Above-the-Line Deductions and Losses Flashcards

1
Q
A taxpayer who materially participates in rental real estate activities in the current year may offset some losses and credits from the activity against nonpassive income (salary, self-employment earnings, etc.) provided that the taxpayer performs more than 50% of his or her personal services for the year in real property trades or businesses in which (s)he materially participates and the number of service hours performed in those real property trades or businesses in which (s)he materially participates is more than
A.	750
B.	1,000
C.	500
D.	450
A

750
Answer (A) is correct.
After December 31, 1993, the losses from rental real estate activities may offset nonpassive income if the taxpayer meets two requirements: (1) More than 50% of personal services performed during the year are performed in the real property trades or businesses in which (s)he materially participates, and (2) the taxpayer performs more than 750 hours of service in the real property trades or businesses in which (s)he materially participates [Publication 925 and Sec. 469(c)(7)(B)].

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q
Ms. Seabreeze had the following during the current year:
Alimony received (post-2018 divorce)
$  6,000 
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
A.	$6,000
B.	$4,000
C.	$14,000
D.	$19,000
A
$14,000
Answer (C) is correct.
Section 219(f) defines compensation as earned income. Wages are the most common example of earned income. Alimony from a post-2018 divorce is not taxable to the recipient and therefore is not included as compensation for this purpose. There is no provision for reducing earned income by net losses from self-employment. Interest income is not earned income. Therefore, for the purpose of an IRA, Ms. Seabreeze had compensation of
Wages
$14,000
Total compensation
$14,000
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q
Larry and Marge Strong are married and living together. They have decided to file joint federal income tax returns for 2019. Larry is an active participant in his employer’s pension plan. Marge is not an active participant in any plan. Each contributed $6,000 to an individual retirement account (IRA) on February 1, 2020. Larry’s adjusted gross income is $100,000 and Marge’s is $98,000. The deductible portion of Marge’s contribution to her IRA is
A.	$0
B.	$1,200
C.	$6,000
D.	$3,000
A

$3,000
Answer (D) is correct.
The Taxpayer Relief Act of 1997 revised the limits for deductions for active plan participants. Since Larry is an active plan participant, and his income exceeds the phaseout range provided in Sec. 219(g)(8) for active plan participants, he is not allowed a deduction. However, since Marge is not an active plan participant (in 1998 and later years), she may deduct her contribution as long as she does not exceed the AGI limits in Sec. 219(g)(7). When one spouse is not an active plan participant, the IRA phaseout occurs when the couple’s AGI is between $193,000 and $203,000. Since the combined AGI of Larry and Marge equals $198,000, the phaseout limit applies. A shortcut method of calculating the reduced dollar limit is to subtract the AGI from the initial amount at which the deduction is limited to zero ($203,000 in this case) and multiply the difference by 0.6. Accordingly, the deduction is limited to $3,000 [($203,000 – $198,000) × 0.6].
If the shortcut calculation of the reduced dollar limit produces a result that is not a multiple of $10, it is rounded to the next highest multiple of $10. However, if the result is less than $200 but more than zero, the reduced limit is $200.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q
Maria received $40,000 in wages, and her husband Scott had a net gain of $8,500 on a passive partnership interest. Scott also had a $35,000 loss from a rental real estate activity in which he actively participated. How much of the rental loss can they deduct on their current-year joint income tax return?
A.	$25,000
B.	$35,000
C.	$0
D.	$33,500
A

$33,500
Answer (D) is correct.
All rental activity is passive. However, a person who actively participates in rental real estate is allowed to deduct up to $25,000 of losses from the passive activity from other than passive income (Publication 925). Since Scott is deemed to actively participate in the rental real estate activity, he may offset the $8,500 of passive income with the passive loss and deduct an additional $25,000 of his wife’s active income, for a total of $33,500 ($8,500 + $25,000).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q
Caitlin served as a kindergarten aide for 1,000 hours. She incurred $350 in expenses for books and supplies used in the classroom and was not reimbursed by the school. What amount is Caitlin entitled to as the educator’s expense deduction on her income tax return?
A.	$175
B.	$350
C.	$250
D.	$0
A

$250
Answer (C) is correct.
Primary and secondary school educators may claim an above-the-line deduction for up to $250 annually in unreimbursed expenses paid or incurred for books and supplies used in the classroom. 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 (Publication 553). Therefore, Caitlin may deduct $250 as an educator’s expense.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q
James (33) and his wife Erica (31) established a Health Savings Account (in conjunction with a high-deductible health plan) on February 1, 2019. The annual health plan deductible is $10,000. What is the maximum amount that can be contributed to the Health Savings Account?
A.	$7,000
B.	$10,000
C.	$8,000
D.	$6,417
A

$7,000
Answer (A) is correct.
For family coverage, the taxpayer or his or her employer can contribute up to the amount of the annual health plan deductible, but not more than $7,000 for 2019. Under the last-month rule, a taxpayer is eligible for the entire year if the taxpayer is eligible on the first day of the last month of the year (Publication 969).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q
In 2019, Rusty paid $5,000 of interest on a qualified education loan. Rusty is not claimed as a dependent by another taxpayer. What is the maximum deduction available to him for the education loan interest?
A.	$2,000
B.	$5,000
C.	$2,500
D.	$0
A

$2,500
Answer (C) is correct.
Individuals are allowed to deduct interest paid during the tax year on any qualified education loan. The maximum amount that may be deducted is $2,500.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Under which condition may a taxpayer claim the student loan interest deduction?
A. The student loan is from a related person.
B. The taxpayer is legally obligated to pay interest on a qualified student loan.
C. The taxpayer’s filing status is married filing separately.
D. Someone is claiming an exemption for the taxpayer on his or her tax return.

A

The taxpayer is legally obligated to pay interest on a qualified student loan.
Answer (B) is correct.
According to Publication 17, a taxpayer may claim the student loan interest deduction if all four of the following requirements are met:
Filing status is any filing status except married filing separately.
No one else is claiming an exemption for the taxpayer on his or her tax return.
The taxpayer is legally obligated to pay interest on a qualified student loan.
The taxpayer paid interest on a qualified student loan.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Which of the following is NOT a payment deductible as alimony for pre-2019 divorces?
A. Payments for child support required by the divorce decree.
B. Payments for medical expenses of your spouse under the terms of the divorce decree.
C. Half of the mortgage payment on a home jointly owned with your ex-spouse when required by the divorce decree.
D. Payments for life insurance premiums required by the divorce decree.

A

Payments for child support required by the divorce decree.
Answer (A) is correct.
For pre-2019 divorces, alimony and separate maintenance payments are gross income to the recipient and deductible by the payor. The following are the requirements for qualified alimony payments.
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 (Publication 17).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Archer MSA contributions are subject to an annual limitation, which is
A. A percentage of the required “high deductible” health plan amount.
B. Only the income earned from the business in the case of a self-employed individual.
C. Only the compensation earned from the employer or the income earned from the business in the case of the self-employed.
D. Only the compensation earned from the employer.

