Study Unit 7

Question 1

Give examples of above-the-line deductions.

Answer 1

• Educator expenses
• Health savings account deduction
• Moving expenses for military
• 50% of self-employment tax
• Self-employed SEP and qualified plans
• Self-employed health insurance deduction
• Penalty on early withdrawal of savings
• Alimony paid pursuant to divorce finalized before 2019
• IRA deduction
• Student loan interest deduction
• Jury duty repayment

Question 2

Compare traditional IRAs and Roth IRAs in terms of (1) deductibility of contributions and (2) tax ability of distributions.

Answer 2

Contributions Distributions

Traditional	Fully deductible up to		Includible in gross income
				the lesser of 
				- $6,000 ($7,000 if >age 50)
				   For 2021
				- all includible compensation

Roth IRAs Not Deductible Not includible in gross income
(if requirements are met)

Question 3

What is the penalty for IRA distributions made before age 59 1/2?

Answer 3

IRA distributions made before 59 1/2 are subject to taxation plus a 10% penalty tax.

Question 4

When is the penalty for IRA distributions made before age 50 1/2 not imposed?

Answer 4

The penalty is not imposed when distributions are for

• Death or disability
• Medical expenses in excess of 7.5% of AGI
• Qualified higher education expenses
• The purchase of a first home (up to $10,000)
• Birth or adoption of a child (up to $5,000)

Question 5

List the individual taxpayers who are not allowed the standard deduction.

Answer 5

• Persons who itemize deductions
• Nonresident alien individuals
• Individuals who file a “short period” return
• Married individuals who file a separate return and whose spouse itemizes

Question 6

What are the six categories of itemized deductions?

Answer 6

1. Medical and dental expenses
2. Taxes paid
3. Interest paid
4. Charitable contributions
5. Casualty and theft losses
6. Other itemized deductions

Question 7

What is the deductible amount for qualified medical expenses as an itemized deduction?

Answer 7

Amounts paid for qualified expenses that exceed 7.5% of AGI may be deducted.

Qualified expenses are those primarily for alleviating or preventing a physical or mental disability or illness, not for improving general health or sense of wellness.

Question 8

What is the deductible amount for taxes paid as an itemized deduction?

Answer 8

Taxpayers may deduct up to $10,000 ($5,000 for MFS) for the following taxes paid:

* State and local real property taxes
* State and local personal property taxes
* Foreign income taxes
* State and local income taxes OR state and local sales taxes (not both)

Question 9

What types of interest are deductible as itemized deductions?

Answer 9

• Qualified residence interest expense
  
  • On loans not more than $750,000 ($375,000 for MFS)
• Investment interest expense
  
  • Deduction limited to net investment income
    (Investment income - investment expense)

Question 10

What are the deductible amounts and limitations for charitable (1) cash, (2) capital gain property, (3) ordinary income property, and (4) services contributions made to 50% limit organizations?

Answer 10

Form of Amount of Limitation
Property Donation

Cash Cash amount 60% of AGI (100% in 2021)

Capital gain FMV 30% of AGI
property

Ordinary income Lower of FMV 50% of AGI
property or AB

Services Unreimbursed 50% of AGI
expenses

Question 11

What are the deductible amounts and limitations for charitable (1) cash, (2) capital gain property, (3) ordinary income property, and (4) services contributions made to non-50% limit organizations?

Answer 11

Form of Amount of Limitation
Property Donation

Cash Cash amount 30% of AGI

Capital Gain Lower of FMV Lesser of - 20% of AGI
Property or AB - 30# of AGI over contributions to public charities

Ordinary income Lower of FMV 30% of AGI
Property or AB

Services Unreimbursed 30% of AGI
expenses

Question 12

What is the deductible amount for personal casualty and theft losses?

Answer 12

Deductible losses are those

* Attributable to a federally declared disaster (or up to casualty gain if not federally declared),
* Not compensated by insurance, and
* Over $100 and over 10% of AGI.

Deductible loss = Casualty loss - Insurance compensation - $100 - 10% of AGI

Question 13

Give examples of expenses deductible as other itemized deductions.

Answer 13

• Gambling losses (up to the amount of gambling winnings)
• Unrecovered investment in a pension
• Amortizable premium on taxable bonds
• Casualty and theft losses from income-producing property
• Federal estate tax on income in respect of a decedent

Question 14

To whom is the qualified business income deduction (QBID) available?

Answer 14

The QBID is available to no corporate taxpayers, including

* Individuals
* Trusts, and
* Estates.

Question 15

What is the overall qualified business income deduction (QBID)?

Answer 15

The overall QBID is 20% of the lesser of

* Qualified business income or
* Taxable income - Net capital gains.

NOTE: Net capital gains = Net long-term capital gains - Net short-term capital loss

Question 16

What qualifies business income for the qualified business income deduction (QBID)?

Answer 16

Qualifying business income

* Is effectively connected with the concuss of a trade or business within the U.S.
* Is included in taxable income for the tax year
* Comes from a flow-through entity
* Is from core activities

Question 17

What types of income are not included in qualified business income (QBI)?

Answer 17

Qualified business income does not include the following:

Income from Non-Core Activities Income from Business as Reasonable Compensation
* Capital gains and losses * Salaries and wages from S corporations
* Dividend income
* Non-operating interest income * Guaranteed payment from partnerships
* Interest income attributable
to working capital
* Foreign currency gains

Question 18

What are the two categories of trade or business used to determine the qualified business income deduction (QBID)?

Answer 18

• Specified service trade or business (SSTB)

* Qualified trade or business (QTB)

Question 19

Can negative qualified business income (qualified business loss be carried back?

Answer 19

Qualified business losses (QBLs) can only be carried forward to reduce the amount of qualified business income (QBI) in later years.

Question 20

Do qualified business income deductions affect the taxpayer’s basis in the flow-through entity?

Answer 20

Qualified business income deductions do not affect the taxpayer’s basis on the flow-through entity.