5. Above-the-Line Deductions & Loss

Question 1

Can primary and secondary school educators claim unreimbursed expenses paid or incurred for books and supplies used as an above-the-line deduction?

Answer 1

Yes, unreimbursed expenses for books and supplies used in the classroom can be claimed as an above-the-line deduction.

Question 2

Can primary and secondary school educators claim unreimbursed expenses paid or incurred for books and supplies used as an above-the-line deduction?

Answer 2

Yes, unreimbursed expenses for books and supplies used in the classroom can be claimed as an above-the-line deduction.

Question 3

Primary and secondary school educators may claim an above-the-line deduction of up to how much for unreimbursed expenses paid or incurred for books and supplies used in the classroom?

Answer 3

Primary and secondary school educators may claim an above-the-line deduction for up to $300 annually. Each taxpayer (educator) on a joint return may deduct up to $300.

Question 4

What materials are eligible for deduction under the above-the-line deduction provided for primary and secondary school educators?

Answer 4

Books, supplies, computer equipment (including related software and services) and other equipment, and supplementary materials used in the classroom qualify for the deduction.

Question 5

Who is an eligible educator to claim an educator expense deduction?

Answer 5

An eligible educator is an individual who, for at least 900 hours during a school year, is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide.

Question 6

Who is an eligible educator to claim an educator expense deduction?

Answer 6

An eligible educator is an individual who, for at least 900 hours during a school year, is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide.

Question 7

What is a Health Savings Account?

Answer 7

A Health Savings Account is a tax-exempt trust or custodial account set up with a U.S. financial institution in which money is saved exclusively for future medical expenses. This account must be used in conjunction with a high-deductible health plan.

Question 8

How much can a 70-year-old contribute to a Health Savings Account?

Answer 8

Contributions are not allowed for taxpayers aged 65 and over.

Question 9

What are the maximum contribution amounts to health savings accounts for self-only and family coverage?

Answer 9

For self-only coverage, the taxpayer or his or her employer can contribute up to $3,650 ($4,650 for taxpayers aged 55-64). For family coverage, the taxpayer or his or her employer can contribute up to $7,300 ($8,300 for taxpayers aged 55-64).

Question 10

Is a taxpayer required to have insurance the entire year to contribute the full amount to their Health Savings Account?

Answer 10

No, the taxpayer is not required to have the insurance for the whole year to contribute the full amount.

Question 11

What portion of FICA taxes paid are deductible by a self-employed person to arrive at his or her AGI?

Answer 11

A self-employed person is allowed a deduction for the employer’s portion of the FICA taxes paid to arrive at his or her AGI.

Question 12

For 2022, what percentage of self-employment taxes are deductible by a self-employed individual?

Answer 12

Generally, the deduction for the employer’s share of FICA taxes is equal to 50% of the self-employment tax or
a. 6.2% of the first $147,000 of net self-employment income plus
b. 1.45% of net self-employment income (no cap).

Question 13

What are some examples of qualified retirement or profit-sharing plans that may result in a deduction for self-employed individuals?

Answer 13

Examples of qualified retirement plans that may result in a deduction for self-employed individuals include SEP and SIMPLE plans.

Question 14

What are the maximum annual deduction and the annual contribution limit for a SEP (Keogh) plan?

Answer 14

The maximum annual deduction is limited to the lesser of 25% of the self-employed earnings or $61,000 (indexed for inflation). Contributions to the plan are subtracted from net earnings to calculate self-employed earnings, creating a circular computation. For convenience, a standard rate of 20% is used to calculate the allowed deduction.

Question 15

What are the maximum annual deduction and the annual contribution limit for a SEP (Keogh) plan?

Answer 15

The maximum annual deduction is limited to the lesser of 25% of the self-employed earnings or $61,000 (indexed for inflation). Contributions to the plan are subtracted from net earnings to calculate self-employed earnings, creating a circular computation. For convenience, a standard rate of 20% is used to calculate the allowed deduction.

Question 16

A self-employed individual can deduct what percentage of payments made for health insurance coverage for himself or herself, his or her spouse, and his or her dependents?

Answer 16

A self-employed individual can deduct 100% of payments made for health insurance coverage for the individual, his or her spouse, and his or her dependents.

Question 17

Are alimony and separate maintenance payments included in the gross income of the recipient, and are they deductible by the payor?

Answer 17

For divorces executed before 2019, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor. For divorces executed after 2018, alimony is nondeductible to the payor and not included in the gross income of the recipient.

