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Which expense, both incurred and paid in the same year, can be claimed as an itemized deduction subject to
the two percent-of-adjusted-gross-income floor?
a. Employee's unreimbursed business car expense.
b. One-half of the self-employment tax.
c. Employee's unreimbursed moving expense.
d. Self-employed health insurance
Choice "a" is correct. Employee business expenses, including unreimbursed car expense, are deductible as itemized deductions subject to the 2% floor.
The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan , the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest
on the loan qualifies as:
a. Deductible personal interest.
b. Deductible qualified residence interest.
c. Nondeductible interest.
d. Investment interest expense
Choice "b" is correct. Interest paid on a debt secured by a home mortgage is classified as deductible qualified residence interest. The Browns would be able to deduct the interest paid as an itemized deduction . The limit is $100,000 of mortgage interest since the loan was not to buy, build, or improve the home.
Insurance against loss of income is not payment for medical care and therefore is not
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, "earned income" is defined as net selfemployment
earnings reduced by the:For Keogh plans, earned income is defined as net self-employment earnings reduced
by the amount of the allowable Keogh deduction and Y, the self-employment tax.
Charitable contributions subject to the 50-percent limit that are not fully deductible in the year made may be:
a. Neither carried back nor carried forward .
b. Carried back two years or carried forward twenty years.
c. Carried forward five years.
d. Carried forward indefinitely until fully deducted.
Choice "c" is correct. Charitable contributions subject to the 50% limit that are not fully deductible in the year made may be carried forward five years.
In Year 10, Farb, a cash basis individual taxpayer, received an $8,000 invoice for personal property taxes.
Believing the amount to be overstated by $5,000, Farb paid the invoiced amount under protest and
immediately started legal action to recover the overstatement. In November, Year 11 , the matter was
resolved in Farb's favor, and he received a $5,000 refund . Farb itemizes his deductions on his tax returns.
Which of the following statements is correct regarding the deductibility of the property taxes?
a. Farb should deduct $8,000 in his Year 10 income tax return and should report the $5,000 refund as
income in his Year 11 income tax return.
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.
During the year, Barlow moved from Chicago to Miami to start a new job, incurring costs of $1 ,200 to move
household goods and $2,500 in temporary living expenses. Barlow was not reimbursed for any of these
expenses. What amount should Barlow deduct as itemized deduction for moving expense?
Choice "a" is correct. There is no itemized deduction for temporary living expenses, and the direct moving
expenses (such as the costs to move the goods and the costs to move the taxpayer's family from the old to
the new location) are deductible before adjusted gross income, not as an itemized deduction.
In the current year, Drake, a disabled taxpayer, made the following home improvements:
Pool installation , which qualified as a medical expense and
increased the value of the home by $25,000 $100,000
Widening doorways to accommodate Drake's wheelchair 10,000
(the improvement did not increase the value of his home)
For regular income tax purposes and without regard to the adjusted gross income percentage threshold
limitation, what maximum amount would be allowable as a medical expense deduction in the current year?
Choice "b" is correct. A capital expenditure for the improvement of a home qualifies as a medical expense if it is directly related to the prescribed medical care. However, it is deductible to the extent that the expenditure
exceeds the increase in value of the home. Thus, Drake may only deduct $75,000, the difference between
the cost of improvement ($100,000) and the increase in market value ($25,000) of the home. In addition , the
full cost of home-related capital expenditures to enable a physically handicapped individual to live
independently and productively qualifies as a medical expense. The widening of hallways qualifies as this
type of expense and , therefore, the entire $10,000 is deductible.
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a six-month
extension to file until October 15 but did not file the return until November 1. What is the latest date that an
IRA contribution can be made in order to qualify as a deduction on the prior year's return?
a. October 15.
b. April 15.
c. August 15.
d. November 1.
Choice "b" is correct. For IRAs, the adjustment is allowed for a year ONLY if the contribution is made by the due date of the tax return for individuals (April 15). The due date for filing the tax return under a filing extension is NOT allowed (i.e., filing extensions are NOT considered).
