Chapter 6 Flashcards
Individual Deductions
Which of the following is a true statement?
a) congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
b) to deduct expenses associated with any profit -motivated activity, taxpayers must maintain a high level of involvement or effort in the activity throughout the year
c) business activities never require a relatively high level of involvement or effort from the taxpayer
d) all business expenses are deducted for AGI
e) all of these choices are correct
a) Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
Which of the following is a true statement?
a) the deduction for interest on educational loans is subject to a phase-out limitation
b) the deduction for moving expenses is subject to a phase out limitation
c) self employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer provided health plan
d) excess business losses are deductible up to $100,000
e) all of these choices are false
a) The deduction for interest on educational loans is subject to a phase-out limitation.
This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married filing jointly and reports modified AGI of $167,000. What is Jong’s deduction for interest expense on an educational loan?
$1,500
2023 phase-out percentage = [$167,000 − $155,000] ÷ $30,000 = 40%; maximum = $2,500 × (1 − 40%) = $1,500.
Han is a self-employed carpenter and his wife, Christine, works full time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums (not with pretax dollars) for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement?
The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.
Business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are eligible to participate in an employer-provided health plan.
Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI?
- The cost of health insurance (not purchased through an exchange)
- The employer portion of self-employment tax paid
- Penalty on early withdrawal of funds from a certificate of deposit
All of these choices are deductible for AGI.
This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago, when she attended State University (a qualified educational institution). This year Millie paid a total of $2,400 of interest on the loan. If Millie files single and reports $80,000 of income and no other items of income or expense, how much of the interest can she deduct?
Millie can deduct $1,600 for AGI.
Millie may deduct the amount of interest paid ($2,400) reduced by the phase-out amount ($2,400 × [($80,000 − $75,000) ÷ $15,000] = $800). Thus, Millie may deduct $1,600 ($2,400 − $800 = $1,600).
Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd’s support:
Auto insurance premiums $ 1,700
Room and board at Todd’s school 2,200
Health insurance premiums (not through an exchange) 600
Travel (to and from school) 350
What amount can Ned include in his itemized deductions?
$600 included in Ned’s medical expenses.
The premiums paid for health and medical insurance for dependents are included in the taxpayer’s medical expenses when determining itemized deductions.
This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true?
Norma can deduct $10,000 of taxes as an itemized deduction.
The itemized deduction for state and local taxes is limited to $10,000 for single taxpayers.
Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year related to this inventory if her AGI is $200,000?
$92,000
The charitable deduction for ordinary income property is the lesser of FMV or basis, limited to 50 percent of AGI.
Simone donated a landscape painting (tangible capital gain property) to a library, a public charity. She purchased the painting five years ago for $50,000, and on the date of the gift, it had a fair market value of $200,000. What is her maximum charitable contribution deduction for the year if her AGI is $300,000?
$90,000 if the library uses the painting in its charitable purpose
The painting is appreciated capital gain property given to a public charity. However, because it is also tangible personal property, the donation is FMV only if it is related to the charitable use or purpose. If so, the deduction is limited to 30 percent of AGI. If not, the deduction is basis limited to 50 percent of AGI.
Larry recorded the following donations this year:
$500 cash to a family in need
$2,400 to a church
$500 cash to a political campaign
To the Salvation Army household items that originally cost $1,200 but are worth $300.
What is Larry’s maximum allowable charitable contribution if his AGI is $60,000?
$2,700
$2,400 to church + $300 FMV of household items.
Which of the following is a true statement?
a) a casualty loss on personal use assets is generally not deductible
b) a casualty loss on investment property is generally not deductible
c) all casualty losses are deductible
d) a casualty loss on a personal use asset is deductible for AGI
e) none of these choices is correct
A casualty loss on personal-use assets is generally not deductible.
Casualty losses on personal-use assets are generally nondeductible.
Andres and Lakeisha are married and file jointly. Andres is 72 years old and in good health. Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and Lakeisha claim in 2023? Use Exhibit 6-11.
$30,700
$30,700 = $27,700 + ($1,500 × 2). The married filing jointly standard deduction is increased $1,500 for each blind taxpayer and/or each taxpayer at or over age 65 by year-end.
In 2023, Campbell, a single taxpayer, has $95,000 of profits (net of the deduction for self-employment taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?
$10,000
Her deduction for qualified business income is limited to 20 percent of her taxable income before the deduction. She is not subject to the wage limit because her income falls below the $182,100 threshold.
Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn’s taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions.
Increase in taxable income of $2,000
Hobby expenses are not deductible, whereas hobby revenue is included in gross income.
