REG Missed Questions Flashcards
In the current year, Mike and Jane Smith filed a joint return. Mike earned $40,000 in wages and was covered by his employer’s qualified retirement plan. Jane was employed part-time and received $7,000 in wages. The couple had no other income. Each contributed $5,000 to a traditional IRA account. The allowable IRA deduction on their current year joint tax return is:
A. $2,500
B. $0
C. $10,000
D. $5,000
Choice “C” is correct. In 2023, taxpayers can contribute and deduct up to $6,500 to a traditional IRA. For couples filing a joint return, where at least one spouse is an active participant in a retirement plan, the deductible portion of a traditional IRA contribution is phased out. For a spouse who is an active participant, the phase-out range in 2023 begins at $116,000. For a spouse who is not an active participant, but is married to someone who is, the phase-out range in 2023 begins at $218,000. The Smiths’ income is below both phase-out ranges, so they can each deduct the full $5,000 contributed, or $10,000 in total.
Janice loves to make handmade quilts as a hobby. She primarily makes quilts as gifts for friends and family and contributes quilts to charities for fundraisers, but occasionally she gets paid for making a custom quilt. In the current year, she received $200 for a custom quilt sale and had the following expenses related to her quilting activity:
Materials $950
Supplies 250
Quilt show expenses 150
Total expenses $1,350
What is the amount of Janice’s taxable quilting income or loss for the current year?
Choice “B” is correct. Janice’s quilting activity is not engaged in for profit (a hobby), so she cannot deduct any of the expenses that would be deductible if the activity were engaged in for profit (a business). She is still required to include the $200 income from the activity in her taxable gross income.
Which of the following is both an item that is an allowable tax deduction to the partnership, reported separately on the individual partner’s Schedule K-1, and then included on the partner’s individual tax return?
A. Depreciation on equipment used in the business
B. Salaries paid to non-partner employees
C. Advertising expenditures
D. Guaranteed payments paid to partners
Choice “D” is correct. A partnership calculates net ordinary business income or loss and passes each partner’s distributive share through on Schedule K-1. Guaranteed payments paid to partners for services provided or for the use of capital, without regard to partnership income or profit and loss sharing ratios, are an allowable deduction to the partnership and are also separately reported on Schedule K-1 for inclusion on the partner’s tax return
Harry has various items of income as follows:
W-2 wages $24,000
Interest and dividends $3,000
Rental real estate on Schedule E $8,000
Income from an S corporation from Schedule K-1 $12,000
Income from a general partnership from Schedule K-1 $10,000
For purposes of the self-employment tax, what are the net earnings from self-employment? (Note: Please answer before the required 92.35% calculation performed on Schedule SE.)
A. $57,000
B. $30,000
C. $22,000
D. $10,000
Choice “D” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, rental real estate income, or income from an S corporation. The only amount here that qualifies is the $10,000 from the general partnership.
In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?
A. As a $1,000 itemized deduction.
B. As a nondeductible item of personal interest.
C. As a $1,000 deduction to arrive at AGI for the year.
D. As a $500 deduction to arrive at AGI for the year.
Choice “C” is correct. The $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. The taxpayer’s AGI of $25,000 is below the phase-out threshold for unmarried taxpayers, so the deduction is not phased out.
What’s the phase out threshold?
R-1 M4
Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 8. On January 2, Year 2, Mott paid $30,000 as consideration for canceling the lease. On November 1, Year 2, Nare leased the building to Pine under a five-year lease. Pine paid Nare $10,000 rent for the two months of November and December, and an additional $5,000 for the last month’s rent. What amount of rental income should Nare report in its Year 2 income tax return?
A. $45,000
B. $15,000
C. $40,000
D. $10,000
Choice “A” is correct. Prepaid rent is income when received even for an accrual-basis taxpayer. The $30,000 received as consideration for canceling the lease is in substitution for rental payments and is thus rental income. The $5,000 prepaid for the last month’s rent is also rental income.
