Practice questions Flashcards
- Karl received qualified long-term care insurance benefits in 2023 of $440 per day. How much of such daily benefits must he include in income, if any, assuming his actual long term care costs were $350 per day and the applicable per diem limitation is $420?
(Search Chapter 1)
a. $0
b. $20
c. $70
d. $90
b. $20
That’s correct! Karl need include only $20 per day in his income. Benefits received under qualified long term care insurance policies that may be excluded from income are those benefits not exceeding the greater of:
The applicable per diem limitation for the year; or
The costs incurred for qualified long term care services provided for the insured.
The applicable per diem limitation for 2023 is $420.
- Sally made a $4,000 traditional IRA contribution in 2023 and received a $1,000 saver’s credit. If she would be eligible to deduct the contribution in the absence of a saver’s credit, how much of her contribution may she deduct?
(Search Chapter 1)
a. $0
b. $2,000
c. $3,000
d. $4,000
d. $4,000
That’s correct! Sally may deduct the entire traditional IRA contribution, provided she is otherwise eligible to take the deduction. The retirement savings contribution tax credit, if any, for which a taxpayer is eligible does not affect the tax treatment to which the contribution would normally be subject.
- Hank is single and has a $30,000 adjusted gross income in 2023. What would his saver’s credit be if he deferred $1,000 in his employer’s 401(k) plan and received a $500 employer match?
(Search Chapter 1)
a. $100
b. $150
c. $200
d. $500
a. $100
That’s correct! Hank qualifies for a 10% retirement savings contribution tax credit. Since the credit is based on his retirement savings contribution during the year, his saver’s credit is $100. ($1,000 × 10% = $100)
- Karl uses his personal vehicle for charitable purposes. If he drove 1,400 miles, spent $50 on gas and oil, $40 on parking fees, $60 on tolls and elected to use the standard mileage deduction, how much of the expenses would be tax-deductible?
(Search Chapter 2)
a. $0
b. $196
c. $296
d. $346
c. $296
That’s correct! Karl’s unreimbursed charitable expense deduction is limited to $296. Taxpayers are permitted to deduct personal vehicle expenses when used for charitable purposes. Since Karl traveled 1,400 miles at 14¢ per mile, paid $40 for parking and $60 for tolls and chooses to use the standard mileage deduction, he may deduct $296. The money spent on gas and oil is not deductible, however, since the standard mileage deduction was elected.
Phil is age 67 and has just received a $20,000 taxable HSA distribution that he is using to supplement his retirement income. What tax penalty, if any, applies to his HSA distribution for other than qualified medical expenses?
(Search Chapter 2)
a. $4,000
b. $3,000
c. $2,000
d. $0
d. $0
That’s correct! Phil is not liable for a tax penalty on account of the taxable HSA distribution because he has reached the age for Medicare. HSA distributions are includible in income and subject to income tax penalties of 20% when they are used for other than qualified medical expenses and fail to meet specific exceptions. The exceptions to the tax penalty apply to distributions received while the account holder is disabled, following the account holder’s death or by the account holder after reaching the eligibility age for Medicare.
- Bill Walters is a 52-year-old single client. His adjusted gross income in 2023 is $200,000, and he is not an active participant in an employer-sponsored retirement plan. What is the maximum 2023 traditional IRA contribution that he may deduct?
(Search Chapter 3)
a. $0
b. $2,000
c. $6,500
d. $7,500
d. $7,500
That’s correct! Bill may make and deduct a traditional IRA contribution in 2023 that is neither eliminated nor reduced by his relatively high adjusted gross income. Because he is age 50 or older, the maximum contribution allowable in 2023 includes both a regular IRA contribution of $6,500 and a catch-up contribution of an additional $1,000. Since he is not an active participant in an employer-sponsored qualified plan, his entire traditional IRA contribution is tax-deductible.
- Peter, age 45, made his first Roth IRA contribution ten years ago and has made contributions to the IRA every year since. His total contributions amount to $40,000, and he has never previously taken a distribution from the IRA. If he withdrew $50,000 this year from the Roth IRA in a nonqualified distribution, what is the maximum amount of the distribution, if any, he may exclude from income?
(Search Chapter 3)
a. $0
b. $10,000
c. $40,000
d. $50,000
c. $40,000
That’s correct! Peter may exclude $40,000 of the distribution from his income, i.e., an amount equal to his total contributions. Because a Roth IRA receives FIFO tax treatment, all contributions to the Roth IRA are deemed to be distributed before any earnings are distributed. Since Roth IRA contributions are made with after-tax dollars, they are withdrawn tax free, even though earnings withdrawn in a distribution that is not a “qualified distribution” would be subject to income tax and, possibly, to a premature distribution tax penalty.
What is George’s business expense deduction if he uses a 400 square foot office in his rented home, assuming he qualifies for a home office deduction, pays $1,200 for business telephone service, uses 20% of the home for business and elects the simplified home office deduction method?
(Search Chapter 4)
a. $1,500
b. $1,740
c. $2,000
d. $2,700
a. $1,500
That’s correct! George’s business deduction is $2,700, comprised of a $1,500 home-office deduction and business expenses not related to his home of $1,200.
- Harold is a sole proprietor of a small company. He sponsors an employee picnic each year at a local park that costs him $25,000. If he incurs $15,000 in food and $10,000 in beverage expenses for his 2023 employee picnic, how much of the expense may he deduct for income tax purposes?
a. $0
b. $10,000
c. $12,500
d. $25,000
d. $25,000
That’s correct! Taxpayers are generally permitted to deduct 50% of the expenses for food and beverages paid or incurred in conducting their trade or business as well as the expenses for food and beverages provided by the taxpayer on the taxpayer’s premises primarily for employees. However, the 50% limitation on the deduction of an employer’s food and beverage expenses does not apply to any expenses if, among other exceptions, the expenses are for recreational, social or similar activities primarily for the benefit of employees other than highly compensated employees.