The charitable contribution deduction for contributions of property is normally the lesser of the property's basis or the fair market value of the property, on the date of the donation, or the lesser of $14,000 or $25,000 in this question. However, contributions of appreciated property, as in this question, are deducted at fair market value. That deduction might be limited to 50% of AGI ($45 ,000) or 30% of AGI for long-term appreciate property ($27,000), but the $25,000 is the maximum deduction in this case. The "lesser or' rule really applies to depreciated property and keeps a taxpayer from taking a fair market value deduction
for such property.Family has two kids, spend 4k on each kid for child care.
Dads wages are 60k
Mary wages are 2,500
What amount of child and dependent care credit may the woods claim on their joint tax return?
The max eligible for 1 dependent is 3000. The it is further limited b/c it is limited to the lowest earned income of either spouse. That would be mary's 2,500. Due to their combined income level they are in 20% credit range, the credit is 20% of 2,500 or 500
t/p has 70k in taxalb eincome before personal exemptions in the current year Mills had no tax preferences. His itemized deductions were as follows;
State and local income taxes 5,000
Home mortgage interest on loan 6,000
Misc deductions 2,000
What amount did mills report as AMT tax income before AMT exemptions
How long can amt credit be carried forward?
Robert had current year adjusted gross income of 100k and potential itemized deductions as follows:
Medical expenses before percentage limitations 12,000
State income taxes 4000
Real estate taxes 3,500
Qualified housing and residence mortgage interest 10,000
Home equity mortgage interst 4,500
Charitable contributions (cash) 5000
What are Roberts itemized deductions for amt?
Medical exp 2000
Qualified housing and residence interest 10,000
Charitable contributions 5,000
Total amt deductions 17k
t/p w/h 16,000 in federal income taxes and made no estimated payments for 2008
April 15 year 2009 t/p timely filed extension request to file her individual tax return and paid 300 of additional taxes
T/p tax liability was 16,500 for 2008
What amount would be subject to the penalty for the underpayment of estimated taxes?
Provided the taxes due after w/h were not over 1000 there is no penalty for underpayment of estimated taxes. Note that there would be failure to pay penalty on the 200 that was not paid until April 30 but that is separate penalty
T/p has agi of 160k, 2008
In 2009 what amount must t/p pay to avoid penalties for underpayment? (for 2009 return answer can be in %)
1. 90 % of tax on the return for the current year paid in 4 equal installments
2. 110% of prior year tax liability paid in 4 equal installments
* lesser of the two is called safe harbor
Tp filed timely on April 15 but accidentally omitted 30% of his income, how many years can the IRS assess penalties?
For a 30% understatement of gross income anything over 25% the statute of limitations is 6 years.
For regular tax purposes, with regard to the itemized deduction for qualified residence interest, home equity
indebtedness incurred during a year:
a. Includes acquisition indebtedness secured by a qualified residence.
b. May exceed the fair market value of the residence.
c. Must exceed the taxpayer's net equity in the residence.
d. Is limited to $100,000 on a joint income tax return
Choice "d" is correct. Home equity indebtedness is limited to $100,000 on a joint income tax return (or single
return), but only $50,000 if married filing separately
An individual's losses on transactions entered into for personal purposes are deductible only if:
a. The losses qualify as casualty or theft losses.
b. The losses can be characterized as hobby losses.
c. The losses do not exceed $3,000 ($6,000 on a joint return ).
d. No part of the transactions was entered into for profit.
Choice "a" 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. In addition, the individual must itemize deductions and the loss must exceed 10% of AGI plus 500 per casualty
Jimet, an unmarried taxpayer, qualified to itemize deductions. Jimet's adjusted gross income was $30,000
and he made a $2,000 cash donation directly to a needy family. During the year, Jimet also donated stock,
valued at $3,000, to his church. Jimet had purchased the stock four months earlier for $1 ,500. What was the
maximum amount of the charitable contribution allowable as an itemized deduction of Jimet's current year
income tax return?