A

A percentage of the required “high deductible” health plan amount.
Answer (A) is correct.
Participation in an Archer MSA is conditioned upon coverage under a high-deductible plan [Sec. 220(c)(2)]. Contributions are subject to an annual limitation, which is a percentage of the deductible of the required high-deductible health plan. For individual coverage, the annual limit is 65% of the deductible. For family coverage, the annual limit is 75% of the deductible. If one spouse has family coverage, both spouses fall under the 75% limit and must split the amount between themselves. No deduction is allowed if an individual received excludable employer contributions (Publication 969).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Which of the following would be considered passive activity income?
A. State, local, and foreign income tax refunds.
B. Personal service income.
C. Alaska Permanent Funds dividends.
D. None of the answers are correct.

A

None of the answers are correct.
Answer (D) is correct.
There are two kinds of passive activities: (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 (Publication 925).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Which of the following items might be considered alimony for a divorce executed prior to 2019?
A. Payments made for the 12-month period after the death of the recipient spouse.
B. Premium paid under a divorce or separation agreement for insurance to the extent that the other spouse owns the policy.
C. Child support payments.
D. Noncash payments.

A

Premium paid under a divorce or separation agreement for insurance to the extent that the other spouse owns the policy.
Answer (B) is correct.
For divorces executed prior to 2019, Sec. 215 allows a deduction for alimony or separate maintenance payment as defined under Sec. 71. For divorces executed prior to 2019, 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. Premiums paid under a divorce or separation agreement for insurance to the extent that the other spouse owns the policy may be considered alimony if the other conditions are met (Publication 17).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Joe divorced Renee in 2018. 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. $5,400
B. $11,400
C. $10,200
D. $8,200

A

$10,200
Answer (C) is correct.
For a pre-2019 divorce, Sec. 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. For a pre-2019 divorce, 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. The mortgage payment attributable to Renee’s ownership, or $4,800 ($9,600 payment × 50%), is deductible as alimony. The life insurance premium payment is deductible as well (Publication 17). Therefore, the total alimony deduction is $10,200 ($4,800 mortgage payment + $5,400 life insurance premiums).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Rick and Stacy were divorced in February of the current year. Requirements of the divorce decree and Stacy’s performance follow:
Transfer title to their residence to Rick. Stacy’s basis was $95,000, the fair market value was $105,000, and the residence was subject to a mortgage of $90,000.
Make the mortgage payments of $1,000 per month (beginning in March) for the remaining 20 years or until Rick dies, if sooner.
Pay Rick $500 per month (beginning in March) for 6 years or until Rick dies, if sooner. Of this amount, $200 is designated as child support.
Stacy’s current-year alimony deduction is

A. $15,000
B. $0
C. $18,000
D. $3,000

A

$0
Answer (B) is correct.
For divorces executed after 2018, alimony is nondeductible to the payor and not included in the gross income of the recipient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q
In the current year, Heidi, a self-employed individual, had net profits from her Schedule C business of $125,000. Besides her Schedule C deductions, Heidi took an $8,831 deduction for her Social Security taxes, and her deduction for self-employed health insurance was $650. Heidi also realized a $30,000 loss from her rental real estate activity in which she actively participated. What is Heidi’s deductible rental real estate loss for the current year?
A.	$12,825
B.	$25,000
C.	$12,500
D.	$12,175
A

$12,825
Answer (A) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. The health insurance, however, must be subtracted from her net profits, for a total of $124,350 ($125,000 net profits – $650 health insurance). Heidi’s adjusted gross income exceeds $100,000 by $24,350. Therefore, the $25,000 allowance is reduced by $12,175 ($24,350 × 50%). This leaves $12,825 of losses ($25,000 allowance – $12,175 reduction) that can be deducted (Publication 925).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When funds from an Archer MSA are distributed for qualified medical expenses, these funds are
A. Generally included in the income of the taxpayer.
B. Generally excluded from the income of the taxpayer.
C. Allocated between contributions made by the employer and the employee, and only the amount attributed to the contributions of the employee are included in income of the taxpayer.
D. Always included in the income of the taxpayer.

A

Generally excluded from the income of the taxpayer.
Answer (B) is correct.
Distributions for qualified medical expenses incurred for the benefit of the individual, a spouse, or dependents are generally excluded from income. Qualified medical expenses usually are unreimbursed expenses that would be eligible for the medical expenses deduction (Publication 17).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Mrs. Domino made deductible contributions to traditional individual retirement accounts for several years. Mrs. Domino decides to withdraw $10,000 from one of her accounts in 2019. Mrs. Domino is 61 years old. How does this transaction affect Mrs. Domino’s tax return for 2019?
A. Mrs. Domino does not have to report anything because she is older than 59 1/2 years.
B. Mrs. Domino does not have to report any amount because this was not withdrawn from a Roth IRA.
C. Mrs. Domino must report all of the distribution received but can elect to use the 10-year option.
D. Mrs. Domino must report the entire amount of $10,000.

A

Mrs. Domino must report the entire amount of $10,000.
Answer (D) is correct.
Traditional IRA contributions are made before-tax. Distributions made from a traditional IRA before the age of 59 1/2 years are subject to federal income tax and a 10% penalty tax. Distributions from a traditional IRA after the age of 59 1/2 years are subject to federal income tax only and must be reported. Mrs. Domino must report the distribution from her traditional IRA (Publication 17).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q
Julie and Frank were married on March 10. Both are full-time third-grade teachers, and they equally incurred a total of $350 in expenses for books and supplies used in the classroom and were not reimbursed by the school. What amount are they entitled to deduct as an education expense on their joint income tax return?
A.	$175
B.	$350
C.	$500
D.	$250
A

$350
Answer (B) is correct.
Primary and secondary school educators may claim a $250 deduction for AGI annually in unreimbursed expenses paid or incurred for books and supplies used in the classroom. For MFJ taxpayers, the deduction limit is doubled ($500) but no more than $250 each. The deduction may not exceed actual expenses of $350.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Who is eligible for an Archer MSA in 2019?
A. All individuals who elected coverage in a high-deductible health plan and are only employed by a small employer with no more than 50 workers when the Archer MSA is established.
B. All individuals who elected coverage in a high-deductible health plan.
C. 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).
D. A maximum of 750,000 individuals who have elected coverage in a high-deductible health plan and are only self-employed.

