would not affect investment interest income in any manner. Choices "D", "B", and "A" are incorrect, per the above discussion.

Answer 193

Choice "D" is correct. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward five years. Choice "A" is incorrect. Charitable contributions are never carried back. Choice "B" is incorrect. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward. Choice "C" is incorrect. Individual capital losses, not charitable contributions, are carried forward indefinitely until used up (or taxpayer's death).

Answer 194

Choice "B" is correct. $1,500. The stock is ordinary income property because it was held for one year or less, so the amount of the deduction for the stock is the lesser of the adjusted basis ($1,500) or the fair market value at the time it was contributed ($3,000), which is $1,500. The contribution of ordinary income property to public charities is limited to 50% of AGI ($30,000 AGI × 50% = $15,000). The $1,500 deduction is less than the $15,000 AGI limitation, so the deduction is not limited. The $2,000 cash donation to a needy family is not deductible because the contribution was not made to a qualifying charity.

Answer 195

Choice "A" is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, because it was necessary to correct a congenital deformity. Doctor bills 5,000 Surgery 15,000 20,000 AGI floor ($100,000 × 7.5%) (7,500) Deduction $12,500 Choices "B", "C", and "D" are incorrect, per the computation above.

Answer 196

Choice "C" is correct. Gambling losses are deductible as a miscellaneous itemized deduction (from AGI) limited to gambling winnings. Choices "A", "B", or "D" are incorrect, per the above explanation.

Answer 197

Choice "C" is correct. The deduction for interest expense on investment indebtedness is limited to net investment income (investment income less investment expenses). Choices "B", "A", and "D" are incorrect, per explanation above.

Answer 198

Choice "C" is correct. This question requires the candidate to determine which items are deductible charitable contributions. The $5,000 cash donation to the church is allowable. The amount of the deduction for the artwork donated to the local art museum is $2,000. The artwork is ordinary income property because it was held for one year or less. The amount of the deduction for ordinary income property is the lesser of the property's adjusted basis ($2,000) or its FMV at the time it is contributed ($3,000), which is $2,000.The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying charitable organization. Choice "A" is incorrect. This choice includes all three contributions. It erroneously includes the artwork at its fair market value as well as including the donation to the needy family, which is not a deductible donation. Choice "B" is incorrect. This choice erroneously includes the donation of the artwork at its fair market value. Choice "D" is incorrect. This choice excludes the donation of the artwork to the art museum.

Answer 199

Choice "A" is correct. Stein may deduct $24,000 on Stein's current year income tax return. The taxpayer can deduct long-term (i.e., held longer than 12 months) capital gain property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carryforward period applies. Fair market value of appreciated long-term stock 25,000 Less: Limitation AGI 80,000 Times 30% × 0.30 Deduction limit (24,000) Carryforward 1,000

Answer 200

Choice "C" is correct. The taxpayer may only deduct the excess contribution over the consideration received. $160 contribution – $100 value of tickets = $60. Payment to qualified charity 160 Fair value of 4 tickets at $25 (100) Charitable contribution 60 Choice "A" is incorrect. This amount is the value of the tickets received. The taxpayer may deduct the excess of the contribution made over the value of the tickets. Choice "B" is incorrect. The taxpayer may only deduct the excess of the contribution made over the value of the tickets received, not the full amount of the contribution. Choice "D" is incorrect. The taxpayer may deduct the excess of the contribution over the value of the tickets received.

Answer 201

Choice "A" is correct. Casualty losses are deductible as an itemized deduction if located in a presidentially declared disaster area. Casualty losses are generally computed as the decline in fair market value, except that the fair market value is limited to the property's basis, here $150,000. Casualty losses are reduced by the amount of any insurance recovery, reducing this loss to $20,000. Next, each individual loss is reduced by $100, bringing this loss to $19,900. Finally, the remaining total amount of all casualty losses (here there is only one) are deductible only to the extent that the amount exceeds 10% of AGI, or $6,000 here. ($150,000 - $130,000 = $20,000; $20,000 - $100 - $6,000 = $13,900.) Choice "B" is incorrect. This is the market value decline minus the adjusted basis. Choice "C" is incorrect. In addition to the $100 per loss nondeductible portion of each separate casualty loss, there is an overall limitation that the remaining total amount of all casualty losses is deductible only to the extent that it exceeds 10% of AGI. Choice "D" is incorrect. This is the adjusted basis minus the insurance reimbursement, without any limitations being applied.