Question 18

Are alimony and separate maintenance payments included in the gross income of the recipient, and are they deductible by the payor?

Answer 18

For divorces executed before 2019, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor. For divorces executed after 2018, alimony is nondeductible to the payor and not included in the gross income of the recipient.

Question 19

The requirements for qualified alimony payments include that

Answer 19

1.Payment is made in cash or equivalent,
2.Payment is received by or on behalf of a spouse under a divorce or separation agreement,
3.The payee spouse and payor spouse must not be members of the same household at the time of the payments,
4.The payor spouse is not liable for any payments after the death of the payee spouse, and
5.The spouses must not file joint returns with each other.

Question 20

The requirements for qualified alimony payments include that

Answer 20

1.Payment is made in cash or equivalent,
2.Payment is received by or on behalf of a spouse under a divorce or separation agreement,
3.The payee spouse and payor spouse must not be members of the same household at the time of the payments,
4.The payor spouse is not liable for any payments after the death of the payee spouse, and
5.The spouses must not file joint returns with each other.

Question 21

Are child support payments deductible?

Answer 21

Child support payments and any part of an alimony payment designated as child support are not deductible.

Question 22

Can a taxpayer’s contributions to an IRA be deductible?

Answer 22

Yes, the taxpayer may make contributions to an IRA that are fully deductible, up to the lesser of $6,000 or 100% of his or her includible compensation.

Question 23

Can an individual make deductible contributions to an IRA for that individual’s nonworking spouse?

Answer 23

Yes, an additional $6,000 may be contributed to the IRA for the taxpayer’s nonworking spouse if a joint return is filed. However, the combined contributions cannot exceed their combined compensation for the year.

Question 24

What increased amount of contributions to an IRA can a 50-year-old individual deduct?

Answer 24

If an individual has reached age 50 before the close of the tax year, the regular contribution limit is increased by $1,000.

Question 25

Excessive contributions (over the deductible amount) to an IRA may be subject to what?

Answer 25

Excessive contributions (over the deductible amount) may be subject to a 6% excise tax.

Question 26

By what date must an owner of an IRA begin receiving distributions from the IRA?

Answer 26

The owner of an IRA must begin receiving distributions by April 1 of the calendar year following the calendar year in which the employee attains age 72 (or the calendar year in which the employee retires, if later, for active participants in an employer-sponsored plan).

Question 27

By what date must an owner of an IRA begin receiving distributions from the IRA?

Answer 27

The owner of an IRA must begin receiving distributions by April 1 of the calendar year following the calendar year in which the employee attains age 72 (or the calendar year in which the employee retires, if later, for active participants in an employer-sponsored plan).

Question 28

IRA distributions made before what age for a reason other than death or disability are subject to taxation as well as a 10% penalty tax?

Answer 28

IRA distributions made before age 59 1/2 for a reason other than death or disability are subject to taxation as well as a 10% penalty tax, with some exceptions.

Question 29

IRA distributions made before age 59 1/2 for a reason other than death or disability will not be subject to the 10% penalty tax if the distributions are used

Answer 29

1.To pay medical expenses in excess of 7.5% of AGI
2.For qualified first-time homebuyer expenses up to $10,000
3.To pay for “qualified higher education expenses” for the individual or his or her lineal relatives
4.For qualified first-year birth or adoption of a child expenses up to $5,000

Question 30

IRA distributions made before age 59 1/2 for a reason other than death or disability will not be subject to the 10% penalty tax if the distributions are used

Answer 30

1.To pay medical expenses in excess of 7.5% of AGI
2.For qualified first-time homebuyer expenses up to $10,000
3.To pay for “qualified higher education expenses” for the individual or his or her lineal relatives
4.For qualified first-year birth or adoption of a child expenses up to $5,000

Question 31

What amount of interest paid on qualified educational loans may taxpayers deduct in 2022?

Answer 31

Taxpayers may deduct $2,500 of interest paid on qualified educational loans in 2022.

Question 32

Qualified expenses for the student loan interest deduction include

Answer 32

1.Room and board
2.Tuition and fees
3.Books, supplies, and equipment
4.Other necessary expenses (e.g., transportation)

Question 33

May a taxpayer deduct the penalty incurred for the early withdrawal of funds from certain savings accounts?

Answer 33

Yes, an above-the-line deduction of the penalty for the early withdrawal of funds from certificates of deposit or other time savings accounts is allowed.

Question 34

Can a taxpayer deduct jury duty pay returned to an employer?