A

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).
Answer (C) is correct.
The Health Insurance Act of 1996 limited the availability of MSAs during the pilot period (1997-2000) to 750,000 individuals who buy a high-deductible health insurance plan and are either self-employed or employed by a small employer. The law defines a small employer as one with no more than 50 workers. The Archer MSA Program is still limited to 750,000 people (Publication 969).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q
Bonnie received $30,000 in wages, and her husband Clyde had a net loss of $2,500 on his Schedule C (the loss was not a hobby loss under the tax code). Clyde materially participated in his Schedule C activity. They had dividend income of $1,500. Clyde also had a $20,000 loss from a rental real estate activity in which he actively participated. How much of the rental loss can they deduct on their current-year joint income tax return?
A.	$10,000
B.	$20,000
C.	$0
D.	$2,500
A

$20,000
Answer (B) is correct.
Since Clyde is deemed to actively participate in the rental real estate activity, he avoids the passive activity limitation rules. Thus, they may deduct the entire amount of the loss (up to $25,000) from the rental real estate activity (Publication 527).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q
Mr. K paid $500 a month for 3 months to his estranged wife while they were negotiating a written separation agreement. Mr. K filed a separate return for the current year. An agreement reached June 1 of the current year required Mr. K to pay $300 a month as alimony. Mr. K made payments of $2,100 for the period June 1 to December 31 of the current year. What is Mr. K’s correct alimony deduction for the current year?
A.	$3,000
B.	$3,600
C.	$0
D.	$900
A

$0
Answer (C) is correct.
For divorces executed after 2018, alimony is nondeductible to the payor and not included in the gross income of the recipient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q
Todd and Susan divorced on September 1, 2019. As part of the divorce decree, beginning in September, Todd was to make payments of $2,000 a month for the balance of the year to Susan’s doctor for recent medical expenses, child support payments of $500 per month, and $1,500 a month for the mortgage payment on a jointly owned home. Susan and the children will continue to live in the home. What is the amount that Todd can deduct as alimony for 2019?
A.	$9,600
B.	$4,200
C.	$16,000
D.	$0
A

$0
Answer (D) is correct.
For post-2018 divorces, alimony is nondeductible to the payor and not included in the gross income of the recipient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q
Sol and Julia Crane are married and filed a joint return for 2019. Sol earned a salary of $125,000 in 2019 from his job at Troy Corporation, where he is covered by his employer’s pension plan. In addition, Sol and Julia earned interest of $5,000 in 2019 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2020, Sol contributed $6,000 to an IRA for himself and $6,000 to an IRA for his spouse. The allowable IRA deduction in the Cranes’ 2019 joint return is
A.	$12,000
B.	$6,000
C.	$11,000
D.	$0
A

$6,000
Answer (B) is correct.
Contributions may be made to an individual retirement account and deducted even if an employee is covered by an employer’s plan. The Taxpayer Relief Act of 1997 revised the limits for deductions for active plan participants. Since Sol is an active plan participant, and his income exceeds the phaseout range ($103,000 – $123,000) provided in Sec. 219(g)(8) for active plan participants, he is not allowed a deduction. However, since Julia is not an active plan participant (in 1998 and later years), she may deduct her contribution, as long as she does not exceed the AGI limits in Sec. 219(g)(7). The IRA phaseout rules do not apply to Julia since, when one spouse is not an active plan participant, the IRA phaseout does not occur until the couple’s AGI is between $193,000 and $203,000, which is not the case in this problem.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

With regard to the passive loss rules involving rental real estate activities, which one of the following statements is true?
A. The passive activity rules do not apply to taxpayers whose adjusted gross income is $300,000 or less.
B. The term “passive activity” loss limitations does not apply to a rental real estate activity when the individual performs more than 50% of his or her personal services during the year in real property trades or businesses in which (s)he materially participates and at least 750 hours of service are performed in those real property trades or businesses in which (s)he materially participates.
C. Gross investment income from interest and dividends not derived in the ordinary course of a trade or business is treated as passive activity income that can be offset by passive rental activity losses when the “active participation” requirement is not met.
D. Passive rental activity losses may be deducted only against passive income, but passive rental activity credits may be used against taxes attributable to nonpassive activities.

A

The term “passive activity” loss limitations does not apply to a rental real estate activity when the individual performs more than 50% of his or her personal services during the year in real property trades or businesses in which (s)he materially participates and at least 750 hours of service are performed in those real property trades or businesses in which (s)he materially participates.
Answer (B) is correct.
Passive activities generally include any activity involving the conduct of a trade or business or the production of income in which the taxpayer does not materially participate (Sec. 469). However, an individual may avoid passive activity limitation treatment on a rental real estate activity if 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. If 50% or less of the personal services performed are in real property trades or businesses, the individual will be subject to the passive activity limitation rules (Publication 925).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Which of the following is a true statement concerning losses from passive activities?
A. Losses from one passive activity may offset income from another passive activity.
B. Losses from each passive activity are not deductible, regardless of income earned in other passive activities.
C. The losses may offset passive income, such as interest and dividends, but not business income or earned income.
D. The rules apply to losses but not credits.

A

Losses from one passive activity may offset income from another passive activity.
Answer (A) is correct.
In general, losses from passive activities may not offset nonpassive income such as salary, interest, dividends, or active business income (Sec. 469). However, deductions from one passive activity may offset income from the same passive activity, and losses from one passive activity may generally offset income from another passive activity (Publication 925).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q
Rebecca graduated from college in 2018. She refinanced her qualified education loans in 2019 with another loan. She is not claimed as a dependent by another taxpayer. What is the maximum deduction available to her for the $3,000 paid for education loan interest in 2019?
A.	$3,000
B.	$0
C.	$2,500
D.	$1,500
A

$2,500
Answer (C) is correct.
Individuals are allowed to deduct interest paid during the tax year on any qualified education loan. The maximum deduction for 2019 is $2,500. A qualified education loan also encompasses debt used to refinance the qualified education loan. Note, however, that if a homeowner obtains a home equity loan to refinance the qualified education debt, the homeowner may not utilize both the mortgage interest deduction and the education loan interest deduction (Publication 17).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

All of the following are true about Health Savings Accounts EXCEPT
A. 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.
B. The taxpayer need not have the insurance for the whole year to contribute the full amount.
C. A Health Savings Account can be a custodial account set up with a U.S. financial institution.
D. A Health Savings Account can be a tax-exempt trust.

A

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 (A) 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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q
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.	$500
B.	$28,000
C.	$25,000
D.	$25,500
A

$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).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

All of the following types of income are considered includible compensation for purposes of deductible contributions to an individual retirement account EXCEPT
A. Self-employment income.
B. Partnership income of an active partner providing services to the partnership.
C. Pension distributions.
D. Wages.