Choice "b" is correct. $1,500.
Deductible amount is lower of:
Stock at cost (short term property)
AGI limit (30% of $30,000)
Rule: Contributions of long-term property are generally deductible at fair market value at the date of the gift. Contributions of short-term property are generally deductible at the lower of cost or fair market value.
If an individual paid income tax in the current year but did not file a current year return because his income
was insufficient to require the filing of a return, the deadline for filing a refund claim is:
a. Two years from the date the tax was paid .
b. Two years from the date a return would have been due.
c. Three years from the date the tax was paid .
d. Three years from the date a return would have been due.
Choice "a" is correct. Two years from the date the tax was paid .
Rule: A taxpayer may file a claim for refund within three years from the time the return was filed , or two years from the time the tax was paid , whichever is later. Since no return has been filed , the refund claim must be filed within two years from the time the tax was paid.
An employee who has had social security tax withheld in an amount greater than the maximum for a particular year, may claim:
a. Such excess as either a credit or an itemized deduction, at the election of the employee, if that excess
resulted from correct withholding by two or more employers.
b. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by
two or more employers.
c. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more
d. The excess as a credit against income tax, if that excess was withheld by one employer.
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 excess resulting from the correct withholding by two or more employers may only be claimed as a credit against income tax.
Mrs. Vick's substantiated cash donation to the American Red Cross.
A. Not deductible.
B. Deductible on Schedule A - Itemized Deductions, subject to a threshold of 7.5% of adjusted gross
C. Deductible on Schedule A - Itemized Deductions, subject to a threshold of 2% of adjusted gross income.
D. Deductible on page 1 of Form 1040 to arrive at adjusted gross income.
E. Deductible in full on Schedule A - Itemized Deductions.
F. Deductible on Schedule A - Itemized Deductions, subject to threshold of 50% of adjusted gross income.
Choice "F" is correct. The substantiated cash donation to the American Red Cross would be deductible on Schedule A - Itemized Deductions, subject to the threshold of 50% of AGI.
Determine whether the statement is true or false regarding the Vicks' Year 15 income tax return.
The funeral expenses paid by Mr. Vick's estate is a Year 15 itemized deduction
Choice "F" is correct. Funeral expenses are non-deductible on the Form 1 040.
Determine whether the statement is true or false regarding the Vicks' Year 15 income tax return.
The Vicks' income tax liability will be reduced by the credit for the elderly or disabled.
Choice "F" is correct. The Vick's income tax liability will not be reduced by the credit for the elderly or
disabled since their AGI amount in excess of the threshold effectively eliminates the credit. (The calculation
for the credit is complicated. In short, the credit is 15% of an adjusted "initial amount," which is $7,500 for
married filing joint and quickly goes to zero with earned income.)
The Vicks paid alternative minimum tax in Year 14. The amount of alternative minimum tax that is
attributable to "deferral adjustments and preferences" can be used to offset the alternative minimum tax in
the following years.
Choice "F" is correct. The amount of alternative minimum tax that is attributable to "deferral adjustments and
preferences" can be used to offset the regular tax liability in the future years, not the alternative minimum tax.
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Listed below is one of Green's business or nonbusiness transactions, as well as possible tax treatments. Select the appropriate tax treatment for Green's transaction.
Qualifying contributions to a simplified employee pension plan.
Qualifying contributions to a simplified employee pension (SEP) plan are fully
deductible to arrive at AGI
In the current year, Oate paid $900 toward continuing education courses (not at a qualified higher
education institution and not qualified for any tax credits) and was not reimbursed by her employer
Employee un-reimbursed business expenses are deductible as miscellaneous
deductions subject to the 2% threshold on Schedule A.
During the current year, Oate had investment interest expense that did not exceed her net investment
Investment interest expense is deductible up to net investment income. Unused
expenses can be carried forward indefinitely.
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