Answer 202

Choice “D” is correct. Investment interest expense deduction is an itemized deduction limited to net investment income. Taxable interest is included in net investment income. Rental income and tax exempt interest are not. Therefore, the limitation is the $100 U.S. Treasury bond interest. Choice “A” is incorrect. $800 incorrectly includes the tax-exempt municipal bond interest and the rental income. Choice “B” is incorrect. $300 incorrectly includes the tax-exempt municipal bond interest. Choice “C” is incorrect. $1,000 would be correct if all of the interest qualified for deduction without limitation.

Answer 203

Choice "B" is correct. Repair and maintenance of medical devices for a disabled dependent child ($600) are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care ($8,000) is also a deductible medical expense. Choice "A" is incorrect. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is a deductible medical expense. Choice "C" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses. The cost of a special school for a handicapped person in an institution primarily for the availability of medical care, when the meals and lodging are merely incident to that care is also a deductible medical expense. Choice "D" is incorrect. Repair and maintenance of medical devices for a disabled dependent child are deductible medical expenses.

Answer 204

Choice "A" is correct. Deductible medical expenses are limited to the amount that exceeds 7.5 percent of the taxpayer's adjusted gross income (AGI). Deductible medical expenses are those expenses that are "necessary" (such as doctors, prescriptions, required surgery, etc.). Nondeductible expenses are such things as elective surgeries, health club memberships, and unnecessary medical expenditures. The Andradis' AGI is $65,000; 7.5 percent of that is $4,875. Qualified medical expenses are $1,300 for their daughter's prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $4,300 are less than the AGI floor of $4,875. So the answer is zero. Choice "B" is incorrect. The son's physical therapy is also a deductible expenditure, and the $1,300 does not take into account the 7.5 percent of AGI floor. Choice "C" is incorrect. This answer is the 7.5 percent of AGI floor, which should then be compared with the qualified expenses in order to figure the amount to be deducted on Schedule A. Choice "D" is incorrect. This answer is the total deductible medical expenses; however, the answer does not take into account the 7.5 percent of AGI floor.

Answer 205

Choice "B" is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "A" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses. Choice "C" is incorrect. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Choice "D" is incorrect. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Answer 206

Choice "A" is correct. The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home (subject to the allowed percentage of AGI floor). The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the allowed percentage of AGI floor). The cost of the appraisal is not deductible as a medical expense. 7,000 (1,000) 700 6,700 Choice "B" is incorrect. This choice includes the entire cost of the filtration system and the increase in the utility bills and disregards the reduction for increase in the home value. Choice "C" is incorrect. This choice includes the filtration system, increase in utility bills and the appraisal but does not consider the reduction for the increase in the value of the home. Choice "D" is incorrect. This choice includes deducting the filtration system and the appraisal and disregards the reduction for the increase in the home value and the utility bills.

Answer 207

Choice "B" is correct. The $4,000 cash contribution to the church is deductible. Relative to the purchase of the art object at the church bazaar, only the excess paid over fair market value ($1,200 - $800 = $400) is deductible. The used clothing donation to the Salvation Army is deductible at its fair market value of $600. The total deduction is $5,000 ($4,000 + $400 + $600). The contributions are also well below the appropriate thresholds of 60 percent for the $4,400 cash contributions and 50 percent for the $600 donation of used clothing (ordinary income property). Choice "A" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. In addition, the deduction for the purchase of the art object is only the $400 excess paid over fair market value, not the $1,200 paid. Choice "C" is incorrect. The used clothing donated to the Salvation Army is deductible at its $600 fair market value. Choice "D" is incorrect. The deduction for the purchase of the art object is not its fair market value of $800, but the $400 excess paid over its fair market value.

Answer 208

Choice "A" is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000). Choice "B" is incorrect. Insurance against loss of income is not payment for medical care and therefore is not deductible. Choice "C" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Choice "D" is incorrect. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care.