- Bob, an Army colonel, was transferred from Germany to Moscow for a permanent change of station. His spouse chose not to accompany him and returned to the United States. If she received a $10,000 relocation allowance and was later reimbursed an additional $2,500, how much of the allowance, if any, must she include in her income?
a. $0
b. $2,500
c. $10,000
d. $12,500
a. $0
That’s correct! In the case of a military relocation, the taxpayer’s move must be pursuant to a military order and involve a permanent change of station. In such a case, no paid or incurred moving and storage expenses:
Furnished in kind, or
For which reimbursement or allowance is provided to the service member, spouse or dependents
…are includible in gross income or reported.
In addition, if the moving expenses paid or incurred in connection with a military relocation are furnished or reimbursed (or an allowance is provided) to the service member’s spouse and dependents to move:
To a location other than the one to which the service member moves, or
From a location other than the one from which the service member moves
…such expenses are likewise neither includible in gross income nor reported.
Howard and Sharon, a married couple, purchased their primary residence in 2023 and took out a $400,000 mortgage for the purchase. Since the house required repairs and updating, they took an additional home equity loan of $150,000 which they used to improve their home. If their 2023 interest paid on the $400,000 mortgage was $12,000 and on the home equity loan was $7,000, what is their 2023 mortgage interest deduction?
a. $0
b. $7,000
c. $12,000
d. $19,000
d. $19,000
That’s correct! They may deduct the entire amount. The TCJA made the following changes to the existing home mortgage interest deduction for taxable years 2018 through 2025:
Interest paid on home equity indebtedness—home equity loans and lines of credit, in other words—incurred after December 15, 2017, is not tax-deductible unless used to buy, build or substantially improve the taxpayer’s home that secures the loan;
Interest paid on acquisition debt incurred after December 15, 2017, less any acquisition debt incurred on or before December 15, 2017, is limited to interest paid on total acquisition indebtedness but only if the total of such mortgages is $750,000 or less ($375,000 or less if married filing separately); and
Interest paid on acquisition debt incurred on or before December 15, 2017, is limited to interest paid on acquisition indebtedness of $1,000,000 or less ($500,000 or less if married filing separately).
An exception to the new mortgage rules may apply to written binding contracts to purchase a residence entered into before December 15, 2017.
Sharon and Bill, a married couple filing a joint tax return, have three children, ages 5, 8 and 18, and a modified adjusted gross income of $160,000. What amount of Child Tax Credit are they eligible for in 2023?
(Search Chapter 6)
a. $4,000
b. $6,100
c. $6,600
d. $9,100
a. $4,000
That’s correct! The Child Tax Credit is a nonrefundable credit that may reduce the taxpayer’s tax up to $2,000 for each of the taxpayer’s qualifying children younger than age 17. Only the children age 5 and 8 qualified for the $2,000 CTC. The 18-year-old child would not be considered a qualifying child. Since two of the children qualify for the Child Tax Credit, the maximum amount for which Sharon and Bill are eligible is $4,000.
- Tanya is a single taxpayer who has two qualifying children and qualifies for the Earned Income Credit in 2023. What is the maximum investment income she can have in 2023 and still be eligible for the credit?
(Search Chapter 6)
a. A taxpayer eligible for EIC cannot have any investment income
b. $1,000
c. $3,650
d. $11,000
d. $11,000
That’s correct! Internal Revenue Code § 32(i) denies the Earned Income Tax Credit to those taxpayers having excessive investment income. ARPA modifies IRC § 32(i) and provides that, for 2023, excessive investment income is that investment income in excess of $11,000, subject to inflation adjustment for years beginning after 2023.
Chapter 7
Audrey is a single sole proprietor who owns and operates an accounting business, a business considered an SSTB. She has no REIT or PTP interests. She has no capital gains or losses and, after allowable deductions not relating to her business, her total taxable income for 2023 is $110,000. The applicable taxable income threshold in 2023 is $182,100. The business’s QBI is $100,000. What is her pass-through deduction, if any?
(Search Chapter 7)
a. $20,000
b. $22,000
c. $32,145
d. Audrey is ineligible for a deduction because her business is an SSTB.
a. $20,000
That’s correct! Audrey’s § 199A deduction for 2023 is equal to $20,000, computed as the lesser of A and B where:
A equals 20 percent of Audrey’s QBI from the business, and
B equals 20 percent of Audrey’s total taxable income for the taxable year.
Accordingly, the deduction for Audrey is the smaller of:
$100,000 × 20 percent = $20,000; or
$110,000 × 20 percent = $22,000.
Since she has no REIT dividends or PTP income, her pass-through deduction is $20,000, i.e., the smaller number.
Chapter 7
As a single taxpayer, Arthur’s alternative minimum taxable income exemption in 2023 would be $81,300 if his income does not exceed $578,150. What is his AMTI exemption amount if his alternative taxable income is $678,150?
(Search Chapter 7)
a. $0
b. $25,000
c. $56,300
d. $81,300
c. $56,300
That’s correct! Arthur’s reduced AMTI exemption is $56,300. The AMTI exemption amount is reduced (but not below zero) by 25 percent of the amount by which the taxpayer’s alternative minimum taxable income exceeds $578,150 for taxpayers whose filing status is “single,” “head of household,” “married filing separately.”