Miyasyke Inc., a calendar year S corporation, has 5 equal shareholders at the end of the tax year. Miyasyke had $75,000 of taxable income. Miyasyke made distributions to its shareholders of $32,000 each, for a total of $160,000. Each shareholder’s basis in the S corporation is $100,000 at the beginning of the tax year. What amount from Miyasyke should be included in each shareholder’s gross income?
A. $47,000
B. $32,000
C. $15,000
D. $0
Choice “C” is correct. Each shareholder reports his/her pro rata share of the S corporation’s taxable income in his or her gross income. The distributions are not taxable to the extent the shareholders’ basis exceeds the distribution (and increased for any income reported by them during the year).
Dr. Merry, a self-employed dentist, incurred the following expenses:
Investment expenses 700
Custodial fees for Dr. Merry’s self-employed retirement plan 40
Work uniforms for Dr. Merry and Dr. Merry’s employees 320
Subscriptions for periodicals used in the waiting room 110
Dental education seminar 1,300
What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business?
A. $1,770
B. $2,430
C. $1,620
D. $1,730
Choice “D” is correct. Business expenses include work uniforms for the taxpayer and taxpayer’s employees, subscriptions for periodicals for patient use, and continuing education expenses.
On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30 of the current year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What amount of interest was deductible on Michaels’ current year income tax return?
A. $12,000
B. $1,000
C. $0
D. $11,000
Choice “D” is correct. Michaels may deduct $11,000 on her current year return.
An S corporation pays one of its individual shareholders for services rendered to the S corporation, and a general partnership pays one of its partners for services rendered to the partnership. Which of the following statements is accurate regarding these payments?
A. The S corporation should classify the payments as deductible wages reportable on Form W-2.
B. The partnership should classify the payments as nondeductible partnership distributions reportable on Form K-1.
C. The partnership should classify the payments as deductible wages reportable on Form W-2.
D. The S corporation should classify the payments as nondeductible dividends reportable on Form 1099-DIV.
Choice “A” is correct. A shareholder in an S corporation can be an employee of the corporation. The individual shareholder-employee would receive a salary for the services rendered to the S corporation; therefore, the payments should be classified as deductible wages reportable on Form W-2.
An individual received $50,000 during the current year pursuant to a divorce decree executed in 2015. A check for $25,000 was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual’s gross income?
A. $40,000
B. $50,000
C. $0
D. $25,000
Rules: Payments for the support of a spouse, pursuant to a divorce agreement executed on or before December 31, 2018, are income to the spouse receiving the payments and are deductible to arrive at adjusted gross income by the payor spouse. Child support is not taxable. Property settlements are not taxable.
Choice “D” is correct. Only the $25,000 in alimony is included in the gross income of the receiving spouse.
Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat’s personal use car on which Pat has no insurance. Pat resides in a federally declared disaster area. Pat purchased the car for $20,000. Immediately before the hurricane, the car’s fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casualty loss for the current year after all threshold limitations are applied?
A. $4,000
B. $0
C. $4,100
D. $100
Choice “B” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 – $4,000 – $100).
Pat has various items of income as follows:
W-2 wages $24,000
Interest and dividends $3,000
Sole proprietorship income on Schedule C $8,000
Income from an S corporation from Schedule K-1 $12,000
Income from a general partnership from Schedule K-1 $10,000
For purposes of the self-employment tax, what are the net earnings from self-employment? (Note: Please answer before the required 92.35% calculation performed on Schedule SE.)
A. $18,000
B. $22,000
C. $10,000
D. $57,000
Choice “A” is correct. Income subject to self-employment includes amounts from an unincorporated sole proprietorship (Schedule C) and general partnerships. It does not include W-2 wages, interest, dividends, or income from an S corporation. The only amounts here that qualify are the $8,000 sole proprietorship income and the $10,000 from the general partnership.
During the year, the Andradis, who were both under age 65, paid the following expenses:
Unreimbursed costs for prescription drugs required for their dependent daughter’s medical condition- $1,300
Mrs. Andradi’s face lift (to improve personal appearance)- $4,000
Physical therapy for their dependent son’s soccer injury- $3,000
Massage therapy fees at Mr. Andradi’s health club obtained because he enjoys massages- $500
The Andradis’ adjusted gross income for the current year was $65,000, and the current year percentage of adjusted gross income floor is 7.5 percent. What amount could be claimed on the Andradis’ current year tax return for medical expenses?