Answer 209

Choice "C" is correct. Transportation to a physician's office for required medical care is a deductible medical expense for tax purposes. Choice "A" is incorrect. Vitamins are not deductible. Choice "B" is incorrect. Health club dues paid on a membership for general health care are not deductible. In order for the dues to be deductible, the membership would need to be recommended by a physician for a specific illness. Choice "D" is incorrect. Premiums paid for insurance are deductible as medical expenses, including Medicare Part B premium payments. However, Social Security taxes that entitle a taxpayer to basic Medicare Part A coverage do not qualify as deductible medical insurance premiums.

Answer 210

Choice "C" is correct. The casualty loss is measured by the difference in the property's value before ($130,000) and after (zero) the casualty, in other words, $130,000. The loss may not exceed the adjusted basis of the property. The casualty loss must be reduced by the $120,000 insurance recovery to $10,000. This loss is reduced by $100 per casualty to $9,900. The sum of all such casualty losses (there is only one in this case) is further reduced by 10% of the taxpayer's adjusted gross income for the year. That is 10% x $70,000 = $7,000. The amount of the casualty loss that is deductible on Frazer's tax return is $9,900 - $7,000 = $2,900.

Answer 211

Choice "A" is correct. Gambling losses are miscellaneous itemized deductions. The deduction for gambling losses are, however, limited to gambling winnings. Choice "B" is incorrect. The deduction for gambling losses cannot exceed gambling winnings. Choice "C" is incorrect. Gambling losses are deductible to the extent of gambling winnings. Choice "D" is incorrect. Gambling losses are deductible up to gambling winnings.

Answer 212

Choice "A" is correct. For a personal residence that is not used for rental purposes, no deduction is allowed for utilities costs or insurance, thus the only deductible amount here is for the mortgage interest. Note that property taxes (not present in this problem) are deductible. In this problem we are not told whether the interest relates to acquisition indebtedness or home equity indebtedness. If it is home equity indebtedness, the proceeds of the loan must be used to substantially improve the home and are subject to an overall loan amount of $750,000 including any acquisition indebtedness. Choice "B" is incorrect. The utilities cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction. Choice "C" is incorrect. The insurance cost is not deductible; furthermore, the deduction for personal residence interest is an itemized deduction. Choice "D" is incorrect. For a personal residence, neither insurance costs nor utilities costs are deductible.

Answer 213

Choice "D" is correct. The deduction for cash contributions to a public charity is limited to 60 percent of AGI. Moore's contribution limit for the current year is 60% × $50,000 = $30,000. The current year contributions of $18,000 plus the charitable contributions carryover from the previous year of $10,000 = $28,000. The total of $28,000 is less than the $30,000 AGI limit, so the deduction is not limited. Choice "A" is incorrect per the explanation above. Choice "B" is incorrect. Moore's deduction is not limited to her prior year charitable contribution carryover. Choice "C" is incorrect. Moore's deduction is not limited to her current year charitable contributions.

Answer 214

Choice "D" is correct. Contributions to charitable entities (including churches) are deductible. When the contribution is charged to a credit card, the contribution is deductible in the year the charge is made, even if payment to the credit card issuer is made in a later year. Choice "A" is incorrect. In order to be deductible, all charitable contributions must be substantiated (e.g., by a canceled check, receipt, etc.). A contribution that is not substantiated is not deductible. Choice "B" is incorrect. Contributions to foreign charities are not deductible as charitable contributions. Choice "C" is incorrect. Political contributions are not deductible as charitable contributions.

Answer 215

Choice "B" is correct. $0 casualty loss deduction on Schedule A because damage caused in home by dog is controllable, and avoidable, and, thus, is not unexpected and does not qualify as a "casualty." In addition, a casualty loss is only deductible if it is in a nationally declared disaster area.