A

Pension distributions.
Answer (C) is correct.
Section 219(f) defines compensation as earned income. Pension distributions are not generally considered earned income; rather, they are treated as a passive form of income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q
Ron and Stacy are divorced in 2017. He pays her $50,000 of alimony in 2018, $39,000 in 2019, and $28,000 in 2020. What is the amount of recapture that Ron must include in his 2020 income?
A.	$1,500
B.	$0
C.	$1,000
D.	$15,000
A
$1,500
Answer (A) is correct.
The recapture is computed as follows:
Alimony paid in 2nd year: $39,000
Alimony paid in 3rd year: $28,000
Add $15,000 floor to 28,000: $43,000
Line 1 minus line 3: $0
Alimony paid in 1st year: $50,000
Adjusted alimony paid in 2nd year (line 1 minus line 4): $39,000
Total alimony from 2nd and 3rd years: $67,000
Divide line 7 by 2: $33,500
Add $15,000: $48,500
Line 5 minus line 9: $1,500
Alimony recapture (line 10 plus line 4): $1,500
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q
Passive activity rules apply to
A.	S corporations.
B.	Partnerships.
C.	Grantor trusts.
D.	Closely held corporations.
A

Closely held corporations.
Answer (D) is correct.
Although passive activity rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. The passive activity rules apply to individuals, estates, trusts, personal service corporations, and closely held corporations (Publication 925).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q
Dr. J has adjusted gross income for the current year of $130,000 before the deduction for a $5,500 contribution to his IRA, and before any potential deduction for $40,000 of losses from rental real estate activities in which he actively participates. How much of the rental losses may he deduct if the rental real estate activities were acquired in the current year?
A.	$0
B.	$12,750
C.	$10,000
D.	$25,000
A

$10,000
Answer (C) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. Dr. J’s adjusted gross income exceeds $100,000 by $30,000 ($130,000 income – $100,000 threshold). Therefore, the $25,000 allowance is reduced by $15,000 ($30,000 × 50%). This leaves $10,000 of losses ($25,000 allowance – $15,000 reduction) that can be deducted (Publication 925).

33
Q

Which one of the following is NOT an adjustment to total income in arriving at adjusted gross income?
A. Portion of health insurance of self-employed persons.
B. Contributions to a Roth IRA.
C. Interest paid on student loans.
D. Certain contributions to a medical savings account.

A

Contributions to a Roth IRA.
Answer (B) is correct.
Section 408A(c)(1) disallows any deduction for contributions made to a Roth IRA (Publication 17).

34
Q

Bill took out a $100,000 non-recourse loan and bought an apartment building. The building is not security for the loan. Bill spent $25,000 of his own money on repairs before he rented the apartment building to the public. Bill is single, works full-time, and earns $80,000 per year. Bill’s loss from the rental real estate activity, in which he actively participates, is $30,000. He has no passive income. For what amount is Bill at-risk, and how much of Bill’s passive loss from his rental activity is deductible?

At-Risk
Passive Loss

A.	
$125,000
$30,000
B.	
$25,000  
$25,000
C.	
$100,000
$25,000
D.	
$125,000
$25,000
A

$25,000
$25,000
Answer (B) is correct.
IRS Publication 925 states that a taxpayer is not considered at risk for his or her share of any nonrecourse loan used to finance an activity or to acquire property used in the activity unless the loan is secured by property not used in the activity. Bill took out a nonrecourse loan, and the building is not security for the loan. Since Bill is deemed to actively participate in the rental real estate activity and Bill’s adjusted gross income is less than $100,000, he is allowed to deduct $25,000 against other income.
Authors’ note: Based on the information given, the answer is probably $25,000 at-risk and $25,000 passive loss. You are at-risk for qualified nonrecourse financing secured by real property used in the holding of real property. Since this problem stated that the building was not security for the loan (who would lend in that manner?) and no other real property was mentioned as security, we have to consider this loan to be non-risk.

35
Q

Which IRA distributions made to a taxpayer before age 59 1/2 are NOT subject to the 10% penalty tax?
A. All IRA distributions made to a taxpayer before age 59 1/2 are subject to the 10% penalty tax.
B. Distributions up to $100,000 used for qualified first-time homebuyer expenses.
C. Distributions used for qualified day care expenses for the taxpayer’s child.
D. Distributions made to pay medical expenses in excess of 7.5% of AGI.

A

Distributions made to pay medical expenses in excess of 7.5% of AGI.
Answer (D) is correct.
Most IRA distributions made to a taxpayer before age 59 1/2 are subject to taxation, as well as a 10% penalty tax. One of the exceptions is for distributions used to pay medical expenses in excess of 7.5% of AGI. These are not subject to the 10% penalty tax.

36
Q

All of the outstanding stock of Bryant Corporation is owned equally by three individuals. Bryant is not a personal service corporation. During the current year, Bryant had active rental real estate income of $250,000, a passive loss on the rental of an office building (acquired in 1989) of $300,000, and portfolio income of $150,000. The corporation earns more than 60% of its gross receipts from the rental real estate in which it materially participates. How much of Bryant’s income may be offset by the rental loss?
A. $0 rental income and $150,000 portfolio income.
B. $250,000 rental income and $50,000 portfolio income.
C. No income may be offset.
D. $250,000 rental income and $0 portfolio income.

A

$250,000 rental income and $50,000 portfolio income.
Answer (B) is correct.
Bryant Corporation is a closely held corporation because more than 50% of the value of its stock is held by five or fewer individuals during the last half of the year. After December 31, 1993, a closely held C corporation is not subject to the passive activity loss rules for real estate trades or businesses if during the tax year the corporation derives more than 50% of its gross receipts from the real property trades or businesses in which it materially participates [Sec.469(c)(7)(D) and Publication 925]. Therefore, Bryant may offset its $300,000 passive loss against active and portfolio income.

37
Q
For a divorce executed prior to 2019, the recapture rule for alimony may apply to a taxpayer if the taxpayer’s alimony payments decrease or cease during the first
A.	2 calendar years.
B.	4 calendar years.
C.	3 calendar years.
D.	5 calendar years.
A

3 calendar years.
Answer (C) is correct.
For a divorce executed prior to 2019, if the taxpayer’s alimony payments decrease or cease during the first 3 calendar years, the taxpayer may be subject to the recapture rule, which reassigns portions of payments from earlier years to later years.

38
Q
Horace and Matilda are married and filing a joint tax return for the year. Horace teaches a 3rd grade class and Matilda teaches a 6th grade class at Oak Elementary School. What is the maximum amount of qualified educator expenses they may deduct on their tax return for the year?
A.	$0
B.	$500
C.	$750
D.	$250
A

$500
Answer (B) is correct.
Primary and secondary school educators may claim an above-the-line deduction for up to $250 annually in unreimbursed expenses paid or incurred for books and supplies used in the classroom (Publication 17). For taxpayers who are married and filing jointly, the deduction is doubled ($500), as long as both taxpayers are eligible educators.

39
Q
Tom Brown, who is single, owns a rental apartment building property. This is the only rental property that Tom owns. He actively participates in this rental activity as he collects the rents and performs ordinary and necessary repairs. In 2019, Tom had a loss of $30,000 on this rental activity and had no reportable passive income. His adjusted gross income, without regard to this rental loss, is $60,000. How much of the rental loss may Tom deduct on his 2019 return?
A.	$30,000
B.	$0
C.	$25,000
D.	$6,000
A

$25,000
Answer (C) is correct.
All rental activity is passive. 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, 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).

40
Q

Each of the following would be one of the requirements for a payment to be alimony under instruments executed after 1984 but before 2019 EXCEPT
A. Payments are cash equivalents.
B. Payments are not made to and from spouses in the same household at the date of payment.
C. Payments are from spouses filing a joint return.
D. Payments are not designated in the instrument as not alimony.

