106 terms

Tax - Chapter 9

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One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed).
False
What is described is a criterion for employee classification.
The IRS will issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor.
True
A ruling from the IRS can be obtained by filing Form SS-8.
In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C.
True
A taxpayer with two jobs may be both an employee (Form 2106) and self-employed (Schedule C).
A statutory employee is not a common law employee but is subject to Social Security tax.
True
A statutory employee is subject to Social Security tax.
Jake performs services for Maude. If Maude provides a helper and tools, this is indicative of independent contractor (rather than employee) status.
False
Because Jake does not provide his own helper and tools, this indicates that he is probably not an independent contractor.
For tax purposes, a statutory employee is treated the same as a common law employee.
False
Among other differences, statutory employees claim their expenses as deductions for AGI on Schedule C.
If an individual is subject to the direction or control of another only to the extent of the end result but not as to the means of accomplishment, an employer-employee relationship does not exist.
True
The work-related expenses of an independent contractor will be subject to the 2%-of-AGI floor.
False
The expenses are deductions for AGI. Only certain itemized deductions are subject to the 2% limitation.
After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job. Ann may deduct the mileage between her first and second job.
True
The deduction is based on the mileage between the first and the second job.
A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
True
After the automatic mileage rate has been set by the IRS for a year, it cannot later be changed by the IRS.
False
In the past and because of rising fuel costs, the IRS has raised the rates in midyear.
In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
True
If taxpayer lives and works in a metropolitan area and a significant commute is involved, car insurance premiums could be quite costly.
A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking.
True
Such costs are deductible under both methods.
A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method.
False
No such deduction is allowed under either method.
A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
True
An adjustment to the basis of the automobile will have to be made for the depreciation deemed taken under the automatic mileage method.
Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.
False
A change is permitted if MACRS (statutory percentage method) depreciation has not been used or the § 179 election to expense was not made.
For tax purposes, "travel" is a broader classification than "transportation."
True
Travel expenses include transportation expenses and meals and lodging while away from home in the pursuit of a trade or business.
Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home.
False
The absence must be a period substantially longer than an ordinary day's work and must require rest.
James has a job that compels him to go to many different states during the year. It is possible that James was never away from his tax home during the year.
True
This could be the case of a long-haul truck driver where his tax home goes with him.
Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama).
False
Marvin's tax home is where his principal job is located. This is determined by considering numerous factors, among which are the level of income earned and the amount of time spent. Thus, it is incorrect to resolve the tax home issue without more facts.
A taxpayer who lives and works in Kansas City is sent to Chicago on an eight-day business trip. While in Chicago, taxpayer uses the hotel valet service to have some laundry done. The valet charge is a nondeductible personal travel expense.
False
Valet service is part of the travel expense deduction.
The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year.
True
A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible.
False
For domestic mixed travel (i.e., both business and personal), no allocation of transportation is required.
Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting, after which he spends three days touring Scotland. All of his air fare is deductible.
True
Bob meets the seven-days-or-less exception.
Eileen lives and works in Mobile. She travels to Rome for an eight-day business meeting, after which she spends two days touring Italy. All of Eileen's airfare is deductible.
True
Eileen meets the less-than-25%-personal-time exception.
Liam just graduated from college. Because it is his first job, the cost of moving his personal belongings from his parents' home to the job site does not qualify for the moving expense deduction.
False
There is no prohibition against claiming moving expenses if the first job is involved.
Sick of her 65 mile daily commute, Edna purchases a condo that is only four miles from her job. Edna's moving expenses to her new condo are not allowed and cannot be claimed by her as a deduction.
True
Edna does not have qualified moving expenses since she did not change job locations.
In November 2016, Katie incurs unreimbursed moving expenses to accept a new job. Katie cannot deduct any of these expenses when she timely files her 2016 income tax return since she has not yet satisfied the 39-week time test.
False
The deduction can be claimed even if the time test has not yet been met.
In May 2016, after 11 months on a new job, Ken is fired after he assaults a customer. Ken must include in his gross income for 2016 any deduction for moving expenses he may have claimed on his 2015 tax return.
False
Since Ken worked for 11 months, he has already satisfied the 39-week time test.
A moving expense deduction is allowed even if at the time of the move the taxpayer did not have a job at the new location.
True
As long as the taxpayer ultimately satisfies the time test, it does not matter when the work assignment is obtained.
Kelly, an unemployed architect, moves from Boston to Phoenix to accept a job as a chef at a restaurant. Kelly's moving expenses are not deductible because her new job is in a different trade or business.
False
For moving expenses to be deductible, a taxpayer need not remain in the same trade or business.
Alexis (a CPA) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national accounting firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee).
False
The change does not matter for purposes of the moving expense deduction.
Qualified moving expenses include the cost of lodging but not meals during the move.
True
Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
True
At age 65, Camilla retires from her job in Boston and moves to Florida. As a retiree, she is not subject to the time test in deducting her moving expenses
False
Camilla is not an expatriate and does not come under that exception.