Answer 216

Choice "A" is correct. Only the $1,500 prescription medication for the taxpayer's dependent qualifies as an itemized deduction. The fact that the medication is for the taxpayer's dependent does not disqualify the taxpayer from deducting the expense because payments on behalf of a dependent are allowed. Burial costs and elective cosmetic surgery are not deductible medical expenses. Contributions to the taxpayer's health savings account are not deductible as an itemized deduction and are only deductible as an adjustment for AGI (or an "above-the-line" deduction"). Choice "B" is incorrect. This answer incorrectly includes the cost of the taxpayer's elective cosmetic surgery, which is not deductible for tax purposes, as well as the taxpayer's contributions to his health savings account, which is deductible as an adjustment for AGI and not as an itemized deduction. Choice "C" is incorrect. This answer incorrectly includes the $2,500 of burial costs that are not deductible as medical expenses. The only item that is deductible is the $1,500 of prescription medication for the taxpayer's dependent. Choice "D" is incorrect. This answer incorrectly includes the burial costs for the taxpayer's spouse, which are not deductible as medical expenses.

Answer 217

Choice "C" is correct. Interest on mortgages of up to $750,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans is only deductible if the proceeds are used to substantially improve the home. Interest for personal expenses such as auto loans and credit cards is not deductible. The total deduction is $19,000. Choices "B", "D", and "A" are incorrect, per the above explanation.

Answer 218

Choice "C" is correct. Home equity debt is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan. Choices "D", "B", and "A" are incorrect based on the above explanation.

Answer 219

Choice "A" is correct. $6,800. Scott could claim $6,800 on his current year tax return for medical expenses. Medical expenses charged to a credit card is expensed in the year the charge is made. It does not matter when the amount charged is actually paid. Expenses paid for the medical care of a decedent by the decedent's spouse are included as medical expenses in the year paid, whether they are paid before or after the decedent's death. Choices "B", "D", and "C" are incorrect, per the above explanation.

Answer 220

Choice "D" is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100). Choice "A" is incorrect. $4,000 is the amount after the $100 reduction but before the 10% of AGI reduction. Choice "B" is incorrect. $4,100 is the starting point of the calculation. It is before the 10% of AGI and $100 reductions. Choice "C" is incorrect. $100 is merely the amount of the reduction per casualty.

Answer 221

Choice "C" is correct. The computation of the allowable casualty loss is as follows: Lesser of: Decrease in fair market value ($500,000 - $300,000) 200,000 or Adjusted basis 350,000 200,000 Less: insurance proceeds (175,000) Economic loss 25,000 Less: 100 floor (applied to each separate casualty loss) (100) Remaining loss after applying 100 floor 24,900 Less: AGI threshold applied to all casualty losses in the aggregate: 10% of AGI of $120,000 (12,000) Loss after consideration of all threshold limits 12,900 Note: It is very important to remember that the $100 reduction applies to each separate casualty loss, while the reduction for 10% of AGI applies to casualty losses in the aggregate. Choice "A" is incorrect. Each casualty loss must be reduced by $100. Choice "B" is incorrect. All casualty losses in the aggregate must be reduced by 10% of AGI. Choice "D" is incorrect. Each casualty loss must be reduced by $100 and then all casualty losses in the aggregate must be reduced by 10% of AGI.

Answer 222

Choice "B" is correct. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible. Choice "A" is incorrect. Interest on auto loans (consumer interest) is not deductible. Choice "C" is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Choice "D" is incorrect. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.

Answer 223

Choice "A" is correct. Under the tax benefit rule, Farb should report the $5,000 refund as income in Year 11 since Farb itemizes deductions and would have received a tax benefit from deducting the $8,000 paid in Year 10. Choice "B" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 10. Choice "C" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. There is no need to wait and file an amended Year 10 return in Year 11. Choice "D" is incorrect. Since Farb paid $8,000 in property taxes in Year 10, Farb should deduct it in that year. This is true even though the $8,000 was paid under protest. Do not net the refund against the amount paid and deduct the net amount in Year 11.

Answer 224

Choice "C" is correct. Individual taxpayers may deduct the FMV of property donated to charity. The limit is 30 percent of the taxpayer's AGI (30% × $90,000 = $27,000). The FMV of the property is $25,000 (which is within the allowable amount) and the church is a qualified charity.

