Above-Line deductions and losses Flashcards
Which of the following statements about moving expenses is true?
A.
Mortgage payoff penalties and refitting carpets and draperies are deductible moving expenses.
B.
Temporary living expenses and expenses of getting or breaking a lease are deductible moving expenses.
C.
Pre-move househunting expenses and meal expenses are deductible moving expenses.
D.
Moving household goods and travel expenses (including lodging but not meals) to the new home are deductible moving expenses.
D.
Moving household goods and travel expenses (including lodging but not meals) to the new home are deductible moving expenses.
Answer (D) is correct.
The definition of moving expenses under Sec.217(b) includes only reasonable expenses of moving household goods and personal effects and of travel (including lodging) from the former residence to the new residence (Publication 521).
Clarence, a real estate professional, owned 10 rental properties. Clarence’s real estate activities are his sole occupation, which he works at all year. Throughout 2017, he was involved in the operation of all properties on a regular, continuous, and substantial basis. At the end of the year, his real estate operations resulted in a $75,000 net loss. Clarence’s spouse, Carlette, had received $90,000 in wages in 2017. Their only other income during the year was $5,000 interest. Which of the following statements is true?
A.
Clarence and Carlette may offset their $95,000 income with $25,000 of their real estate loss on their 2017 joint tax return if Clarence actively participated in the real estate activity.
B.
Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2017 joint tax return.
C.
Clarence and Carlette may not offset their $95,000 income with any real estate loss on their 2017 joint tax return.
D.
None of the answers are correct.
Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2017 joint tax return.
Answer B is correct.
Certain real estate professionals may be able to treat rental real estate activities as nonpassive [Code Sec. 469(c)(7)]. To qualify, (1) more than one-half of the personal services performed in trades or businesses by the taxpayer during the tax year must involve real property trades or businesses in which the taxpayer materially participates, and (2) the taxpayer must perform more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates. These two requirements must be satisfied by one spouse if a joint return is filed (Publication 925). Assuming that the requirements for the exception are satisfied, the passive activity loss rules are not applied, and Clarence and Carlette may offset their income with the entire $75,000 loss.
Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barry earned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings?
A.
$25,000
B.
$22,500
C.
$0
D.
$40,000
22,500
Answer B is correct.
Any rental activity is a passive activity, whether or not the taxpayer participates in the activity. An individual who actively participates in a rental real estate activity may use up to $25,000 of net losses from the rental real estate activity to offset other income. The $25,000 is reduced by 50% of the amount by which AGI (determined without regard to Social Security, IRA contributions, and passive losses) exceeds $100,000. Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000). Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%] and is therefore $22,500. If Barry does not actively participate, he is not allowed a deduction (Publication 925).
e following items are reported on Mr. and Mrs. Spice’s 2017 joint return:
Net profit on Mrs. Spice’s Schedule C of $40,000
Mr. Spice’s paid court-ordered alimony of $5,000
Self-Employment Tax of $5,650 on Mrs. Spice’s Schedule C profit ($2,825 employer’s portion)
Compute their adjusted gross income for 2017.
A.
$32,175
B.
$35,000
C.
$28,880
D.
$40,000
$32,175
Answer A is correct.
Alimony and separate maintenance payments are gross income to the recipient and deductible by the payor. In addition, self-employed individuals can deduct the employer’s portion of FICA taxes paid to arrive at AGI (Publication 17). For 2017, the deduction is for Mrs. Spice. Thus, the Spices’ AGI is equal to $32,175 ($40,000 – $5,000 – $2,825).
B.
$35,000
Contributions to an IRA must be made by the due date of the return, without regard to extensions to qualify for return year.
True.
False.
True.
Your answer is correct.