Answer 34

Yes, jury duty pay returned to an employer is deductible by the employee from gross income.

Question 35

A taxpayer’s loss is limited by three different rules. The loss is limited

Answer 35

1.To the amount of the taxpayer’s basis in the activity,
2.By the at-risk rules, and
3.By the passive activity rules.

Question 36

The at-risk rules apply to

Answer 36

Individuals, partners in partnerships, members in limited liability companies, shareholders of S corporations, trusts, estates, and closely held C corporations.

Question 37

What does a person’s initial at-risk amount include?

Answer 37

A person’s initial at-risk amount includes money contributed, the adjusted basis (AB) of property contributed, and borrowed amounts.

Question 38

What amounts borrowed are included in a person’s at-risk amount?

Answer 38

A person’s at-risk amount includes amounts borrowed only to the extent that, for the debt, the person has either personal liability or property pledged as security (recourse debt).

Question 39

Is a loss attributable to a person’s passive activities allowable?

Answer 39

Yes, the amount of loss attributable to a person’s passive activities is allowable as a deduction or credit, but only against and to the extent of gross income or tax attributable to those passive activities.

Question 39

Is a loss attributable to a person’s passive activities allowable?

Answer 39

Yes, the amount of loss attributable to a person’s passive activities is allowable as a deduction or credit, but only against and to the extent of gross income or tax attributable to those passive activities.

Question 40

The passive activity loss rules apply to

Answer 40

Individuals, estates, trusts, personal service corporations, and closely held corporations.

Question 41

What is a passive activity?

Answer 41

A passive activity is either rental activity or a trade or business in which the person does not materially participate.

Question 42

In order for an individual to have materially participated in an activity during the tax year, they must have performed one of the following:

Answer 42

1.Participated more than 500 hours;
2.The individual’s participation constitutes substantially all of the participation in the activity;
3.Participated for more than 100 hours and exceeded the participation of any other individual;
4.The activity is a significant participation activity in which the taxpayer participates more than 100 hours and the taxpayer’s participation in all significant participation activities exceeds 500 hours;
5.Materially participated in the activity for any 5 years of the 10 years preceding the year in question;
6.Materially participated in a personal service activity for any 3 years preceding the year in question; or
7.Satisfies a facts and circumstances test proving that the taxpayer participated in the activity on a regular, continuous, and substantial basis for more than 100 hours.

Question 43

Passive activity rules do not apply to

Answer 43

1.Active income, loss, or credit;
2.Portfolio income, loss, or credit; or
3.Casualty and theft losses, vacation home rental, qualified home mortgage interest, business use of home, or a working interest in an oil or gas well held through an entity that does not limit the person’s liability.

Question 44

Passive activity rules do not apply to

Answer 44

1.Active income, loss, or credit;
2.Portfolio income, loss, or credit; or
3.Casualty and theft losses, vacation home rental, qualified home mortgage interest, business use of home, or a working interest in an oil or gas well held through an entity that does not limit the person’s liability.

Question 45

When may a person be entitled to deduct up to $25,000 of loss from rental real estate activities?

Answer 45

A person who actively participates in rental real estate activity is entitled to deduct up to $25,000 of losses from the passive activity from other than passive income. The person also must own 10% or more of the activity for the entire year and have modified AGI of less than $150,000.

Question 46

Which is a more stringent requirement, active participation or material participation?

Answer 46

Material participation is more stringent than active participation.

Question 47

What is active participation (under the passive activity loss limitation rules)?

Answer 47

Active participation is met with participation in management decisions or arranging for others to provide services (such as repairs).

Question 48

When may an individual avoid passive activity loss limitation treatment on a rental real estate activity?

Answer 48

When the following two requirements are met:
1.More than 50% of the individual’s personal services performed during the year are performed in the real property trades or businesses in which the individual materially participates and
2.The individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates.

Question 49

In what year may the suspended and current-year losses from a passive activity become fully deductible?

Answer 49

Suspended (and current-year) losses from a passive activity become deductible in full in the year the taxpayer completely disposes of all interest in the passive activity.

Question 50

When does a wash sale occur?

Answer 50

A wash sale occurs when a taxpayer sells or trades an asset at a loss and, within 30 days before or after the sale, does one of the following:
1.Purchases a substantially identical asset,
2.Acquires a substantially identical asset in a fully taxable trade, or
3.Acquires a contract or option to buy a substantially identical asset.

Question 51

May a taxpayer deduct losses from wash sales?

Answer 51

No, losses from wash sales are not deductible.