After completing an overseas assignment in Oslo (Norway), Daniel retires from Pelican Corporation and moves to a retirement community in Key West (Florida). Daniel's moving expenses from Oslo to Key West are deductible as they are exempt from the time test.
True
A special exception for retiring expatriates applies.
An education expense deduction may be allowed even if the education results in a promotion or pay raise for the employee.
True
There is no prohibition as to this result in deducting education expenses.
Lloyd, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible.
False
A deduction might be available under the § 222 qualified tuition for higher education provision. Here, it does not matter that a new skill is being acquired.
Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense.
True
If the education involves the taxpayer being away from home (i.e., in travel status).
There is no cutback adjustment for meals and entertainment as to employees who are subject to regulation by the U.S. Department of Transportation.
False
The cutback adjustment applies, but at a reduced rate.
Mallard Corporation pays for a trip to Aruba for its two top salespersons. This expense is subject to the cutback adjustment.
False
The cost of the trips to Aruba are additional compensation to the employees involved. Consequently, they are not subject to the cutback adjustment and are fully deductible by Mallard Corporation. They are also taxed as income to the employees.
Flamingo Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment.
True
A taxpayer takes six clients to an NBA playoff game. If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $60 ($120 × 50% cutback adjustment) per ticket is deductible.
True
$60 ($120 × 50% cutback adjustment) per ticket is deductible.
Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. All of Ethan's annual dues for his club membership are deductible.
False
Dues to country clubs are not deductible.
Jackson gives his supervisor and her husband each a $30 box of chocolates at Christmas. Jackson may claim only $25 as a deduction.
False
As gifts to supervisors and spouses are not deductible, Jackson has no deduction.
On their birthdays, Lily sends gift certificates (each valued at $25) to Caden (a key client) and to each of Caden's two minor children. Lily can deduct only $25 as to these gifts.
True
These gifts will be aggregated in applying the $25 limit.
Travis holds rights to a skybox (containing 10 seats) at Memorial Stadium which he uses to entertain key clients. At one sporting event, he took only six clients since three were ill. Even so, Travis may still deduct the appropriate cost of all ten seats.
True
In the case of an office in the home deduction, the exclusive business use test does not apply when the home is used as a daycare center.
True
Mixed use (i.e., business and personal) of the home is permitted in daycare situations.
If a taxpayer does not own a home but rents an apartment, the office in the home deduction is not available.
False
The only difference would be a substitution of rent expense for depreciation. Otherwise, the deduction is equally available.
A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.
False
The office in the home deduction will be allowed if the taxpayer is self-employed.
Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.
True
For tax year 2015, Taylor used the simplified method of determining her office in the home deduction. For 2016, Taylor must continue to use the simplified method and cannot switch to the regular (actual expense) method
False
A new choice is available each year. Taylor cannot, however, change the choice she made for 2015.
Under the simplified method, the maximum office in the home deduction allowed is the greater of $1,500 or the office square feet × $5.
False
The deduction is office square feet x $5 but not to exceed $1,500 or the net income from the business.
If the cost of uniforms is deductible, their maintenance cost (e.g., laundry, dry cleaning, alterations) also is deductible.
True
Tired of renting, Dr. Smith buys the academic robes she will wear at her college's graduation procession. The cost of this attire does not qualify as a uniform expense.
False
These robes do qualify as they are not adaptable for ordinary wear.
Frank, a recently retired FBI agent, pays job search expenses to obtain a position with a city police department. Frank's job search expenses do qualify as deductions.
True
It appears that Frank is seeking a job in the same trade or business (i.e., law enforcement).
After graduating from college with a degree in chemistry, Alberto obtains a job as a chemist with DuPont. Alberto's job search expenses qualify as deductions.
False
Job search expenses incurred in obtaining the first job are not deductible.
Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
True
No job change requirement exists.
Madison is an instructor of fine arts at a local community college. If she spends $600 (not reimbursed) on art supplies for her classes, $250 of this amount can be claimed as a deduction for AGI.
False
The $250 special rule for school supplies applies only to elementary and secondary school teachers.
Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.
True
In the case of a traditional IRA, however, the income will be taxed when distributed to the participant.
When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from the IRA upon retirement are fully taxed.
True
Contributions are deductible, while distributions are taxable.
By itself, credit card receipts will not constitute adequate substantiation for travel expenses.
True
The credit card receipts establish the date, place, and amount of the expenditure. Because neither the business relationship nor the business purpose is established, the substantiation is incomplete.
The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations in the country.
False
The Federal per diem rates are different for different locations in the United States.
A taxpayer who claims the standard deduction will not avoid the 2%-of-AGI floor on unreimbursed employee expenses.
False
The 2%-of-AGI floor applies only to miscellaneous itemized deductions. A taxpayer who claims the standard deduction will not be itemizing.
For self-employed taxpayers, travel expenses are not subject to the 2%-of-AGI floor.
True
For self-employed taxpayers, travel expenses are deductions for adjusted gross income. The 2%-of-AGI floor applies only to certain deductions from AGI, such as unreimbursed employee expenses.
Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer.
True
Aiden performs services for Lucas. Which, if any, of the following factors indicate that Aiden is an employee, rather than an independent contractor?
a. Aiden provides his own support services (e.g., work assistants).
b. Aiden obtained his training (i.e., job skills) from his father.
c. Aiden is paid based on hours worked.
d. Aiden makes his services available to others.
c. Aiden is paid based on hours worked.
Jordan performs services for Ryan. Which, if any, of the following factors indicate that Jordan is an independent contractor, rather than an employee?