Subject to certain qualifying rules and limitations, an individual who is not an active participant in an employer-maintained retirement plan may make contributions to an IRA that are fully deductible, up to the lessor of $5,500 or 100% of his or her includible compensation. Contributions must be made by the due date of the return, without regard to extensions, to qualify for return year.
oe divorced Renee last year. During the current year, per the divorce decree, Joe made the following payments to Renee:
The entire mortgage payment on house jointly owned
$9,600
Tuition for their child
2,800
Child support
6,000
Life insurance premiums on policy owned by Renee
5,400
What is the amount Joe can deduct as alimony on his tax return?
A.
$8,200
B.
$5,400
C.
$10,200
D.
$11,400
0,200
Answer C is correct.
Section 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. Section 71(b) defines alimony as any payment in cash if (1) it is received under a divorce or separation instrument, (2) the instrument does not designate the payment as not includible in gross income, (3) the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4) there is no liability to make such payment for any period after the death of the payee spouse. The mortgage payment attributable to Renee’s ownership, or $4,800, is deductible as alimony. The life insurance premium payment is deductible as well (Publication 17). Therefore, the total alimony deduction is $10,200.
aWhich of the following is a deductible moving expense?
A.
Meals while moving from your old residence to your new residence.
B.
Travel expenses incurred to move members of your household to your new home.
C.
Temporary living expenses while occupying quarters in the area.
D.
Travel expenses, meals, and lodging for pre-move househunting trips.
Travel expenses incurred to move members of your household to your new home.
Answer B is correct.
The definition of moving expenses under Sec. 217(b) includes only reasonable expenses of moving household goods and personal effects and of travel (including lodging) from the former residence to the new residence [Sec. 217(b)(1)]. Indirect moving expenses, including househunting trips, meals during the move, and temporary living expenses, are not deductible (Publication 521).
Larry purchased 100 shares of ABC stock on May 31, Year 1, for $100 per share. On October 28, Year 1, he sold the 100 shares for $90 per share. On November 22, Year 1, his wife, Vickie, purchased 100 shares of ABC stock for $80 per share. Vickie held the stock until September 30, Year 2. On that date, she sold the stock for $110 per share. They filed married filing separately on all returns.
A.
Vickie has short-term gain of $3,000 on her Year 2 tax return.
B.
Vickie will have a short-term gain of $3,000 on her Year 2 tax return, and Larry takes the short-term loss of $1,000 on his Year 1 tax return.
C.
Larry has a short-term loss of $1,000 on his Year 1 tax return.
D.
Vickie will have a long-term gain of $2,000 on her Year 2 tax return and Larry will not have any capital loss on his Year 1 tax return.
Vickie will have a long-term gain of $2,000 on her Year 2 tax return and Larry will not have any capital loss on his Year 1 tax return.
Answer D is correct.
Publication 550 states, “You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade, or
Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.” Larry’s unrecognized loss can be used to reduce Vickie’s gain [$11,000 selling price – ($8,000 purchase price + $1,000 Larry’s unrecognized loss) = $2,000 recognized gain]. The holding periods are added together, creating a long-term capital gain.
All of the following are requirements for a payment to be alimony (under instruments executed after 1984), except
A.
Payments cannot be a transfer of services.
B.
Payments are not required after death of the recipient spouse.
C.
Payments are required by a divorce or separation instrument.
D.
Payments can be in cash or property.
D.
Payments can be in cash or property.
Answer (D) is correct.
Sec.215 allows a deduction for alimony or separate maintenance payments (Sec.71). Sec.71(b) defines alimony as any payment in cash if (1)it is received under a divorce or separation instrument, (2)the instrument does not designate the payment as not includible in gross income, (3)the payee spouse and payor spouse are not members of the same household at the time the payment is made, and (4)there is no liability to make such payment for any period after the death of the payee spouse. Thus, if the payments are in services or property and not cash, they cannot be considered alimony [Publication17 and IRC Sec.215, Sec.71(b)].
Payments to a third party that are in lieu of payments of alimony directly to a former spouse can qualify as alimony.
True.
False.
True.