A

Payments are from spouses filing a joint return.
Answer (C) is correct.
Section 215 allows a deduction for alimony or separate maintenance payments (Sec. 71) from a pre-2019 divorce. 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. However, the spouses cannot file a joint tax return when the payments are being made (Publication 17).

41
Q
During the current year, Amanda, who is single, received $110,000 in salary and realized a $30,000 loss from her rental real estate activities in which she actively participates. She contributed $2,000 to an IRA. What is the amount that Amanda may claim as loss from her current-year real estate activities?
A.	$30,000
B.	$25,000
C.	$20,000
D.	$21,000
A

$20,000
Answer (C) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000. Amanda’s adjusted gross income exceeds $100,000 by $10,000 [Sec. 469(i)(3)]. Therefore, the $25,000 allowance is reduced by $5,000 ($10,000 × 50%). This leaves $20,000 of losses that can be deducted (Publication 925).

42
Q

A payment by a taxpayer to a former spouse pursuant to an agreement executed prior to 2019 may qualify as alimony even though
A. The payment is made to keep up the taxpayer’s property.
B. The payment is designated as child support.
C. The payment is to a third party.
D. The liability to make the payment would survive the recipient spouse’s death.

A

The payment is to a third party.
Answer (C) is correct.
For divorces executed prior to 2019, 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 (Publication 17).

43
Q
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.	$22,500
B.	$25,000
C.	$40,000
D.	$0
A

$22,500
Answer (A) 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).

44
Q

Chris, age 35, contributes the following amounts to his self-only Health Savings Account:
$500 on April 30, 2019
$300 on September 16, 2019
$750 on December 31, 2019
$1,000 on February 5, 2020
$1,500 on April 30, 2020
What amounts are considered contributions to the Health Savings Account for 2019?

A. $2,550
B. $4,050
C. $3,500
D. $1,550

A

$2,550
Answer (A) is correct.
For self-only coverage, the taxpayer or his or her employer can contribute up to the amount of the annual health plan deductible, but not more than $3,500 (for taxpayers under 55). Contributions to a Health Savings Account for 2019 may be made until April 15, 2020 (Publication 969). Therefore, the contributions for 2019 equal $2,550 ($500 + $300 + $750 + $1,000).

45
Q

Employer contributions to an Archer MSA are
A. Not included in the income of the employee unless made through a cafeteria plan and included on the employee’s W-2.
B. Included in income.
C. None of the answers are correct.
D. Not included in the income of the employee and not included on the employee’s W-2.

A

Not included in the income of the employee unless made through a cafeteria plan and included on the employee’s W-2.
Answer (A) is correct.
Archer MSAs (formerly called Medical Savings Accounts) are like IRAs created to defray unreimbursed medical expenses. Contributions to the account by an individual are deductible from adjusted gross income, and contributions made by the employer are excluded from income (unless made through a cafeteria plan). Employee contributions must be reported on the employee’s W-2. Earnings of the fund are not included in taxable income for the current year (Publication 17).

46
Q

Starting in 2019, Mr. West must pay his former spouse $20,000 annually under a 2019 divorce decree in the following amounts:
$1,000 a month for mortgage payments (including principal and interest) on a jointly-owned home
$250 a month for tuition fees paid to a private school until their son attains the age of 18 or leaves the school prior to age 18
$5,000-a-year cash payment to the former Mrs. West
In addition to the above amounts, the former Mrs. West also received in 2019 a lump-sum amount of $150,000 from the sale of their other marital assets
Assume the parties did not file a joint return and were not members of the same household. Also, assume that there were no written statements between the parties as to how the amounts should be treated. What is the amount of Mr. West’s 2019 alimony deductions?

A. $20,000
B. $17,000
C. $0
D. $155,000

A

$0
Answer (C) is correct.
For divorces after 2018, child support continues to not be deductible, while alimony is no longer deductible.

47
Q
Miss Jones owns several rental properties, which she acquired in January of last year, and actively participates in all activities connected with the rentals. She received a salary of $42,300 from her advertising job in the current year. Her net rental loss for the current year was $60,000. What is the amount of rental loss that Miss Jones can deduct in the current year?
A.	$0
B.	$42,300
C.	$60,000
D.	$25,000
A

$25,000
Answer (D) is correct.
In the case of rental real estate activities in which an individual actively participates, up to $25,000 of losses from such activities are allowed each year against nonpassive income [Sec. 469(i)]. Since Miss Jones had an adjusted gross income of less than $100,000, no phaseout calculation is necessary, and the full $25,000 of losses may be deducted against her $42,300 of nonpassive (earned) income (Publication 925).

48
Q
Consider the following expenditures and determine the total amount that would be deducted as adjustments to income in arriving at adjusted gross income (assuming no income limitations and including appropriate amounts in Gross Income as required) on Form 1040, Individual Income Tax Return:
$1,000 interest paid on student loan
$2,000 paid to a deductible IRA plan
$100 jury duty pay given to the employer
Nondeductible expenses from the nonbusiness rental of personal property ($500 income received)
A.	$3,600
B.	$1,100
C.	$2,600
D.	$3,100
A

$3,100
Answer (D) is correct.
The $1,000 interest paid on a student loan is an allowed deduction in arriving at adjusted gross income (AGI) because individuals are allowed to deduct up to $2,500 of student loan interest as an adjustment to income (Publication 970). Employee contributions to an IRA are deductible on line 32 of Form 1040 Schedule 1. Jury duty pay must be included in income, but if jury duty pay 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. The expenses from the nonbusiness rental of personal property are nondeductible. Thus, the total deduction to be taken in arriving at AGI is $3,100 ($1,000 interest + $2,000 IRA contribution + $100 jury duty pay).

49
Q
Alex started his own welding business this year. He paid $8,000 for a truck, contributed $15,000 cash and paid $20,000 for tools for the business. His bank loaned $50,000 to buy a building for the business. The building secures the loan. What is Alex’s at-risk amount for this activity?
A.	$43,000
B.	$93,000
C.	$53,000
D.	$103,000
A

$43,000
Answer (A) is correct.
Section 465 generally limits losses from an activity for each year to the amount the taxpayer has at-risk in the activity at year end. A taxpayer is generally considered at-risk for money and the adjusted basis of property contributed to the activity and amounts borrowed for use in the activity. However, if amounts borrowed for use in the activity are secured by property used in the activity, those amounts are not considered at-risk. The at-risk amounts result only from amounts the taxpayer is personally liable for (Publication 925). Alex is personally liable for $43,000 ($8,000 truck + $15,000 cash + $20,000 tools).

50
Q
Kathy paid $8,000 of interest on qualified education loans in 2019. Kathy is not claimed as a dependent by another taxpayer. Since she graduated from medical school 7 years ago, she has faithfully paid the minimum interest due each month. What is the maximum deduction available to her for education loan interest in 2019?
A.	$2,500
B.	$8,000
C.	$0
D.	$500
A

$2,500
Answer (A) is correct.
Individuals are allowed to deduct interest paid during the tax year on any qualified education loan. The maximum amount that may be deducted is $2,500 in 2019 (Publication 17).