a. Ryan sets the work schedule.
b. Ryan provides the tools used.
c. Jordan files a Form 2106 with his Form 1040.
d. Jordan is paid based on tasks performed.
e. None of these.
d. Jordan is paid based on tasks performed.
Which, if any, of the following factors is not a characteristic of independent contractor status?

a. Work-related expenses are reported on Form 2106.
b. Receipt of a Form 1099 reporting payments received.
c. Workplace fringe benefits are not available.
d. Services are performed for more than one party.
a. Work-related expenses are reported on Form 2106.
A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons:

a. Avoids the cutback adjustment as to business meals.
b. All of the self-employment tax is deductible for income tax purposes.
c. Work-related expenses are not subject to the 2%-of-AGI floor.
d. A Schedule C does not have to be filed.
c. Work-related expenses are not subject to the 2%-of-AGI floor.
Independent contractors are also subject to the cutback adjustment (choice a.). All of the self-employment tax is not deductible (choice b.). Because all work-related expenses are deductions for AGI, the 2%-of-AGI reduction is avoided (choice c.). Work-related expenses will have to be reported on Schedule C (choice d.).
A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons:
a. To claim unreimbursed work-related expenses as a deduction for AGI.
b. To avoid the self-employment tax.
c. To avoid the cutback adjustment on unreimbursed business entertainment expenses.
d. To avoid the 2%-of-AGI floor on unreimbursed work-related expenses.
e. None of these.
ANSWER: b
RATIONALE: The self-employment tax is twice the Social Security equivalent imposed on employees (choice b.). Most unreimbursed employee expenses are deductions from AGI (choice a.) and will be subject to the 2%-of-AGI adjustment (choice d.). Unreimbursed entertainment expenses will be subject to the cutback adjustment (choice c.).
Statutory employees:
a. Report their expenses on Form 2106.
b. Include common law employees.
c. Are subject to income tax withholdings.
d. Claim their expenses as deductions for AGI.
e. None of these.
ANSWER: d
RATIONALE: Their expenses are reported on Schedule C, not Form 2106 (choice a.). Although subject to Social Security tax, they are not subject to income tax withholdings (choice c.). Statutory employees are not common law employees (choice b.). Expenses are deductions for AGI (choice d.).
Corey is the city sales manager for "RIBS," a national fast food franchise. Every working day, Corey drives his car as follows:

Miles
Home to office 20
Office to RIBS No. 1 15
RIBS No. 1 to No. 2 18
RIBS No. 2 to No. 3 13
RIBS No. 3 to home 30

