Above the Line Deductions

Question 1

The following items are reported on Mr. and Mrs. Spice’s 2023 joint return:
Net profit on Mrs. Spice’s Schedule C of $40,000

Mr. Spice’s paid court-ordered alimony of $5,000 for a pre-2019 divorce

Self-Employment Tax of $5,650 on Mrs.
Spice’s Schedule C profit ($2,825 employer’s portion)
Compute their adjusted gross income for 2023.

Answer 1

For pre-2019, 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 2023, the deduction is for Mrs. Spice. Thus, the Spices’ AGI is equal to $32,175 ($40,000 net profit – $5,000 alimony – $2,825 employer’s portion of self-employment tax).

Question 2

Alimony

Answer 2

For pre-2019, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor.

Question 3

Alimony after 2018

Answer 3

not deductible

Question 4

requirements for qualified alimony payments.

Answer 4

The payment must be made in cash or equivalent.

Payment must be received on behalf of a spouse under a divorce or separation agreement.

Payee spouse and payor spouse must not be members of the same household at the time of payments.

The payor spouse is not liable for any payments after the death of the payee spouse.

The spouses must not file joint returns with each other.

In addition, child support payments and any part of an alimony payment designated as child support are not deductible. Since child support payments are not deductible to the payor, these payments are not considered alimony

Question 5

All of the following are requirements for a payment to be alimony (under instruments executed after 1984 but before 2019),

Answer 5

Payments are required by a divorce or separation instrument.

Payments are not required after death of the recipient spouse.

Payments cannot be a transfer of services.

Question 6

IRA distributions only up to $10,000 used for qualified first-time homebuyer expenses are

Answer 6

not subject to the 10% penalty tax.

Question 7

IRA Distributions made to pay medical expenses in excess

Answer 7

of 7.5% of AGI.

Question 8

During the year, Sally Sales purchased tickets to three theater performances and two sporting events. Each event includes a meal during the event. She purchased two tickets for each event for a total of 10 tickets, each separately stating the cost of the performance/event and the meal. Sally gave these tickets away to legitimate business customers and has records to prove it. Sally did not go with these customers to the event or performance. Sally can claim

Answer 8

transportation between home and a temporary work location in the same trade or business may be deducted.

Thus, the transportation expenses to visit clients and the business-related seminars are all deductible.
Mileage $3,603 (5,500 miles × $.655/mile)
Airfare 300
Deductible travel costs
$3,903transportation between home and a temporary work location in the same trade or business may be deducted.

Thus, the transportation expenses to visit clients and the business-related seminars are all deductible.
Mileage $3,603 (5,500 miles × $.655/mile)
Airfare 300
Deductible travel costs
$3,903

Question 9

Individuals are allowed to deduct

Answer 9

interest paid during the tax year on any qualified education loan.

Question 10

qualified education expense for purposes of the student loan interest deduction?

Answer 10

amounts paid for the following items: tuition and fees; room and board; books, supplies, and equipment; and other necessary expenses, such as transportation.

Question 11

Gross income exceeds the upper limit of the

Answer 11

phaseout range for the student loan interest deduction ($90,000).

Question 12

if the Alimony payments are in services or property and not cash,

Answer 12

they cannot be considered alimony

Question 13

Section 219(g) limits the deductions made to IRAs by individuals filing a joint tax return when one or both are covered by their employers’ retirement plans.

For the taxpayer covered by the plan, the deduction is phased out beginning when AGI exceeds $116,000 in 2023.

Mr. and Mrs. Smith are both employed and file joint federal income tax returns.

both have IRAs, and their combined modified adjusted gross income was $53,000.

Mr. Smith contributed $6,500 to his IRA, and Mrs. Smith contributed $3,500 to her IRA. What is the maximum IRA deduction each is entitled to for 2023?

Answer 13

Because the Smiths’ income does not exceed the phaseout limit for active participants, they may deduct the entire contribution.

Question 14

Larry and Marge Strong, ages 45 and 46, are married and living together.

file joint federal income tax returns for 2023.

Larry is an active participant in his employer’s pension plan. Marge is not an active participant in any plan.

Each contributed the maximum allowed for the year of $6,500 to an individual retirement account (IRA) on February 1, 2024. Larry’s adjusted gross income is $141,000 and Marge’s is $82,000. The deductible portion of Marge’s contribution to her IRA is

Answer 14

Larry is an active plan participant, and his income exceeds the phaseout range ($116,000-$136,000 MFJ) for active plan participants, he is not allowed a deduction.

Marge is not an active plan participant; she may deduct her contribution as long as she does not exceed the AGI limits.

When one spouse is not an active plan participant, the IRA phaseout occurs when the couple’s AGI is between $218,000 and $228,000.

6500/(228000-218000) phaseout range) X (228000-223000(agi)= 3250

Question 15

Ms. Seabreeze had the following during the current year:
Alimony received (post-2018 divorce) $ 6,500
Wages 14,000
Net loss from self-employment
(10,000)
Interest income
5,000
For the purpose of an IRA, Ms. Seabreeze had compensation for the current year of

Answer 15

Alimony not taxable to recipient
Self Employment net loss not included
Insterest income is not earned

Compensation =14,000

Question 16

Who is eligible for an Archer MSA in 2023?

Answer 16

A maximum of only 750,000 individuals who have elected coverage in a high-deductible health plan and are either self-employed or employed by a small employer with no more than 50 workers when the Archer MSA is established (Publication 969).

Question 17

All of the following are true about Archer MSAs

Answer 17

deduction for an Archer MSA is not included with other medical expenses and is not subject to the 7.5% limitation.