A. $0
B. $1,300
C. $4,875
D. $4,300
Choice “A” is correct. Deductible medical expenses are limited to the amount that exceeds 7.5 percent of the taxpayer’s adjusted gross income (AGI). Deductible medical expenses are those expenses that are “necessary” (such as doctors, prescriptions, required surgery, etc.). Nondeductible expenses are such things as elective surgeries, health club memberships, and unnecessary medical expenditures. The Andradis’ AGI is $65,000; 7.5 percent of that is $4,875. Qualified medical expenses are $1,300 for their daughter’s prescriptions and $3,000 for physical therapy for their son. Total allowable gross expenditures of $4,300 are less than the AGI floor of $4,875. So the answer is zero.
Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year. The following additional information is available for the year:
Cash contribution to church- $ 4,000
Purchase of art object at church bazaar (with a fair market value of $800 on the date of purchase)- $1,200
Donation of used clothing to Salvation Army (fair value evidenced by receipt received)- $600
What is the maximum amount Spencer can claim as an itemized deduction for charitable contributions in the current year?
A. $5,200
B. $4,400
C. $5,000
D. $5,400
Upon the recommendation of a physician, Mark, age 40, has an air filtration system installed in his personal residence. He suffers from severe allergy problems. In connection with this matter, Mark incurs and pays the following amounts during the current year:
Filtration system and cost of installation- $7,000
Increase in utility bills due to the system- $700
Cost of certified appraisal- $350
The system has an estimated useful life of five years. The appraisal was to determine the value of Mark’s residence with and without the system. The appraisal states that the system increased the value of Mark’s residence by $1,000. Expenses qualifying for the medical deduction in the current year total:
A. $7,700
B. $8,050
C. $6,700
D. $7,350
Choice “C” is correct. The cost of a home improvement is an allowable itemized medical deduction to the extent it exceeds any increase in the fair market value of the home (subject to the allowed percentage of AGI floor).
The cost of the filtration system less the increase in the home value of $1,000 is permitted ($7,000 less $1,000), plus the $700 increase in the utility bills is allowable as an itemized medical deduction (subject to the allowed percentage of AGI floor). The cost of the appraisal is not deductible as a medical expense.
7,000
(1,000)
700
6,700
Wells paid the following expenses during the year:
Premiums on an insurance policy against loss of earnings due to sickness or accident- $3,000
Physical therapy after spinal surgery- $2,000
Premium on an insurance policy that covers reimbursement for the cost of prescription drugs- $500
In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells’ current year income tax return for medical expenses before the adjusted gross income limitation?
A. $1,000
B. $3,500
C. $4,000
D. $500
Choice “A” is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).
The Stevensons are filing married filing jointly, and their adjusted gross income was $58,250. Additional information is as follows:
Interest paid on their home mortgage- $5,200
State taxes paid- $2,000
Medical expenses in excess of AGI floor- $1,500
Deductible contributions to IRAs- $4,000
Alimony paid to Mr. Stevenson’s first wife (divorce finalized in 2015)
$5,000
Child support paid for Mr. Stevenson’s daughter- $5,100
What amount may the Stevensons claim as itemized deductions on their Schedule A?
A. $7,200
B. $8,700
C. $13,800
D. $12,300
Choice “B” is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of the AGI floor are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.
Home mortgage interest- $5,200
State taxes paid- $2,000
Medical expenses- $1,500
Total itemized deductions- $8,700
The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes:
Real estate tax on personal residence- $2,000
Personal property tax on personal automobile- $500
Current-year state and city income taxes withheld from paycheck- $1,000
What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return?
A. $3,500
B. $3,000
C. $2,500
D. $1,000
Choice “A” is correct. Taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes are allowable deductions. The total amount of itemized deductions for tax expense is calculated as follows:
Real estate tax on personal residence- $2,000
Personal property tax on personal automobile- $500
Current-year state and city income taxes withheld- $1,000
Total deduction for taxes- $3,500
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?