51
Q

Under the rules governing the existence of a passive activity, which of the following would NOT constitute material participation in a trade or business activity for the current tax year?
A. You participated in the activity for more than 500 hours.
B. You participated in the activity for less than 50 hours during the current year, but you materially participated in the activity for 5 of the 10 preceding years.
C. You participated in the activity for less than 100 hours, but you participated on a regular, continuous, and substantial basis.
D. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual for the year.

A

You participated in the activity for less than 100 hours, but you participated on a regular, continuous, and substantial basis.
Answer (C) is correct.
Generally, to be considered as materially participating in an activity during a tax year, 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 [Temporary Reg. Sec. 1.469-5T(a)]. The regulations state, however, that, 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 (Publication 925).

52
Q

An individual starts paying student loan interest in the current year. For how many years may the individual deduct a portion of the student loan interest?
A. Current year only.
B. Ten years.
C. Duration of time that interest is paid.
D. Five years.

A

Duration of time that interest is paid.
Answer (C) is correct.
Taxpayers are allowed a deduction for interest paid on qualified educational loans. In 2019, a taxpayer may deduct $2,500 of interest paid on qualified educational loans subject to phaseouts based on AGI. There is no time limit on how many years the individual may deduct a portion of the student loan interest. However, in order to be deducted, interest must actually be paid.

53
Q

All of the following statements relating to net operating losses and the at-risk limits are true EXCEPT
A. You are considered at-risk for the amount of money you borrow to contribute to an activity, other than activities involving the holding of real property, if the lender’s recourse is only to your interest in the activity.
B. 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.
C. 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.
D. If you have a loss in excess of your at-risk investment, the loss disallowed will not be allowed in subsequent years unless you increase your at-risk investment.

A

You are considered at-risk for the amount of money you borrow to contribute to an activity, other than activities involving the holding of real property, if the lender’s recourse is only to your interest in the activity.
Answer (A) is correct.
Section 465 generally limits losses from an activity for each year to the amount the taxpayer has at-risk in the activity at year end. A taxpayer is generally considered at-risk for money and the adjusted basis of property contributed to the activity and amounts borrowed for use in the activity. But amounts borrowed for use in the activity are not included as at-risk if the lender has no recourse against the borrower personally, except for certain qualified financing with respect to real property (Publication 925).

54
Q
Bernie is a self-employed accountant in 2019. He reported net income of $54,150 on his Schedule C for 2019. During the year, Bernie paid the following: $5,200 in child support, $5,000 in alimony (pre-2019 divorce), $6,000 in medical insurance premiums, self-employment tax of $7,650, and $2,000 to his IRA plan. What amounts are deductible in arriving at adjusted gross income?
A.	$25,850
B.	$20,025
C.	$16,825
D.	$22,025
A

$16,825
Answer (C) is correct.
Bernie is permitted to deduct certain expenses paid during the year from gross income. Alimony for pre-2019 divorces is deductible by the payor and income to the recipient. Medical insurance premiums are 100% deductible by self-employed individuals. Also, Bernie is permitted to deduct the employer’s portion of self-employment taxes paid ($3,825), calculated as $7,650 × 50%. Bernie is allowed a deduction for his IRA contribution (Publication 17). Therefore, the total deductions to calculate AGI are $16,825 ($5,000 + $6,000 + $3,825 + $2,000).

55
Q

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 2019, 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 2019. Their only other income during the year was $5,000 interest. Which of the following statements is true?
A. None of the answers are correct.
B. Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2019 joint tax return.
C. Clarence and Carlette may offset their $95,000 income with $25,000 of their real estate loss on their 2019 joint tax return if Clarence actively participated in the real estate activity.
D. Clarence and Carlette may not offset their $95,000 income with any real estate loss on their 2019 joint tax return.

A

Clarence and Carlette may fully offset their $95,000 income with their $75,000 real estate loss on their 2019 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.

56
Q
Your divorce decree, which became final in 2018, requires that you pay $400 a month, of which $250 is specified as child support. During 2019, you pay only $4,000, although in no month did you pay less than $250. What amount may you deduct and must your former spouse report as alimony?
A.	$2,500
B.	$1,800
C.	$1,000
D.	$3,000
A

$1,000
Answer (C) is correct.
Any part of a payment which the terms of the decree specify as a sum payable for the support of minor children is not includible in the recipient’s gross income and is not deductible by the payor [Sec. 71(c)]. If any payment is less than the amount specified in the decree, it will first be considered child support, until all the child support obligation is paid. The decree specified that $250 per month ($3,000 for the 12 months of the year) was for child support. For a pre-2019 divorce, the remaining $1,000 ($4,000 paid – $3,000 child support) is includible in the recipient’s gross income and deductible by the payor as alimony (Publication 504).

57
Q
Henry, a single taxpayer, completed his graduate degree in April of 2014 with a significant amount of student loan debt but now makes a modified adjusted gross income of $115,000 per year. Each year, Henry makes payments toward his debt. In 2019, Henry paid $16,000 toward the principal of his debt and $4,000 of interest. How much may Henry deduct on his 2019 tax return?
A.	$20,000
B.	$4,000
C.	$0
D.	$2,500
A

$0
Answer (C) is correct.
Henry’s adjusted gross income exceeds the upper limit of the phaseout range for the student loan interest deduction ($85,000). Therefore, Henry may not deduct any amount of qualifying student loan interest paid.

58
Q

Susie was paid $150 for serving as a juror. Susie’s employer continued to pay Susie her salary while she served on the jury, so she is required to turn the jury duty pay over to her employer. How should Susie account for the jury duty pay?
A. Deduct the $150 as an itemized deduction.
B. Include the $150 in taxable income.
C. Exclude the $150 from gross income.
D. Deduct the $150 from gross income.

A

Deduct the $150 from gross income.
Answer (D) is correct.
Jury duty 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 (Publication 17).

59
Q
Heathcliff and Gertrude file a joint income tax return for the current year. During the current year, Heathcliff received wages of $120,000 and taxable Social Security benefits of $5,000. Gertrude actively participated in a rental real estate activity in which she had a $30,000 loss. They had no other income during the current year. How much of the rental loss may they deduct on their current-year income tax return?
A.	$15,000
B.	$0
C.	$25,000
D.	$12,500
A

$15,000
Answer (A) is correct.
The $25,000 allowance of losses from active participation in rental real estate activities against nonpassive income is reduced by 50% of the amount by which adjusted gross income (determined without regard to Social Security benefits, IRA contributions, and passive losses) exceeds $100,000 [Sec. 469(i)(3)]. Heathcliff and Gertrude’s adjusted gross income exceeds $100,000 by $20,000. Therefore, the $25,000 allowance is reduced by $10,000 ($20,000 × 50%). This leaves $15,000 of losses that can be deducted (Publication 925).