Corey's deductible mileage is:
a. 0 miles.
b. 50 miles.
c. 66 miles.
d. 76 miles.
e. None of these.
ANSWER: e
RATIONALE: 15 miles + 18 miles + 13 miles = 46 miles. The mileage for driving from his home to the office (20 miles) and from the last worksite to home (30 miles) is not deductible.
When using the automatic mileage method, which, if any, of the following expenses also can be claimed?
a. Engine tune-up.
b. Parking.
c. Interest on automobile loan.
d. MACRS depreciation.
e. None of these.
ANSWER: b
RATIONALE: Choices a., c., and d. would be allowed under the actual cost method.
Under the actual cost method, which, if any, of the following expenses will not be allowed?
a. Car registration fees.
b. Auto insurance.
c. Interest expense on a car loan (taxpayer is an employee).
d. Dues to auto clubs.
e. All of these will be allowed.
ANSWER: c
RATIONALE: Interest on a car loan is deductible only by a self-employed taxpayer (not an employee)—choice c. (This assumes the car financing is not handled with a home equity loan—see Chapter 10.)
Dave is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City. When the company opens new stores in Boise, Dave is given the task of supervising their initial operation. For three months, he works weekdays in Boise and returns home on weekends. He spends $350 returning to Salt Lake City but would have spent $410 had he stayed in Boise for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction?
a. $0, since the trips are personal and not work related.
b. $0, since Dave's tax home has changed from Salt Lake City to Boise.
c. $60
d. $350
e. $410
ANSWER: d
RATIONALE: Dave's assignment in Boise is temporary, so his tax home has not changed (choice b.). Dave's deduction is limited to the lesser of what he actually spent and what he would have spent had he not returned home (choice d.).
Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction?

a.
Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice.

b.
Dr. Brown, a surgeon, attends a two-day seminar on financial planning.

c.
Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills.

d.
Myrna went on a two-week vacation in Boston. While there, she visited her employer's home office to have lunch with former co-workers.

e.
All of these.
ANSWER:
a
During the year, John went from Milwaukee to Alaska on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are:

Air fare $3,200
Lodging 900
Meals 800
Entertainment 600

Presuming no reimbursement, deductible expenses are:
a. $3,200.
b. $3,900.
c. $4,800.
d. $5,500.
e. None of these.
ANSWER: c
RATIONALE: $3,200 + $900 + $700 [50%($800 + $600)] = $4,800. No allocation is required for domestic transportation costs (i.e., the airfare) since the trip is primarily business related.
In terms of meeting the distance test for purposes of deducting moving expenses, which of the following statements is correct?
a. The taxpayer's new job location must be at least 50 miles away from the old job.
b. The taxpayer's new residence must be at least 50 miles away from the new job.
c. The taxpayer's new residence must be at least 50 miles away from the old residence.
d. The taxpayer's new job location must be at least 50 miles farther from the old residence than the old residence was to the old job.
e. None of these.
ANSWER: d
RATIONALE: The distance comparison is between the old residence to the old job and old residence to new job (choice d.). In this regard, the location of the new residence is immaterial (choices b. and c.), as is the distance between the old and new jobs (choice a.).
As to meeting the time test for purposes of deducting moving expenses, which of the following statements is correct?
a. Work at the new location must involve a full-time job—part-time job will not suffice.
b. The taxpayer has two years in which to satisfy the 39-weeks or 78-weeks requirement.
c. The time test is waived for persons whose move follows retirement.
d. The moving expense deduction cannot be claimed if the taxpayer has not yet met the time test.
e. None of these.
ANSWER: a
RATIONALE: Full-time status (not part-time) is required (choice a.). The two-year limitation applies only to the 78-week option—twelve months is required for the 39-week option (choice b.). The retirement waiver applies only to expatriates (choice c.).
Rachel is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During the year, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $4,100 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Rachel has a:
a. Deduction for and deduction from AGI of $0.
b. Deduction for AGI of $4,000 and deduction from AGI of $800.
c. Deduction for AGI of $4,000 and deduction from AGI of $700.
d. Deduction for AGI of $4,100 and deduction from AGI of $700.
e. None of these.
ANSWER: b
RATIONALE: Section 222 allows up to $4,000 for qualified tuition and related expenses. As Rachel spent $4,100, she can claim only $4,000 as a deduction for AGI. The remaining expenses of $800 ($100 + $300 + $200 + $200) can be claimed as deductions from AGI.
The § 222 deduction for tuition and related expenses is available:
a. Only if the taxpayer itemizes deductions from AGI.
b. To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit.
c. To cover the tuition of a son who does not qualify as taxpayer's dependent.
d. Only if job related.
e. None of these.
ANSWER: e
RATIONALE: The § 222 deduction is a deduction for AGI (choice a.). The deduction is not available when the lifetime learning credit is used (choice b.). The student involved is not a dependent of the taxpayer (choice c.). The education need not be job related (choice d.).
The § 222 deduction for tuition and related expenses is available:
a. Regardless of the amount of a taxpayer's MAGI.
b. To cover room and board expenses to attend college.
c. To a married taxpayer filing a separate return.
d. Even if a taxpayer does claim the standard deduction.
e. None of these.
ANSWER: d
RATIONALE: No deduction at all is allowed if the taxpayer has AGI in excess of $80,000 ($160,000 in the case of a joint return) (choice a.). Section 222 does not cover room and board (choice b.). In order to claim a deduction under § 222, a married taxpayer must file a joint return (choice c.). Since § 222 provides for a deduction for AGI, it does not matter if a taxpayer claims the standard deduction.
Which, if any, of the following is subject to a cutback adjustment?
a. An airline pilot for an executive jet rental company who pays his own travel expenses.
b. Meals provided at cost to employees by a cafeteria funded by the employer.
c. Fourth of July company picnic for employees.
d. A trip to Bermuda awarded to the company's top salesperson.
e. None of these.
ANSWER: a
RATIONALE: Although a reduced rate is in effect, the cutback adjustment still applies to persons subject to regulation by the U.S. Department of Transportation.
Robert entertains several of his key clients on January 1 of the current year. Expenses paid by Robert are as follows:

Cab fare $ 60
Cover charge at supper club 200
Dinner at club 800
Tips to waiter 160

Presuming proper substantiation, Robert's deduction is:

a.
$610.

b.
$640.

c.
$740.

d.
$1,220.

e.
None of these.
ANSWER:
b
RATIONALE:
$60 + [50% × ($200 + $800 + $160)] = $640.
Which, if any, of the following is an advantage of using the simplified method for determining the office in the home deduction?

a.
No depreciation on the personal residence has to be computed.

b.
The exclusive use requirement does not have to be met.

c.
Allows the expense to be classified as a deduction for AGI.

d.
Can also be used for a residence that is rented (not owned) by the taxpayer.

e.
None of these.
ANSWER:
a
RATIONALE:
The exclusive use requirement (choice b.) always has to be met for an office in the home deduction to be available. The method chosen for arriving at the deduction has no relevance to how it is classified (i.e., deduction for or from AGI)--choice c. Either the simplified method or the regular method can be used for rented property (choice d.).
Which of the following expenses, if any, qualify as deductible?
a. Contributions to a Coverdell Education Savings Account (CESA).
b. Contributions to a qualified tuition program (§ 529 plan).
c. Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX).
d. Contribution to a traditional IRA.
e. None of these.
ANSWER: d
RATIONALE: Although the benefits paid out are nontaxable, neither the contribution to CESAs (choice a.) nor § 529 plans (choice b.) are deductible. Since being an FBI agent and a city manager do not appear to be in the same trade or business (law enforcement), the job hunting expense does not qualify (choice c.).
Which, if any, of the following expenses is subject to the 2%-of-AGI floor?
a. Qualified tuition expenses under § 222.
b. Contribution to traditional IRA.
c. Cost of a CPA exam review course—taxpayer just began employment with an accounting firm.
d. Office in the home deduction for a self-employed taxpayer.
e. None of these.
ANSWER: e
RATIONALE: Choices a., b., and d. are deductions for AGI. Choice c. is not deductible.
Which, if any, of the following expenses is subject to the 2%-of-AGI floor?
a. Gambling losses (to the extent of gambling gains).
b. Moving expenses (not reimbursed by employer).
c. Teaching supplies (in excess of $250) purchased by a fifth grade teacher.
d. Union dues of self-employed machinist.
e. None of these.
ANSWER: c
RATIONALE: Moving expenses and teaching supplies (up to $250) are deductions for AGI (choice b.). Likewise, the union dues of a self-employed taxpayer are classified as a deduction for AGI. Gambling losses are miscellaneous itemized deductions but are not subject to the 2% adjustment (choice a.).
Which, if any, of the following expenses are not subject to the 2%-of-AGI floor?
a. Safety shoes purchased by an plumber employed by a company.
b. Reimbursed employee expenses. Taxpayer-employee renders an adequate accounting to the employer.
c. Unreimbursed employee expenses.
d. Tax return preparation fee paid by a non-employed retiree.
e. None of these.
ANSWER: b
RATIONALE: Being employed, all job-related expenses are deductions from AGI (choice a.). All employee expenses, unless reimbursed pursuant to an adequate accounting, are subject to the 2%-of-AGI floor (choices a. and c.).
One of the tax advantages of being self-employed (rather than being an employee) is:
a. The self-employment tax is lower than the Social Security tax.
b. The cutback adjustment does not apply.
c. The actual cost method for deducting the business use of an automobile can be selected.
d. Job-related expenses are deductions for AGI.
e. A deduction for an office in the home is available.
ANSWER: d
RATIONALE: The self-employment tax is double what the employee pays (choice a.). The cutback adjustment also applies to self-employed taxpayers (choice b.). Job-related expenses are reported on Schedule C (rather than Schedule A) which results in deduction-for-AGI treatment (choice d.). The actual cost method and the deduction for office in the home are equally available to both employees and self-employed persons (choices c. and e.).
After graduating from college, Clint obtained employment in Omaha. In moving from his parents' home in Baltimore to Omaha, Clint incurred the following expenses:

Transportation $ 700
Meals 380
Lodging 400
Cost of moving household goods 3,500

a. How much may Clint deduct as moving expense?
b. Would any deduction be allowed if Clint claimed the standard deduction for the year of the move? Explain.
a. $4,600 ($700 + $400 + $3,500). No deduction is allowed for meals.

b. Yes. Moving expenses are deductions for AGI and can be claimed regardless of whether a taxpayer takes the standard deduction or chooses to itemize.
. Arnold is employed as an assistant manager in the furniture division of a national chain of department stores. He is a recent college graduate with a degree in marketing. During 2016, he enrolls in the evening MBA program of a local university and incurs the following expenses: tuition, $4,200; books and computer supplies, $800; transportation expense to and from the university, $450; and meals while on campus, $400. Arnold is single and his annual AGI is $64,000. As to these expenses, what are Arnold's:

a. Deductions for AGI?
b. Deductions from AGI?
​a.$4,000. Although the tuition was $4,200, § 222 imposes a limitation of $4,000.

b. $1,450. $200 (excess tuition not allowed under § 222) + $800 (books and computer supplies) + $450 (transportation) = $1,450. No deduction is allowed for meals, since Arnold is not in travel status. Further adjustment will be required due to the 2%-of-AGI limitation on certain itemized deductions.


A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA.
a. True
b. False
ANSWER: False
RATIONALE: For deductible contributions, the adjusted basis is zero. For nondeductible contributions, the basis for a traditional IRA is equal to the amount of the contributions.
. If a married taxpayer is an active participant in another qualified retirement plan, the traditional IRA deduction phaseout begins at $98,000 of AGI for a joint return in 2016.

a.
True

b.
False
ANSWER:
True
. If an individual is ineligible to make a deductible contribution to a traditional IRA, nondeductible contributions of any amount can be made to a traditional IRA.

a.
True

b.
False
ANSWER:
False
RATIONALE:
Nondeductible contributions up to the statutory limit of $5,500 in 2016 (assuming not eligible for catch up provision) can be made.
The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,500 or the individual's compensation for the year.
a. True
b. False
ANSWER: True
RATIONALE: The normal statutory limits apply to the Roth IRA as well as to a traditional IRA.
An individual, age 40, who is not subject to the phase-out provision may contribute a nondeductible amount to a Roth IRA up to $5,500 per year in 2016.

a.
True

b.
False
ANSWER:
True
RATIONALE:
The $5,500 maximum contribution in 2016 to a Roth IRA is not deductible. Contributions to a Roth IRA are never deductible.
Joyce, age 40, and Sam, age 42, who have been married for seven years, are both active participants in qualified retirement plans. Their total AGI for 2016 is $120,000. Each is employed and earns a salary of $65,000. What are their combined deductible contributions to traditional IRAs?