Answer 225

Choice "A" is correct. State and local income taxes withheld from a cash-basis taxpayer are deductible in the year withheld, so Matthews can deduct the $1,500 withheld. She can also deduct the $400 in estimated tax liability she paid in the current year. The $2,500 federal income tax withheld is not deductible in calculating federal income tax. The current year state and local income tax paid in the following year is not deductible until paid because she is a cash-basis taxpayer. The total amount of deductible taxes, therefore, is $1,900. Choice "B" is incorrect. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid. Choice "C" is incorrect. The $400 state estimated income taxes are deductible in the current year since the amount was paid in the current year. Choice "D" is incorrect. Federal income tax withheld is not deductible in calculating federal income tax. Since Matthews is a cash basis taxpayer, the $300 state and local income taxes paid in the following year are not deductible until paid.

Answer 226

Choice "D" is correct. Both expenditures related to the medical care for the taxpayers' dependent child with a physical disability are qualifying medical expenses. Wheelchair repair and maintenance 300 School for children with disabilities 4,000 Total 4,300 Choice "A" is incorrect. Both expenditures related to the medical care for the taxpayers' physically disabled dependent child are qualifying medical expenses. Choice "B" is incorrect. The costs of the special school for children with disabilities are also qualifying medical expenses, not just the repair and maintenance costs for the motorized wheelchair. Choice "C" is incorrect. The repair and maintenance costs for the motorized wheelchair are also qualifying medical expenses, not just the costs of the special school for children with disabilities.

Answer 227

Choice "C" is correct. A charitable contribution is not allowed for the value of services rendered to a charity. Choice "A" is incorrect. The charitable contribution deduction for long-term appreciated stock is limited to 30% of adjusted gross income. Choice "B" is incorrect. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $5,000. Choice "D" is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more.

Answer 228

Choice "B" is correct. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Because the artwork had been held for more than one year and has appreciated in value, the fair market value of $11,000 could be deducted. The deduction of appreciated long-term capital gain (LTCG) property is limited to 30 percent of AGI. In this case, the $11,000 deduction amount is less than the AGI limit of $12,000 ($40,000 AGI × 30%), so the deduction is not limited. Choice "A" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Choice "C" is incorrect. The $1,500 donation is not deductible because it was made directly to the needy family rather than to a qualified organization. Furthermore, the fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated LTCG property. Choice "D" is incorrect. The fair market value of the artwork could be deducted because it had been held for more than one year and that value fell within the 30% of AGI overall limitation for appreciated LTCG property.

Answer 229

Choice "D" is correct. $1,200 tax deduction for state income tax. Self-employment tax is not an itemized deduction, but 50% can be used as adjustment in arriving at AGI. Choice "A" is incorrect. This amount is 50 percent of the self-employment tax ($7,650 × 50% = $3,875). This amount can be deducted as an adjustment for AGI, not an itemized deduction. Choice "B" is incorrect. This amount includes the $1,200 state income tax and 50 percent of the self-employment tax ($7,650 × 50% = $3,875). The state income tax is an itemized deduction but the 50 percent of self-employment tax is an adjustment for AGI, not an itemized deduction. Choice "C" is incorrect. Self-employment tax is not an itemized deduction, but 50 percent can be deducted as an adjustment for AGI.

Answer 230

Choice "B" is correct. Taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes are allowable deductions. The total amount of itemized deductions for tax expense is calculated as follows: Real estate tax on personal residence 2,000 Personal property tax on personal automobile 500 Current-year state and city income taxes withheld 1,000 Total deduction for taxes 3,500 Choice "A" is incorrect. Real estate taxes and personal property taxes are allowable itemized deductions. Choice "C" is incorrect. Personal property taxes are allowable itemized deductions. Choice "D" is incorrect. Current-year state and city income taxes withheld from a paycheck are allowable itemized deductions.

Answer 231

Choice "A" is correct. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. Choice "B" is incorrect. A medical expense paid by credit card is deductible in the year the amount is charged to the credit card (rather than in a subsequent year when the credit card bill is paid). Choice "C" is incorrect. Vitamins and supplements are not qualified medical expenses. Choice "D" is incorrect. A medical expense deduction is allowed for Medicare insurance premiums.