60
Q

In the current year, the Aloha Gardens apartment complex had rental losses of $40,000. Which of the following is true?
A. 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.
B. John’s estate has a 20% interest in the property. John was actively involved in managing the complex from 2009 until his death in 2015. His estate may offset its portion of the rental loss against any nonpassive income.
C. 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.
D. T Trust has a 40% interest in the property. The trustee is active in managing the apartments. The trust may offset its portion of the rental loss against other income earned during the year.

A

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 (A) is correct.
In the case of rental real estate activities in which an individual actively participates, up to $25,000 of losses from such activities are allowed each year against nonpassive income [Sec. 469(i)]. Active participation requires only participation such as making management decisions on lease terms, tenant approvals, repair versus replacement decisions, etc., even if an agent handles day-to-day matters. 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)(A)]. 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%).

61
Q
Fern is a self-employed florist. In 2019, she paid self-employment tax of $5,000 ($2,500 employer’s portion) and $8,000 in medical insurance premiums. What amount of these expenses may Fern deduct in arriving at adjusted gross income?
A.	$9,000
B.	$10,500
C.	$13,000
D.	$6,500
A

$10,500
Answer (B) is correct.
A self-employed individual may deduct from gross income certain expenses paid during the year. Medical insurance premiums are 100% deductible by self-employed individuals. Fern may also deduct the employer’s portion of self-employment taxes paid. Therefore, Fern may deduct a total of $10,500 to arrive at adjusted gross income ($2,500 self-employment tax + $8,000 medical insurance premiums).

62
Q

In which situation must a taxpayer pay the additional 10% tax on a premature distribution from his IRA?
A. Taxpayer, age 25, used the distribution to pay emergency medical bills for his wife. The medical bills equal 3% of the couple’s AGI.
B. Taxpayer, age 30, withdrew his entire balance in an IRA to pay for his own qualified higher education expenses.
C. Taxpayer, age 45, became totally disabled.
D. Taxpayer, age 50, died and the IRA was distributed to his beneficiaries.

A

Taxpayer, age 25, used the distribution to pay emergency medical bills for his wife. The medical bills equal 3% of the couple’s AGI.
Answer (A) is correct.
Distributions from an IRA to a participant before (s)he reaches age 59 1/2 are subject to a 10% penalty tax. Taxpayers are exempted from this penalty tax if the distribution is attributable to the taxpayer becoming disabled or is made on or after the taxpayer’s death. Certain other exceptions apply, but payment of medical expenses is not one of them unless the medical expenses exceed the Sec. 213 nondeductible floor. Since the medical expenses are only 3% of the couple’s AGI, they are below the 7.5%-of-AGI nondeductible floor, and the 10% penalty applies to the entire distribution.

63
Q

The at-risk rules
A. Apply at the entity level for partnerships and S corporations.
B. Limit a taxpayer’s deductible losses from investment activities.
C. Limit the type of deductions in income-producing activities.
D. Apply to business and income-producing activities on a combined basis.

A

Limit a taxpayer’s deductible losses from investment activities.
Answer (B) 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).

64
Q

Which of the following is NOT a qualified education expense for purposes of the student loan interest deduction?
A. Books, supplies, and equipment.
B. All of the choices are qualified education expenses.
C. Tuition and fees.
D. Room and board.

A

All of the choices are qualified education expenses.
Answer (B) is correct.
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items: tuition and fees; room and board; books, supplies, and equipment; and other necessary expenses, such as transportation (Publication 17).

65
Q
Joanna completed 4 years of higher education in 2016 and makes a payment on her student loan debt each year. In 2019, Joanna paid $11,000 on her student loans, of which $8,400 is attributable to principal. What amount of this may be deducted as an above-the-line deduction for 2019?
A.	$11,000
B.	$8,400
C.	$2,600
D.	$2,500
A

$2,500
Answer (D) is correct.
The maximum deduction for student loan interest on qualified educational loans in 2019 is $2,500. Because Joanna paid $2,600 of interest ($11,000 payment – $8,400 attributable to principal), she will be able to deduct the upper limit of $2,500.

66
Q

All of the following are true about Archer MSAs EXCEPT
A. Archer MSAs can be rolled into a Health Savings Account tax-free.
B. The Archer MSA deduction is included with other medical expenses.
C. Archer MSAs were previously called Medical Savings Accounts.
D. Archer MSAs allow individuals who are self-employed to make tax-deductible contributions towards medical expenses.

A

The Archer MSA deduction is included with other medical expenses.
Answer (B) is correct.
The 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 and use those funds accumulated to pay medical expenses. An Archer MSA can be rolled into a Health Savings Account tax-free.

67
Q
Mr. Jones had a student loan for qualified higher education expenses on which interest was due. The loan payments were required from July 1, 2012, until December 31, 2019. The interest payments were $1,200 per year. How much may he deduct in arriving at adjusted gross income in 2019?
A.	$600
B.	$2,500
C.	$1,200
D.	$0
A

$1,200
Answer (C) is correct.
Individuals are allowed to deduct interest paid during the tax year on any qualified education loan in 2019. The maximum amount that may be deducted is $2,500 in 2019. However, the deduction for Mr. Jones is limited to the amount paid (Publication 17).

68
Q

Which of the following is NOT an example of a passive activity?
A. A working interest in oil and gas property, when the taxpayer-owner has unlimited liability, and does not materially participate in the activity.
B. The farming of land when the taxpayer owning the land has hired others to manage operations.
C. A limited partner’s interest in a limited partnership.
D. The rental of office equipment with no provision of unusual services.

A

A working interest in oil and gas property, when the taxpayer-owner has unlimited liability, and does not materially participate in the activity.
Answer (A) is correct.
Passive activities generally include any activity involving the conduct of a trade or business or the production of income and in which the taxpayer does not materially participate (Sec. 469). However, Sec. 469(c)(3) of the 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 (Publication 925).

69
Q

All of the following are requirements for a payment to be alimony (under instruments executed after 1984 but before 2019), EXCEPT
A. Payments are required by a divorce or separation instrument.
B. Payments can be in cash or property.
C. Payments cannot be a transfer of services.
D. Payments are not required after death of the recipient spouse.

A

Payments can be in cash or property.
Answer (B) is correct.
Section 215 allows a deduction for alimony or separate maintenance payments (Sec. 71) from a pre-2019 divorce. 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. Thus, if the payments are in services or property and not cash, they cannot be considered alimony [Publication 17 and IRC Sec. 215, Sec. 71(b)].

70
Q
For 2018 and 2019, Malcom and Julie, husband and wife, paid health insurance premiums of $3,000 each year ($1,500 for each person). Malcom was self-employed, and his net profit was $70,000 in 2018 and $80,000 in 2019. Julie was unemployed in 2018 then took a job in January 2019. She had the option to join a subsidized health plan for the family with her employer but declined. Since this expense is not deductible on Schedule C, what amount can they deduct elsewhere as a business expense on their 2018 and 2019 joint tax returns?
A.	2018: $0; 2019: $0.
B.	2018: $3,000; 2019: $0.
C.	2018: $3,000; 2019: $3,000.
D.	2018: $0; 2019: $3,000.
A

2018: $3,000; 2019: $0.
Answer (B) is correct.
Self-employed persons may deduct from gross income 100% of amounts paid during 2019 for health insurance for themselves, their spouses, and their dependents and, normally, 100% of amounts paid during 2018. However, the couple cannot take a deduction for 2019 since Julie was eligible for an employer health plan even though she declined to participate (Publication 17).