a.
$0

b.
$3,000

c.
$4,000

d.
$8,000

e.
None of the above
ANSWER:
a
RATIONALE:
Joyce and Sam may contribute a total of $11,000 ($5,500 each) to a traditional IRA, but because their AGI exceeds the phaseout ceiling of $118,000 in 2016, $0 is deductible.
Dana, age 31 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $120,000. What amount, if any, may Dana contribute to a Roth IRA in 2016?

a.
$0

b.
$3,225

c.
$4,400

d.
$5,500

e.
None of the above
ANSWER:
c
RATIONALE:
Dana may contribute $4,033 to a Roth IRA in 2016, calculated as follows:


$120,000 AGI - $117,000 threshold = $3,000 excess AGI




$3,000/$15,000 phaseout range × $5,500 = $1,100 phaseout




$5,500 maximum contributions - $1,100 phaseout = $4,400 contribution ceiling
Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan. His modified AGI is $55,000 in 2016. The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:
a. $2,800.
b. $3,500.
c. $5,000.
d. $5,500.
e. None of the above.
ANSWER: d
RATIONALE: Sammy can deduct $5,500 because he is not an active participant in a qualified retirement plan.
Frank established a Roth IRA at age 25 and contributed a total of $131,244 to it over 38 years. The account is now worth $376,000. How much of these funds can Frank withdraw tax-free?
a. $0
b. $131,244
c. $244,756
d. $376,000
e. None of the above
ANSWER: d
RATIONALE: $376,000. Assuming that Frank met the AGI limitations at the time of his contributions, all of the funds may be withdrawn tax-free. He satisfies the five-year holding period requirement for a Roth IRA and is over age 59 1/2 at the time of the distribution.
Mary establishes a Roth IRA at age 50 and contributes the maximum amount per year to the Roth IRA for 15 years. The account is now worth $199,000, consisting of $75,000 in contributions plus $124,000 in accumulated earnings. How much can Mary withdraw tax-free?
a. $0
b. $75,000
c. $124,000
d. $199,000
e. None of the above
ANSWER: d
RATIONALE: Assuming that Mary meets the income limitation at the time of the contributions to the Roth IRA, all of the funds may be withdrawn tax-free. She satisfies the five-year holding period for a Roth IRA and is over age 59 1/2 at the time of the distribution.
During the year, Sophie went from Omaha to Lima (Peru) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Sophie's unreimbursed expenses are:

Air fare
$3,000
Lodging
800
Meals
600
Entertainment
400

Sophie's deductible expenses are:

a.
$4,300.

b.
$3,100.

c.
$2,800.

d.
$2,500.

e.
None of these.
ANSWER:
b
RATIONALE:
$1,800 [60% (6 days business/10 day trip) × $3,000 (air fare)] + $800 + $500 [50%($600 + $400)] = $3,100. The air fare has to be allocated as Sophie did not meet either the seven days (or less) or less than 25% personal use exceptions for foreign travel.
During the year, Walt travels from Seattle to Tokyo (Japan) on business. His time was spent as follows: 2 days travel (one day each way), 2 days business, and 2 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion):

Air fare
$3,000
Lodging
2,000
Meals and entertainment
1,000

Presuming no reimbursement, Walt's deductible expenses are:

a.
$3,500.

b.
$4,500.

c.
$5,500.

d.
$6,000.

e.
None of these.
ANSWER:
c
RATIONALE:
$3,000 + $2,000 + (50% × $1,000) = $5,500 . Since the 7-days-or-less exception applies, the full airfare ($3,000) is allowed.
Due to a merger, Allison transfers from Miami to Chicago. Under a new job description, she is reclassified from employee to independent contractor status. Her moving expenses, which are not reimbursed, are as follows:

Transportation $1,400
Meals 400
Lodging 500
Cost of moving household goods 4,000
Penalty for breaking lease on Miami apartment 3,000

Allison's deductible moving expense is:
a. $0.
b. $5,900.
c. $6,100.
d. $8,900.
e. $9,300.
ANSWER: b
RATIONALE: $1,400 (transportation) + $500 (lodging) + $4,000 (moving household goods) = $5,900 (choice b.). Meals are not qualified moving expenses (choices c. and e.) nor are penalties for breaking a lease (choices d. and e.). It is immaterial that Allison's status as an employee changed to that of an independent contractor (choice a.).