A. $21,000
B. $24,000
C. $17,000
D. $25,000
Choice “B” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
The taxpayer can deduct long-term (i.e., held longer than 12 months) capital gain property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carryforward period applies.
Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer?
A. A charitable contribution deduction is not allowed for the value of services rendered to a charity.
B. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income.
C. A qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000.
D. A contemporaneous written acknowledgement is required for donations of $100.
Choice “A” is correct. A charitable contribution is not allowed for the value of services rendered to a charity.
Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?
I. The client’s investment interest expense exceeds net investment income.
II. The client’s qualified residence interest expense reduces the deductible amount of investment interest expense.
A. II only.
B. Neither I nor II.
C. Both I and II.
D. I only.
Choice “D” is correct. The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer. Any excess amount will be carried forward indefinitely. For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000. The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year. The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years. Qualified residence interest is not investment interest and would not affect investment interest income in any manner.
On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to add a new room to their residence. That same year they took out a $5,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest $17,000
Interest on room construction loan $1,500
Auto loan interest $500
For Year 4, how much interest is deductible?
A. $17,000
B. $17,500
C. $18,500
D. $19,000
Choice “C” is correct. Mortgages of up to $750,000 to buy, build, or substantially improve a home allow for the full deduction of interest. Interest on auto loans (consumer interest) is not deductible.
Krete, an unmarried taxpayer with income exclusively from wages, filed her initial income tax return for Year 8. By December 31, Year 8, Krete’s employer had withheld $16,000 in federal income taxes and Krete had made no estimated tax payments. On April 15, Year 9, Krete timely filed an extension request to file her individual tax return and paid $300 of additional taxes. Krete’s Year 8 income tax liability was $16,500 when she timely filed her return on April 30, Year 9, and paid the remaining income tax liability balance.
What amount would be subject to the penalty for the underpayment of estimated taxes?
A. $500
B. $200
C. $0
D. $16,500
Choice “C” is correct. Provided the taxes due after withholdings were not over $1,000, there is no penalty for underpayment of estimated taxes. Note that there would be a failure to pay penalty on the $200 that was not paid until April 30, but this is a separate penalty.
Calculate the taxpayer’s qualified business income deduction for a specified service trade or business:
Filing status: Single
Taxable income: $300,000
Net capital gains: $0
Qualified business income (QBI): $50,000
W-2 wages: $10,000
A. $10,000
B. $5,000
C. $60,000
D. $0
Choice “D” is correct. A single taxpayer with taxable income before the QBI deduction of $232,100 or more (2023) is not eligible for the QBI deduction on income from a specified service trade or business (SSTB).
Carroll, a 35-year-old unmarried taxpayer with an adjusted gross income of $100,000, incurred and paid the following unreimbursed medical expenses:
Doctor bills resulting from a serious fall- $5,000
Cosmetic surgery that was necessary to correct a congenital deformity- $15,000
Carroll had no medical insurance. For regular income tax purposes, what was Carroll’s maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?
A. $12,500
B. $0
C. $15,000
D. $20,000
Choice “A” is correct. Both medical expenses are deductible. The cosmetic surgery is not elective, because it was necessary to correct a congenital deformity.
Doctor bills- $5,000
Surgery- $15,000
$20,000
AGI floor ($100,000 × 7.5%) (7,500)
Deduction $12,500
Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?
A. $24,000
B. $17,000
C. $21,000
D. $25,000
Choice “A” is correct. Stein may deduct $24,000 on Stein’s current year income tax return.
The taxpayer can deduct long-term (i.e., held longer than 12 months) capital gain property at the higher fair market value (higher than cost basis) without paying capital gains tax on the appreciated portion. This deduction is limited to 30 percent of adjusted gross income (AGI). A five-year carryforward period applies.
Fair market value of appreciated long-term stock- $25,000
Less: Limitation
AGI- $80,000
Times 30%- × 0.30
Deduction limit-
(24,000)
Carryforward $1,000