71
Q

Which of the following items may be considered alimony for pre-2019 divorces?
A. Payments made to a third party on behalf of the former spouse for the former spouse’s medical expenses.
B. Noncash property settlement.
C. Payments you made under a written separation agreement for the mortgage and real estate taxes on a home you owned by yourself and in which your former spouse lived rent-free.
D. Payments made for the 3-month period after the death of the recipient spouse.

A

Payments made to a third party on behalf of the former spouse for the former spouse’s medical expenses.
Answer (A) 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 (Publication 17).

72
Q

John divorced Lisa in 2017. During 2019, per the divorce decree, John made the following payments:
The entire mortgage payment on house (jointly owned)
$10,800
Tuition for their child
6,000
Child support
4,500
Life insurance premiums on policy owned by Lisa
3,000
What is the amount John can deduct as alimony on his 2019 tax return?
A. $3,000
B. $8,400
C. $10,800
D. $5,400

A

$8,400
Answer (B) is correct.
For a pre-2019 divorce, Sec. 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 Lisa’s ownership, or $5,400 ($10,800 payment × 50%), is deductible as alimony. The life insurance premium payment is deductible as well. Therefore, the total alimony deduction is $8,400 ($5,400 mortgage payment + $3,000 life insurance premium). Child support includes the child’s tuition payments and is not deductible (Publication 17).

73
Q

The following items are reported on Mr. and Mrs. Spice’s 2019 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 2019.

A. $32,175
B. $35,000
C. $28,880
D. $40,000

A

$32,175
Answer (A) is correct.
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 2019, 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).

74
Q

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 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.
B. Vickie has short-term gain of $3,000 on her Year 2 tax return.
C. 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.
D. Larry has a short-term loss of $1,000 on his Year 1 tax return.

A

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 (A) 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.

75
Q

Sunnie is single and under the age of 50 and does not actively participate in her employer’s pension plan. She received taxable compensation of $5,000 in 2018 and $6,000 in 2019. Her modified adjusted gross income was $25,000 in both years. For 2018, she contributed $5,500 to her IRA but deducted only $5,000 on her income tax return. For 2019, she contributed $5,500 but deducted $6,000 on her income tax return. Based on this information, which of the following statements is true?
A. Sunnie must pay an excise tax for 2018 on the $500 excess contribution made in 2018, but since she properly treated the 2018 excess contribution as part of her 2019 deduction, she does not owe the excise tax for 2019.
B. Sunnie must pay an excise tax on the excess contribution for 2018 and also for 2019 since she did not withdraw the excess.
C. Sunnie should claim an IRA deduction of only $5,500 for 2019.
D. Sunnie will be assessed a 10% tax for early withdrawals when she withdraws the excess contribution.

A
Sunnie must pay an excise tax for 2018 on the $500 excess contribution made in 2018, but since she properly treated the 2018 excess contribution as part of her 2019 deduction, she does not owe the excise tax for 2019.
Answer (A) is correct.
Section 219(b) limits contributions to an IRA to the lesser of $5,500 (2018) and $6,000 (2019) or the amount of compensation includible in the taxpayer’s gross income. Sunnie’s 2018 contributions should have been limited to $5,000. She therefore had $500 of excess contributions in 2018 ($5,500 – $5,000). Under Sec. 4973, a nondeductible 6% excise tax is imposed on excess contributions to an IRA. Under Sec. 219(b), the deduction for contributions to an IRA is limited to the lesser of $5,500 (2018) and $6,000 (2019) or the amount of compensation that must be included in gross income. Sunnie’s $5,000 deduction in 2018 was correct. In 2019, Sunnie contributed only $5,500 but deducted $6,000. Under Sec. 219(f)(6), Sunnie may treat the $500 unused contributions from 2018 as having been made in 2019. Therefore, her allowable deduction for IRA contributions in 2019 is $6,000.
76
Q

Which of the following would NOT be considered alimony with respect to payments to or for a spouse under a divorce or separation instrument executed prior to 2019?
A. Cash to a third party under terms of the instrument or written request.
B. Payments by cash, check, or money order.
C. Payments for which there is no liability after the death of the recipient spouse.
D. Transfer of services or property (including a debt instrument of a third party or an annuity contract).

A

Transfer of services or property (including a debt instrument of a third party or an annuity contract).
Answer (D) is correct.
For a divorce executed prior to 2019, Sec. 215 allows a deduction for alimony or separate maintenance payments as defined under Sec. 71. For a divorce executed prior to 2019, 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 (Publication 17).

77
Q

Mr. and Mrs. Smith are both employed and file joint federal income tax returns. Both Mr. and Mrs. Smith are covered by their employers’ retirement plans. For 2019, Mr. Smith’s salary was $40,000 and Mrs. Smith’s was $12,000. They both have IRAs, and their combined modified adjusted gross income was $52,000. Mr. Smith contributed $6,000 to his IRA, and Mrs. Smith contributed $3,000 to her IRA. What is the maximum IRA deduction each is entitled to for 2019?

Mr. Smith

Mrs. Smith

A.	
$0       
$3,000
B.	
$3,000
$1,500
C.	
$6,000
$3,000
D.	
$0       
$0
A

$6,000
$3,000
Answer (C) is correct.
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 $103,000 in 2019.
Because the Smiths’ income does not exceed the phaseout limit for active participants, they may deduct the entire contribution.

78
Q
Harry and Sally are married and both are under age 50. During 2019, Harry earned $1,500 and Sally earned $38,000. Neither is covered by an employer retirement plan. What is the maximum amount they can contribute to their individual retirement accounts for 2019?
A.	$6,000
B.	$3,000
C.	$7,000
D.	$12,000
A

$12,000
Answer (D) is correct.
Under Sec. 408(a)(1), contributions to an IRA may not exceed $6,000 on behalf of any individual. This limitation applies separately to each spouse who has compensation and makes a contribution to a separate IRA. No other limitations apply because neither taxpayer is an active plan participant. The $6,000 is limited to the amount of compensation includible in the taxpayer’s gross income for the year. However, as of 1997, Harry may use Sally’s compensation for purposes of obtaining the combined maximum contribution of $12,000. Taxpayers 50 years old or older are allowed to contribute an additional $1,000.

79
Q
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole’s adjusted gross income?
A.	$2,600
B.	$2,500
C.	$3,000
D.	$1,600
A

$2,600
Answer (A) is correct.
Above-the-line deductions are subtracted from gross income to arrive at adjusted gross income. The $3,000 of wages is included in gross income, and the only above-the-line deduction is for the $400 student loan interest. Therefore, Cole’s adjusted gross income is $2,600 ($3,000 wages – $400 student loan interest deduction).