Your answer is correct.
Payments of cash to a third party made at the written request of the payee spouse will qualify as alimony. Payments are often made on behalf of the payee spouse, such as payments for mortgages, rent, medical costs, or education.
All of the following are true about Health Savings Accounts EXCEPT
A.
The taxpayer need not have the insurance for the whole year to contribute the full amount.
B.
The amount that may be contributed to a taxpayer’s Health Savings Account does not depend on the nature of the taxpayer’s coverage and age.
C.
A Health Savings Account can be a tax-exempt trust.
D.
A Health Savings Account can be a custodial account set up with a U.S. financial institution.
B.
The amount that may be contributed to a taxpayer’s Health Savings Account does not depend on the nature of the taxpayer’s coverage and age.
Answer B is correct.
The amount that may be contributed to a taxpayer’s Health Savings Account depends on the nature of the taxpayer’s coverage and age. A Health Savings Account is a tax-exempt trust or custodial account set up with a U.S. financial institution in which money can be saved exclusively for future medical expenses. The taxpayer is no longer required to have the insurance for the whole year to contribute the full amount.
The at-risk rules A. Limit a taxpayer’s deductible losses from investment activities.
B.
Apply to business and income-producing activities on a combined basis.
C.
Apply at the entity level for partnerships and S corporations.
D.
Limit the type of deductions in income-producing activities.
risk rules
A.
Limit a taxpayer’s deductible losses from investment activities.
Answer A is correct.
The at-risk rules are contained in Sec.465 and limit a taxpayer’s deductible losses from each business and income-producing activity to the amount for which the taxpayer is at risk with respect to that activity. Although originally designed to limit deductible losses from tax shelters, the at-risk rules apply across the board to most activities (Publication 925).
Barry is a lawyer. He owns 10 apartment buildings that are managed by his brother’s real estate business. At the end of the year, the apartment buildings resulted in a $40,000 loss. Barryearned $80,000 in wages. His wife, Claire, earned $20,000 from her part-time job. Their other income included $5,000 in dividends from their mutual funds. They had no other income. How much of the rental loss can Barry use assuming Barry actively participates in the apartment buildings? A. $22,500 B. $40,000 C. $0 D. $25,000
A.
$22,500
Answer (A) is correct.
. An individual who actively participates in a rental real estate activity may use up to $25,000 of net losses from the rental real estate activity to offset other income.
o Social Security, IRA contributions, and passive losses) exceeds $100,000. Barry has AGI of $105,000 ($80,000 + $20,000 + $5,000).
IF Social Security+Retirement contr=>100,000 then $25,000 is reduced 50%
Accordingly, his allowable $25,000 deduction will be reduced by $2,500 [($105,000 – $100,000) × 50%] and is therefore $22,500. If Barry does not actively participate, he is not allowed a deduction (Publication 925).
Erica received $40,000 in wages, and her husband Paul had a net loss of $2,000 on his Schedule C. Paul materially participated in his Schedule C activity. They had interest income of $500. Paul also had a $28,000 loss from a rental real estate activity in which he actively participates. How much of the rental loss can they deduct on their current-year joint income tax return?
A.
$25,500
B.
$500
C.
$25,000
D.
$28,000
$25,000
Answer C is correct.
Since Paul is deemed to actively participate in the rental real estate activity and Paul and Erica’s adjusted gross income is less than $100,000, they are allowed to deduct $25,000 against other income (Publication 925).
The at-risk rules limit your losses from most activities to your loss or amount at risk, whichever is less. The at-risk rules must be applied before the passive activity rules.
True.
False.
True.
Your answer is correct.
The passive loss rules apply only if the taxpayer has usable basis after application of the basis rule limitations (applied first) and the at-risk rules limitations (applied second). A taxpayer is at risk if (s)he is personally liable for repayment of a loan borrowed for use in the activity or if (s)he pledged property as security for a loan (Sec. 465).