Archer MSAs (previously called Medical Savings Accounts)

allow individuals who are self-employed or employed by a small employer and who are covered by a high-deductible health insurance plan to make tax-deductible contributions to an Archer MSA

Funds accumulated to pay medical expenses.

An Archer MSA can be rolled into a Health Savings Account tax-free.

Question 18

Jury duty

Answer 18

pay must be included in gross income,

but if it must be given to an employer because the employer continues to pay salary while the individual is serving on the jury, the amount of jury duty pay turned over to the employer can be deducted as an adjustment to gross income

Question 19

n the current year, Ms. Smith withdrew her funds from a time-savings account before maturity and was charged a penalty of $2,000 for early withdrawal. The interest earned on the account in the current year was $1,600.

Answer 19

Report $1,600 interest income; deduct penalty of $2,000 as an adjustment to gross income to arrive at adjusted gross income.

Question 20

Archer MSA contributions are subject to an annual limitation, which is

Answer 20

A percentage of the required “high deductible” health plan amount.
Family coverage is 75%

Individual coverage is 65%

Question 21

What amount can Self-employed persons may deduct from gross income for health insurance

Answer 21

100% of amounts paid during 2023 for health insurance for themselves, their spouses, and their dependents and, normally,

100% of amounts paid during 2022.

However, the couple cannot take a deduction for 2023 since Julie was eligible for an employer health plan even though she declined to participate (Publication 17).

Question 22

Rental Income is

Answer 22

Passive

Question 23

A person who actively participates in rental real estate activity is entitled to deduct up to

Answer 23

$25,000 of losses from the passive activity from other-than-passive income, provided that the individual’s income does not exceed $100,000.

Single individuals and married individuals filing jointly can qualify for the $25,000 amount.

Married individuals who live together for the entire year and file separately cannot qualify. Thus, Tom may deduct $25,000 of the loss (Publication 925).

Question 24

net operating losses and the at-risk limits are t

Answer 24

In applying at-risk limits to individuals, each item of leased Sec. 1245 equipment, farm, or oil and gas property is treated as a separate activity.

In applying at-risk limits to individuals, each item of leased Sec. 1245 equipment, farm, or oil and gas property is treated as a separate activity.

If the amounts that you borrow for use in the activity are secured by property not used in the activity, the amount considered at-risk is limited to the net fair market value (the fair market value on the date the property is pledged less any prior or superior claims to which it is subject) of your interest in the property.

Question 25

Section 465 generally limits losses from an activity for

Answer 25

each year to the amount the taxpayer has at-risk in the activity at year end.

Question 26

Certain real estate professionals may be able to treat rental real estate activities as nonpassive [Code Sec. 469(c)(7)].

Answer 26

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,

(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.

Question 27

Passive Income rules apply to

Answer 27

individuals,
estates,
trusts,
personal service corporations, and
closely held corporations (Publication 925).

Question 28

passive activity rules do not apply to

Answer 28

grantor trusts,
partnerships, and
S corporations directly,

they do apply to the owners of these entities.

Question 29

rules governing the existence of a passive activity

Answer 29

an individual must satisfy any one of the following tests:
(1) (S)he participates more than 500 hours;
(2) his or her participation constitutes substantially all of the participation in the activity;
(3) (s)he participates for more than 100 hours, and this participation is not less than the participation of any other individual;
(4) the activity is a “significant participation activity,” and his or her participation in all such activities exceeds 500 hours;
(5) (s)he materially participated in the activity for any 5 years of the 10 years that preceded the year in question;
(6) the activity is a “personal service activity,” and (s)he materially participated in the activity for any 3 years preceding the tax year in question; or
(7) (s)he satisfies a facts and circumstances test that requires him or her to show that (s)he participated on a regular, continuous, and substantial basis

Question 30

Passive Income

You participated in the activity for less than 100 hours, but you participated on a regular, continuous, and substantial basis.

Answer 30

if an individual participates in an activity for less than 100 hours, (s)he will be precluded from applying the facts and circumstances test.

Thus, it does not matter that the participation was on a regular, continuous, and substantial basis since it amounted to less than 100 hours

Question 31

two kinds of passive activities:

Answer 31

(1) trade or business activities in which the taxpayer does not materially participate and

(2) rental activities, unless the taxpayer is a real estate professional (

Question 32

Which of the following is NOT an example of a passive activity?

Answer 32

tax code excludes from the passive activity definition any working interest in oil or gas property in which the form of ownership does not limit liability. This is true whether or not the taxpayer-owner materially participates in the activity

Question 33

John’s estate has a 20% interest in the property. John was actively involved in managing the complex from 2013 until his death in 2019. His estate may offset its portion of the rental loss against any nonpassive income. True or False

Answer 33

False

An estate is considered to participate actively in an activity for only 2 years following the death of a taxpayer who actively participated in the year of death.

Question 34

Steve and his wife Barbara each have a 5% interest in the property and manage the apartments. They had nonpassive income of $30,000 for the year. They may offset their share of the rental loss against their nonpassive income.

Answer 34

An individual is not treated as actively participating in a rental real estate activity if the individual’s and spouse’s interests are less than 10% of all interests in the activity [Sec. 469(i)(6)].

Since Steve and his wife together own 10% of the property and manage the apartments, they qualify for allowing up to $25,000 of rental real estate losses against nonpassive income (Publication 925). Their share of the losses is $4,000 ($40,000 × 10%).

Question 35

Kathy has an interest as a limited partner in the property. Her nonpassive income for the year is $50,000. She may offset her portion of the rental loss against her nonpassive income up to $25,000.

True or False

Answer 35

False

An interest as a limited partner is usually not treated as an activity in which the taxpayer actively participates.